Final Results

RNS Number : 0608I

PartyGaming Plc

04 March 2010

 

4 March 2010

PartyGaming Plc

Audited results for the year ended 31 December 2009

 

Year ended 31 December	2009 $million	2008 $million
Revenue
Poker	196.7	274.0
Casino+	196.2	175.0
Bingo+	32.8	5.9
Sports Betting	19.0	18.0
Net revenue	444.7	472.9
Other revenue	1.5	-
Total revenue	446.2	472.9
Clean EBITDA*
Poker	42.8	76.1
Casino+	74.4	65.7
Bingo+	13.4	0.3
Sports Betting	5.8	5.1
Unallocated	(1.4)	(3.0)
Clean EBITDA* from Continuing operations	135.0	144.2
Clean EBITDA* from Discontinued operations#	(0.8)	(10.9)
Total Clean EBITDA*	134.2	133.3
Profit from operating activities - Continuing operations	81.1	77.9
Profit before tax - Continuing operations	82.6	82.4
Profit after tax - Continuing operations	76.7	77.8
(Loss) profit after tax	(26.5)	66.9
Basic EPS (cents) - Continuing operations	18.8	19.2
Clean EPS* (cents) - Continuing operations	21.5	24.9
Basic EPS (cents)	(6.5)	16.5
Clean EPS* (cents)	21.3	22.2

 

● Total revenue of $446.2m (2008: $472.9m) with a softer performance in poker mitigated by growth in all other verticals

 

●  Continuing Clean EBITDA* of $135.0m (2008: $144.2m); slightly ahead of market expectations

 

● Continuing Clean EPS* of 21.5 cents (2008: 24.9 cents); total Clean EPS of 21.3 cents (2008: 22.2 cents)

 

●  Non-Prosecution Agreement reached with the US authorities with associated costs of $105.0m of which $15.0m was paid in 2009, resulting in a loss after tax of $26.5m

 

● Acquisition of Cashcade and World Poker Tour completed

 

● Net cashflow from Continuing operations of $120.5m (2008: $125.2m) with net cash at the year end of $164.7m (2008: $201.4m)

 

* EBITDA/EPS before the provision for costs associated with the Group's Non-Prosecution Agreement, reorganisation costs, and before non-cash charges relating to share-based payments (see reconciliation of Clean EBITDA to operating profit below).

 # Operations located physically outside of the US but which relate to US customers that were no longer accepted following the enactment of the UIGEA.

+ In 2008 net revenue from casino games on the bingo platform were reported within casino. These amounts are now reported within bingo. As a result, bingo net revenue for 2008 has been increased by $1.0m and bingo Clean EBITDA by $0.4m, with a corresponding decrease in casino.

Commenting on today's results announcement, Jim Ryan, Chief Executive Officer, said:

 

"We delivered a solid performance during 2009 which demonstrated the resilience of our business model that continues to generate strong cashflow, even in the most challenging of circumstances. Leading brands and market position, supported by a strong balance sheet underpin our business strategy. With some acquisitions and major B2B deals already under our belt, we plan to do more in 2010 and I believe we are on course to meet our objective of becoming the world's most valuable online gaming company."

 

Regarding current trading he added:

 

"The Group has continued to perform in-line with the Board's expectations. In the two month period ended 28 February 2010, average gross daily revenue was $2,074,000 (Q409: $2,090,800) reflecting a 1% reduction from the fourth quarter of 2009 that included an exceptionally strong performance in casino. All other verticals increased average gross daily revenue from the previous quarter. In poker, new player sign-ups increased to an average of 1,700 per day (Q409: 1,400), and there were on average 55,900 active players per day (Q409: 51,700) generating average gross daily poker revenue of $709,000 (Q409: $690,000). In casino, average gross daily revenue was $775,600 (Q409: $854,800). In bingo, average gross daily revenue was $493,800 (Q409: $452,600) and in sports betting, average gross daily revenue was $95,600 (Q409: $93,400).

 

"Whilst the macroeconomic environment remains uncertain, we remain focused on executing our stated strategy and are confident about the Group's prospects."

 

Contacts:

PartyGaming Plc	+44 (0) 207 337 0100
Peter Reynolds, Group Director of Corporate Affairs
John Shepherd, Director of Corporate Communications

 

Interview with Jim Ryan and Martin Weigold

An interview with Jim Ryan, Chief Executive Officer, and Martin Weigold, Group Finance Director, in video/audio and text will be available from 7.00am GMT on 4 March 2010 on: http://www.partygaming.com and on http://www.cantos.com.

 

Analyst meeting, webcast and dial-in details: Thursday 4 March 2010

There will be an analyst meeting for invited UK-based analysts at Numis Securities, The London Stock Exchange Building, 10 Paternoster Square, London, EC4M 7LT starting at 9.30am GMT. There will be a simultaneous webcast and dial-in broadcast of the meeting. To register for the live webcast, please pre-register for access by visiting the Group website (www.partygaming.com). Details for the dial-in facility are given below. A copy of the webcast and slide presentation given at the meeting will be available on the Group's website later today.

 

Dial-in details to listen to the analyst presentation: Thursday 4 March 2010

9.20 am	Please call +44 (0) 20 3037 9236
Title	PartyGaming 2009 Results
9.30 am	Meeting starts

 

A recording of the meeting will be available for a period of seven days from 4 March 2010. To access the recording please dial the following replay telephone number:

 

Replay telephone number	+44 (0) 20 8196 1998
Replay passcode:	5268582#

 

About PartyGaming Plc

 

PartyGaming Plc is the world's leading listed online gaming company. It is a constituent of the FTSE 250 share index with its shares listed on The London Stock Exchange under the ticker: PRTY. In the year to 31 December 2009, PartyGaming's Continuing operations generated revenues of $446.2m and Clean EBITDA of $135.0m. PartyGaming's principal brands are PartyPoker.com, one of the world's largest online poker rooms, EmpirePoker.com, PartyCasino.com, PartyBingo.com, PartyGammon.com, PartyBets.com, Intertrader.com, FoxyBingo.com, ThinkBingo.com, BingoScotland.com, CheekyBingo.com, GetMinted.com, WorldPokerTour.com and Gamebookers.com. None of the Group's sites accept real money customers located in the US.

 

PartyGaming Group companies are regulated and licensed by the Governments of Gibraltar and Italy and by the Alderney Gambling Control Commission. The Group is also certified as a responsible gaming operator by GamCare, the leading UK authority on the provision of advice, practical help, support and counseling in addressing the social impact of gambling. PartyGaming's shares are also a constituent member of the FTSE4Good Index Series, which enables investors to identify companies that meet globally recognised corporate responsibility standards. For more information, please visit www.partygaming.com.

 

Business Review

 

Introduction

The Group delivered a robust performance over the past year and made good progress against the three-year plan that was introduced in September 2008. We have weathered what can be described as a 'perfect storm' of volatile currency movements, the financial crisis and an unlevel playing field in poker and the Group remains on course to achieve its long-term strategic objectives.

 

While full details of the consolidated performance of Continuing and Discontinued operations are contained in the financial information and the accompanying notes, all references to financial performance or key performance indicators throughout this document refer to the Continuing operations only, unless expressly stated otherwise.

 

Results overview

Our performance over the past year demonstrates the resilience of our business model that continues to generate large amounts of operating cashflow even in very difficult economic conditions. This bodes well for the future as it ensures we can continue to position the business to take full advantage of the many exciting opportunities before us. Harnessing just one or two of these will put us well on our way to achieving our objective of becoming the world's largest online gaming company by market capitalisation.

 

Total revenue declined by 6% to $446.2m (2008: $472.9m) reflecting a soft performance in poker that was mitigated by solid growth in casino as well as the addition of Cashcade that was acquired on 23 July 2009. Foreign exchange movements accounted for approximately half of the year-on-year decline in revenue. Despite the high level of operational gearing inherent within the Group's business model, the corresponding impact on Clean EBITDA was reduced by careful management of the Group's cost base. Clean EBITDA margins were 30.3% (2008: 30.5%) resulting in a 6% reduction in Clean EBITDA to $135.0m (2008: $144.2m).

 

The following table provides a reconciliation of the movements between Clean EBITDA and operating profit:

 

Reconciliation of Clean EBITDA to operating profit / (loss)

Year ended 31 December	2009 $million	2008 $million
Continuing operations
Clean EBITDA	135.0	144.2
Depreciation	(12.0)	(18.6)
Amortisation	(30.5)	(23.0)
Share-based payments	(8.9)	(21.7)
Impairment losses - assets held for sale	(0.6)	(1.3)
Reorganisation costs	(1.9)	(1.7)
Profit from operating activities - Continuing operations	81.1	77.9
Discontinued operations
Clean EBITDA	(0.8)	(10.9)
Provision for payments associated with the Group's Non-Prosecution Agreement	(101.0)	-
Loss from operating activities - Discontinued operations	(101.8)	(10.9)

 

Although we have continued to optimise the Group's cost base, it has not been at the expense of new investment across the business. Examples include the acquisitions of Cashcade and WPT, our continued drive to attract the very best talent in the industry, the launch of our new VIP and loyalty programmes as well as the addition of over 80 new games to our platform. Having now achieved a market-leading position in three out of four of our product verticals, we are keen to strengthen our position in sports betting.

 

The Group's performance in 2009 and the solid start made in the first few weeks of 2010 have been driven by the effective implementation of our business strategy.

 

Strategy

 

Our focus on profitable growth, after taking into account the competitive and regulatory landscape, drives our business strategy, the core elements of which remain as follows:

 

·; Grow the player base;

·; Localise the customer offer;

·; Broaden the product base; and

·; Act responsibly.

 

Delivering the strategy

 

Despite the shifting landscape over the past 12 months, each of the four elements of our strategy are as relevant today as they were when first introduced in 2006. We have identified four key drivers that we strongly believe improve our chances of success and we have sought to apply each of them across all of our tactical plans.

 

Operational Excellence - a focus on our core operations, ensuring that all aspects of our business are optimised and delivering the desired results.

 

Delight the Customer - by creating the most enjoyable player experience, through a balanced mix of innovation, technology and customer care, we believe that our customer appeal and customer retention rates will increase, delivering higher returns on investment.

 

Leverage our own assets - compared with many other listed companies, the Group has a relatively high proportion of intangible assets such as our brands, extensive customer lists, years of international online gaming experience, technical know-how and expertise and the jewel in the crown: our multi-product, multi-currency and multi-lingual technology platform. All of these assets are important for our business-to-consumer offer and are also now being put to good use by others through B2B deals to generate incremental revenue streams for the Group.

 

Leverage the assets of others - owning the vast majority of our content has historically been a key differentiator between PartyGaming and several of our main competitors. However, we recognise that we don't have all the best ideas, products and brands and that there are third-party assets that we can draw upon to improve our product offer and enhance the customer experience.

 

2009 business developments

Our three-year rolling business plan comprises a number of strategic as well as operational initiatives aimed at delivering on all four pillars of our strategy. These initiatives have begun to produce positive results in the form of encouraging KPI trends and we expect that this will feed through into current and future financial performance.

 

We have again grown the player base and seen an increase in the number of unique active players that reached 727,100 in the fourth quarter of 2009 (Q4 2008: 584,300). As the popularity of online gaming continues to expand internationally, we have sought to continue to localise our customer offer by adding new language versions of our products and increasing the number of languages supported by our customer service teams. We have added over 80 new games to our system over the past year, helping to broaden the product base and ensure our customer offer remains one of the best in the market. Each of these strategies has been executed whilst continuing to act responsibly. Responsibility and our associated reputation are increasingly valuable as they influence licensing bodies in certain countries and are already proving important in securing B2B and B2G contracts with sizeable international corporations and governments.

 

Key highlights

 

Having resolved the Company's legal position in the US, announced and launched a number of B2B services as well as completed the acquisition of both Cashcade and World Poker Tour, 2009 was a successful year on the strategic front. Our operational development has been no less impressive. We launched our Italian poker network in June, revitalised our VIP and loyalty programmes in July, introduced many new games onto our platform, relaunched the PartyPoker.com and PartyCasino.com brands, launched a dedicated affiliate network for PartyCasino.com and developed a market-leading jackpot strategy that resulted in one of the largest online jackpot wins in history in December 2009. A number of these developments are described in more detail below.

 

Non-Prosecution Agreement

Consistent with our stated strategy of removing any legacy issues relating to the Group's acceptance of customers located in the US prior to the enactment of the Unlawful Internet Gambling Enforcement Act ('UIGEA'), the Company entered into a Non-Prosecution Agreement with the US authorities ('NPA') on 6 April 2009, under which the Group will not be prosecuted. The settlement included a commitment by PartyGaming to pay $105.0m over a 42-month period, of which as at 31 December 2009, a total of $15.0m had been paid. This draws a line under the Group's US-facing activities prior to 13 October 2006 and since concluding the NPA, the Group has been successful in both completing M&A transactions and winning B2B contracts, opportunities that previously might not have been available.

 

B2B

Our B2B strategy was announced in August 2008 as part of our drive to broaden the player base and expand our geographic reach. Since then the Group has made excellent progress in building an expanding portfolio of customers. Using the models of both white labels - where we own the gaming customer list but leverage the brands of our business partner - as well as network services, where we act as a service provider to a third-party, we announced and launched five deals in 2009, in-line with our stated target. Our portfolio has been further boosted by the acquisition of Cashcade.

 

Acquisitions

On 23 July 2009 the Group acquired Cashcade, the UK's number one online bingo business1, for a cash consideration of £71.9m with up to £24.0m in contingent consideration, depending on future profit performance. This acquisition has transformed the Group's position in the $1.7 billion per annum online bingo market2, becoming a market-leader with opportunities for international expansion.

1Source: BingoPort.com 2 Source: H2GC – February 2010

 

On 9 November 2009, the Group completed the acquisition of the business and assets of WPT Enterprises Inc., the owner of the World Poker Tour ('WPT'), for $12.3m plus an ongoing revenue share agreement which is subject to a minimum aggregate payment of $3.0m over the next three years. The Group plans to leverage the strong WPT brand and land-based tournament franchise, to promote the Group's leading position in the global online poker market and to position the Group for a possible re-entry to the US, should an appropriate licensing regime be introduced.

 

On 22 January 2010 the Group confirmed that it was in preliminary discussions with a number of parties regarding possible consolidation opportunities. While there can be no certainty that such discussions will result in any form of transaction with any party, the Group is determined to continue to play an active role in consolidating the industry.

 

Italian Poker

In its first full year of operation, the Italian online poker market grew rapidly reaching gross turnover of approximately €2.5 billion1. To-date, poker games have been limited to tournament poker only. However, this is set to change with the imminent introduction of ring games as well as online casino games expected in April 2010 and with online bingo games later in the year. In January 2010, the PartyPoker network, that also now includes players from our two B2B partners in Italy, INTRALOT and Fueps, had an estimated market share of approximately 2%. Having been a late market entrant, this is still relatively small but the Group has doubled its share since September 2009 and with the proposed regulatory changes and a number of exciting marketing initiatives planned, this growth is expected to continue.

 

1 Source: Agenzia Autonoma Monopolio di Stato

Product expansion

The Group has continued to broaden its product base, not just through acquisition as described above, but also by leveraging the assets of others through the exclusive licensing of popular international brands such as Godfather and Gone With The Wind to create unique slots and jackpot slots that act as useful player acquisition tools and help to differentiate PartyCasino from other casino offerings. We also continue to add games provided to us by third parties including Wagerworks, NextGen and Cryptologic although our own games are proving to be just as popular as some of the more well-established games. For example, Terminator was the Group's most popular slot game in December 2009. In addition to new games, we have also revolutionised our jackpot strategy, resulting in a $5.0 million winner in December 2009. Large jackpots are highly attractive to players and help to drive both player activity and player yields.

 

An update on each of the Group's areas of operations is provided below.

 

1. Sales and player marketing

The Group's sales and marketing function has continued to attract large numbers of new players with 802,800 new real money players added to our network in 2009. Having boosted the senior management team with new leadership, a focus on the Group's most attractive territories resulted in a 27% increase in the number of new player sign-ups versus the previous year. Geographically it is clear where our focus lies as EMEA grew new player sign-ups by 35% while the Americas and Asia Pacific both fell year-on-year. This fed through into active player days as shown in the following tables.

 

New player sign-ups (000)

Year ended 31 December	2009	2008	% change
EMEA*	723.3	536.6	35%
Americas (non-US)	56.3	66.3	(15%)
Asia Pacific	23.2	27.0	(14%)
Total	802.8	629.9	27%

 

Active player days (m)

Year ended 31 December	2009	2008	% change
EMEA*	22.7	20.7	10%
Americas (non-US)	3.4	4.5	(24%)
Asia Pacific	0.9	1.2	(25%)
Total	27.0	26.4	2%

* Europe, Middle East and Africa

 

The past year has been focused on improving some of the core elements of our marketing function. First and foremost was our loyalty programme which was seen as being overly complex and was relatively unattractive compared with certain of our competitors. Our revamped Palladium Club Reward Programme was launched in July 2009 and represented a complete re-engineering of the Group's loyalty scheme. Initially focused on increasing the retention of and share of wallet of our most valuable VIP players, the programme was then extended to include medium-value players. This alone has had a significant impact upon player numbers and loyalty and has begun to feed through into both revenue and profit.

 

In addition, we improved our process for reactivating players that has also helped to improve player retention, particularly in poker. Having organised our database into over 1,100 customer segments, the programme identifies groups of players based on their individual behaviour, allowing us to offer them a bespoke promotion based on what they did and when they did it. This ensures that the player gets the right offer and at the right time, according to the segment that he or she is in. Running 24/7, the programme can make up to a total of 15,000 separate offers across our database of players every day.

 

The past 12 months has seen a step change in the organisation and effectiveness of our promotions. In poker we had a number of successes in particular with initiatives such as the Gladiator and Cash Machine promotions that offered players incentives to extend their play with us. Our fraud detection and bonus abuse monitoring tools have also allowed us to improve the efficiency of our promotions, increasing the return on investment and driving yields higher.

 

2. Systems and product development

The Group's systems and technical infrastructure continue to contribute to the Group's long-term success. As well as maintaining and improving the core B2C product and platform, during 2009 we designed, developed and launched five B2B services as part of our technology roadmap. In addition to a continuous programme of minor upgrades and fixes, our team of full-time product development personnel oversaw the introduction of a total of six major software releases during the year, delivering approximately 1,100 specific projects requested by the business.

 

Having committed to expanding the Group's product base through games developed internally as well as those supplied by third parties, our casino now offers over 145 different games. Despite only having been launched relatively recently, our own in-house developed games have proved to be particularly successful. In-house produced gaming content during 2009 included slot games such as Sinatra, Rambo, Naked Gun,Call Of Duty and Raptor Island as well as our new $1.5 million seeded jackpot slot, Melon Madness, all delivered on schedule.

 

The unlevel playing field that exists in poker means that as a business we have had to get smarter by developing new concepts and promotions. The introduction of 9-seat tables, that increased the average speed of a hand of poker on those tables, as well as heads-up tables and many more tournaments, all contributed to the turnaround in our poker business during the fourth quarter of 2009. The launch of Gamebookers poker at the end of June also helped to attract players from territories in Central and Eastern Europe where the Gamebookers brand is particularly strong.

 

Having a cutting edge product is of course key for winning B2B and B2G contracts. We successfully launched products for five B2B alliances in 2009, including our first network service for INTRALOT in Italy.

 

3. Customer service

Delivering a fantastic customer experience is a key focus for us - get this right and success will usually follow. Responding quickly to customer problems and queries is important for customer satisfaction and minimising player loss but it also drives our KPIs by helping to increase the velocity and volume of player transactions.

 

At the end of 2009 we had over 180 full-time customer service agents providing support in 13 languages other than English (Danish, French, German, Greek, Italian, Hungarian, Japanese, Polish, Romanian, Russian, Spanish, Swedish and Portuguese). Approximately one third of the 3.2 million customer contacts received during the year were conducted in languages other than English and 70% of the total were dealt with via email and the balance by phone and chat. During the year we increased the capability of our chat functions in order to be much more pro-active in helping customers with problems and this is helping to increase player conversion.

 

Regulatory developments

There follows a review of the key regulatory developments as we see them and how they may have a bearing on our business.

 

United States

The US remains the world's largest online gaming market and resolving any uncertainty with regard to the Group's legal status in the US was a top priority for 2009. We achieved this aim on 6 April 2009 when the United States Attorney's Office for the Southern District of New York ('USAO') agreed not to prosecute the Group for providing internet gaming services to customers in the US prior to the enactment of the UIGEA in October 2006.

 

In spite of the law change in 2006, certain online gaming businesses continue to offer real money games to customers in the US and this remains a significant competitive threat. Not only do such sites benefit from the huge pool of US player liquidity that attracts European players, they also generate large profits that can be deployed in markets where we also compete. While there has been a six-month delay to the implementation of the UIGEA provisions until June 2010, we believe the US authorities will enforce their laws and that this could provide a major stimulus for PartyGaming and other publicly listed online gaming companies that no longer accept players located in the US.

 

Recent regulatory developments in the US fall under either a federal or state-level heading.

 

At a federal level, The Internet Gambling, Regulation Consumer Protection and Enforcement Act sponsored by Barney Frank, the Chair of the US House of Representatives Financial Services Committee, and its companion Internet Gambling Tax Act, sponsored by Jim McDermott, continue to gain support in Washington, albeit slowly. Mr Frank has already held one hearing in his Committee and more are expected in 2010. Separately, while the Internet Poker and Games of Skill Regulation, Consumer Protection, and Enforcement Act of 2009 that was introduced into the Senate by Robert Menendez has made limited progress, in February 2010 Senators Wyden and Gregg introduced the Bipartisan Tax Fairness and Simplification Act. This bill contains provisions to license regulate and tax online gaming along the lines proposed by Congressmen Frank and McDermott.

 

A key driver behind Mr Frank's and Mr McDermott's Bills is that if introduced they would, according to the Joint Committee on Taxation, generate incremental tax revenues of approximately $42 billion over 10 years and this is at a time when US government finances are under significant strain.

 

At a state level, proposals are being contemplated to regulate and license intra-state online poker in several states, including California and New Jersey. A state-sponsored study into the implications of a similar regime was presented to Florida's Senate Regulated Industries Committee in January 2010.

 

While these are encouraging developments, the prospects for any of these federal or state measures becoming law remains uncertain.

 

Europe

In Brussels, a newly elected European Parliament and also a newly appointed European Commission under President José Manuel Barroso are now in place. A particular area of focus in 2010 is likely to be how Michel Barnier, the new Internal Market Commissioner, intends to tackle the 10 Member States facing alleged breaches of EU law relating to their restrictions imposed on legitimate EU-licensed online gaming companies. Some of these date from 2004 with little progress yet to be made.

 

At the European Court of Justice ('ECJ'), the long-awaited case involving the Portuguese monopoly, Santa Casa da Misericórdia de Lisboa and Bwin, an online gaming company, concluded that the centuries-old Portuguese monopoly may be justified under EU law if certain conditions are met and the ECJ has now asked the domestic court to decide whether or not this is the case. Seen as a victory by monopolies across Europe, the charitable and almost unique status of Santa Casa has prompted many to comment that any wider implications for other gaming monopolies in Europe should not be taken for granted. This was a view shared by Commissioner Barnier in response to questions from members of the European Parliament shortly after he took office.

 

Good progress has been made in liberalising gaming laws in other countries, including Italy where the government announced its intention to launch cash game poker, casino as well as bingo games in 2010. France is also expected to liberalise in 2010 with proposals to license and regulate online poker and sports betting. While we wait to see the exact shape and timing for the French legislation, this is likely to prove an exciting development for us.

 

The Danish online gaming market is expected to open in early 2011 and again we feel we are well-positioned, assuming the requisite legislation is passed. Recent developments in Spain would indicate that it may well follow a similar model in 2011.

 

Not all countries are looking to open their markets. The Netherlands is continuing to press ahead with legal action against two UK online sports betting companies for alleged breaches of its domestic gaming laws, even though these laws themselves appear to be in breach of EU law. In Germany, certain Länder (regional states) are keen to enforce Germany's State Lottery Treaty, despite the fact that the European Commission has already commented that such law appears to be inconsistent with EU law. However, at the same time other Länder have stated their intention to reject the State Lottery Treaty in favour of their own state-level licensing system for private operators. Elsewhere, new laws that affect online gaming have also been introduced in Belgium, Estonia, Poland, Romania and Slovenia but concerns from the European Commission mean that we must wait to see how these unfold.

 

In summary, whilst objections still remain in parts of Europe and other markets, the financial crisis and the need to raise tax receipts may prove to be an invaluable catalyst in forcing governments to recognise that online gaming is here to stay and has the potential to generate substantial tax revenue. As well as helping to mitigate budgetary challenges, there is a need to ensure their citizens can enjoy a safe and secure online gaming environment, one that also protects children and the vulnerable. Whilst we believe that effective regulation can tick all these boxes, we also believe that a uniform framework across Europe is unlikely to become a reality in the short-term.

 

Directors

Rami Lerner was appointed as a Non-Executive Director on 4 March 2009, replacing John Davy following his resignation on the same day. John O'Malia resigned on 28 February 2009 and Emilio Gomez on 22 September 2009. The Board of Directors has a balance of independent and non-independent Directors (excluding the Chairman) and therefore complies with the Combined Code on Corporate Governance.

 

Dividend

Given the wealth of consolidation opportunities, the Board believed it was imprudent to recommend the payment of a final dividend in 2009. However, the Board continues to keep this position under review.

 

Key objectives for 2010

During 2010 we will continue to execute our strategic plan and will seek to capitalise on a number of strategic and operational developments.

 

B2B and B2G

Having launched online gaming services through five commercial alliances in 2009, we aim to secure another five deals in 2010, but only those that fulfil our criteria i.e. have the potential to make a meaningful difference to our bottom-line and can help to enhance our reputation.

M&A

In August 2009 we announced our desire to complete an acquisition to put us in a market-leading position in sports betting. Assuming issues of valuation, risk, culture and technology can be overcome, the operational leverage embedded within online gaming businesses means that the potential financial benefits from business combinations in our industry can be significant. Whilst we continue to hold discussions with a number of potential partners, there can be no guarantee that any transaction will take place with any party.

 

Operations

Operationally, 2009 has been one of our busiest years yet with a raft of initiatives across all of our business segments with a focus on delighting the customer. For 2010 we plan more of the same by improving every element of the customer experience, whilst continuing to hone our operational procedures and reduce costs, where practicable to do so.

 

Given the opportunities before us, we plan to reinvest the majority of any cost savings made. Three areas of investment are likely to be marketing - both offline, but especially online where we believe that there is an opportunity to make further gains; technology - preparing our systems for the opening of new markets such as Italy (cash game poker, casino and bingo), France (poker and sports betting), Denmark (poker, casino and sports betting) as well as the possibility that we could see a return to the US at some point and; finally, we will continue to invest in each of our four core products:

 

Poker - we will expand our presence internationally by building new partnerships through B2B and B2G, leveraging the WPT platform and increased localisation. The evolution of our product will also continue in 2010 with new game variants as well as additional features to enhance the overall player experience. Combined with attractive promotions and our enhanced VIP and loyalty programmes, our objective is to drive up both player numbers and revenues.

 

Casino - we will continue to reduce our reliance on the cross-sell from poker and increase the number of dedicated casino players on our sites. Extending average player values through automated retention campaigns, enhanced customer relationship management techniques and the addition of at least 50 new games are also planned in 2010. Unique and cutting-edge content will be sourced from both our in-house team and third-party suppliers.

 

Bingo - completing the successful integration of Cashcade is a priority. We also plan to improve retention and loyalty measures as well as build the market share of its flagship Foxy Bingo brand in 2010. We believe major opportunities exist to grow our brands into international markets such as Italy and we plan to grab these opportunities with both hands.

 

Sports betting - we remain focused on continuing to improve our gross win margin through the deployment of additional mathematical live trading models and the recruitment of experienced 'live traders' whilst ensuring that top line growth also remains on track with targeted marketing campaigns for key territories.

 

Current trading and outlook

The Group has continued to perform in-line with the Board's expectations. In the two month period ended 28 February 2010, average gross daily revenue was $2,074,000 (Q409: $2,090,800) reflecting a 1% reduction from the fourth quarter of 2009 that included an exceptionally strong performance in casino. All other verticals increased average gross daily revenue from the previous quarter. In poker, new player sign-ups increased to an average of 1,700 per day (Q409: 1,400), and there were on average 55,900 active players per day (Q409: 51,700) generating average gross daily poker revenue of $709,000 (Q409: $690,000). In casino, average gross daily revenuewas $775,600 (Q409: $854,800). In bingo, average gross daily revenue was $493,800 (Q409: $452,600) and in sports betting, average gross daily revenue was $95,600 (Q409: $93,400).

 

Whilst the macroeconomic environment remains uncertain, we remain focused on executing our stated strategy and are confident about the Group's prospects.

 

SUMMARY OF RESULTS

	Net revenue		Clean EBITDA
Year ended 31 December	2009	2008	2009	2008
Poker	196.7	274.0	42.8	76.1
Casino	196.2	175.0	74.4	65.7
Bingo	32.8	5.9	13.4	0.3
Sports Betting	19.0	18.0	5.8	5.1
Unallocated Corporate	-	-	(1.4)	(3.0)
Total Continuing operations	444.7	472.9	135.0	144.2
Discontinued operations	-	-	(0.8)	(10.9)
Total	444.7	472.9	134.2	133.3

 

While the acquisition of Cashcade and a strong performance in casino helped to mitigate the impact of a challenging macroeconomic environment and an unlevel playing field in poker, revenue declined by 6% versus the previous year. Approximately half of the decline was attributable to foreign exchange movements. Despite the high operational gearing inherent within the Group's business model, careful cost control meant that the impact on Clean EBITDA margins was limited and Clean EBITDA fell by 6% to $135.0m (2008: $144.2m). A reduction in costs from Discontinued operations meant that total Clean EBITDA increased to $134.2m (2008: $133.3m).

 

The underlying performance of each of our consolidated key performance indicators, which are based on net revenue, are highlighted below:

 

Consolidated Key Performance Indicators

Year ended 31 December	2009	2008	% change
Active player days (million)	27.0	26.4	2%
Daily average players (000s)	74.0	72.0	3%
Yield per active player day ($)	16.5	17.9	(8%)
New real money sign-ups (000s)	802.8	629.9	27%
Average daily net revenue ($000)	1,218.4	1,292.0	(6%)

 

Active player days increased by 2% and daily average players by 3% in 2009 driven by a 27% increase in new player sign-ups with lower activity levels in poker and casino being off-set by the addition of Cashcade and an improvement in sports betting. Reduced yields in poker and bingo outweighed another strong performance in casino and overall consolidated yield per active player day fell 8% to $16.5, although the Group saw a return to growth in the fourth quarter of 2009 with yields up 8% over the previous quarter. The net effect was that average daily net revenue for the year as a whole, fell by 6% year-on-year to $1,218,400 (2008: $1,292,000).

 

There follows a more detailed review of the Continuing operations including each of the individual product segments. Full details of all of the Group's historic quarterly key performance indicators can be downloaded from the Group's website at: http://www.partygaming.com/investor/documentation.html.

 

Poker

Year ended 31 December	2009 $million	2008 $million	% change
Gross revenue	250.9	327.6	(23%)
Bonuses and other fair value adjustments to revenue	(54.2)	(53.6)	(1%)
Net and total revenue	196.7	274.0	(28%)
Clean EBITDA	42.8	76.1	(44%)
Clean EBITDA margin	21.8%	27.8%

 

While gross poker revenues declined by 23% versus the prior year, it was the impact of a strong US dollar coupled with a consumer downturn and severe competitive pressures in the first half that was the key drag on gross revenue performance in 2009. Gross revenue in the second half was broadly flat compared with the previous half following a conscious decision to recover some lost ground in player numbers and become more competitive through an increase in bonus rates. These rates increased from under 20% of gross revenue in the first half to 24% in the second half of 2009. Whilst player numbers and overall activity levels increased in the second half, this was at the expense of net revenue that fell by approximately 8% versus the first half of 2009.

 

The poker business returned to growth during the fourth quarter of 2009 with both player numbers and average net daily revenues increasing over the previous quarter. While the Group has lost some share to US-facing competitors, the Group re-claimed third place in the global rankings in January 2010, a position it has held since then. In the week ended 28 February 2010, it is estimated that the Group had approximately 6%1 of the global online poker market versus 7% in August 2009.

1Based on the average number of daily real money cash game players - source: PokerScout.com

 

The reduction in net revenue impacted Clean EBITDA margins that reduced to 21.8% (2008: 27.8%) and as a result poker Clean EBITDA also declined to $42.8m (2008: $76.1m).

 

The table below shows the key performance indicators for poker versus the prior year:

 

Poker - Key Performance Indicators

Year ended 31 December	2009	2008	% change
Active player days (million)	18.4	21.0	(12%)
Daily average players (000s)	50.4	57.3	(12%)
Yield per active player day ($)	10.7	13.1	(18%)
New real money sign-ups (000s)	496.1	444.9	12%
Average daily net revenue ($000)	538.9	748.8	(28%)

 

Despite a 12% increase in new player sign-ups to 496,100 (2008: 444,900), player numbers declined by 12% reflecting intense competition in the global poker market as well as a delay in the relaunch of the Group's VIP and loyalty programmes that did not go live until July 2009. Since being introduced, player numbers have increased as reflected in the Group's fourth quarter performance reported on 3 February 2010. The Group's Italian poker network began to gather momentum in the second half but despite growing strongly, was still less than 1% of total poker revenue in 2009.

 

Improving the rewards for both loyal players and VIPs helped to soften the impact of increasing player attrition rates associated with an expanding customer base. Approximately 16.6% of all 2009 poker sign-ups remained active after six months versus 16.9% of all 2008 sign-ups. As at 31 December 2009, across all real money poker sign-ups, the proportion of players remaining active after six months was approximately 23% (2008: 24%), after 12 months it was 17% (2008: 19%) and after 18 months it was 14% (2008: 15%).

 

Whilst the strategic decision to become more competitive on player bonuses reduced yield per active player day to $10.7 (2008: $13.1), the trend in yields did improve in the fourth quarter of 2009 on the back of the improved loyalty and VIP programmes referred to above, as well as more effective player marketing.

 

Casino

Year ended 31 December	2009 $million	2008 $million	% change
Gross revenue	267.1	241.3	11%
Bonuses and other fair value adjustments to revenue	(70.9)	(66.3)	(7%)
Net and total revenue	196.2	175.0	12%
Clean EBITDA	74.4	65.7	13%
Clean EBITDA margin	37.9%	37.5%

 

The Group's casino business delivered a particularly strong performance in 2009, strengthening our position as the world's largest online casino. Despite the exceptionally strong performance during the fourth quarter of 2009, the total amount wagered in 2009 was down 6% to $7.5 billion (2008: $8.0 billion) due to reduced wagering on blackjack on the back of lower cross-sell from poker, the macroeconomic climate and currency movements. However, an improved mix in games played towards higher hold games such as slots and jackpot slots and away from lower hold games such as blackjack, increased the average hold resulting in an 11% increase in gross revenue to $267.1m (2008: $241.3m).

 

A reduction in bonuses and other fair value adjustments from 27.5% to 26.5% of gross revenue meant that net revenue increased by 12% to $196.2m. This increase, that included approximately $2.0m from the recycling of a $5.0m jackpot prize won by one of our VIP players in December 2009, meant that Clean EBITDA margins increased to 37.9% (2008: 37.5%) and Clean EBITDA increased by 13%. A summary of the key performance indicators for the casino business during 2009 is shown in the table below:

 

Casino - Key Performance Indicators

Year ended 31 December	2009	2008	% change
Active player days (000s)	4,001.2	4,277.2	(6%)
Daily average players (000s)	11.0	11.7	(6%)
Yield per active player day ($)	49.0	40.9	20%
New real money sign-ups (000s)	103.0	80.0	29%
Average daily net revenue ($000)	537.5	478.1	12%

 

Our focus on growing the volume of dedicated casino players continued in 2009 with a 29% increase in new player sign-ups to 103,000. This reflects our desire to both reduce the reliance on poker as a source of casino traffic and also to increase player yield as dedicated casino customers tend to generate more revenue than poker players. As can be seen, whilst overall player activity is down 6%, player yields are up 20% reflecting the improving player mix and the shift towards higher yielding games - in 2009 blackjack represented 17% of the amount wagered in casino compared with 25% in 2008.

 

Bingo

Year ended 31 December	2009 $million	2008 $million	% change
Gross revenue	76.3	7.7	891%
Bonuses and other fair value adjustments to revenue	(43.5)	(1.8)	(2,317%)
Net revenue	32.8	5.9	456%
Other revenue	0.7	-	n/a
Total revenue	33.5	5.9	468%
Clean EBITDA	13.4	0.3	4,367%
Clean EBITDA margin	40.0%	5.1%

 

The acquisition of Cashcade in 2009 transformed the Group's presence in the $1.7 billion global online bingo market1. Acquired for a multiple of between five and six times EBITDA, dependent on financial performance in 2009 and 2010, the Group is now a market-leader in this exciting gaming segment. Average daily revenue in the fourth quarter of 2009 increased by 26%.

1 Source: H2GC February 2010

 

While bonuses as a proportion of revenue increased sharply following the Cashcade acquisition, this simply reflects a different philosophy with regard to bonuses, one that has helped to build Cashcade into the highly profitable business that it is today. With the addition of $0.7m of other revenue from network services, bingo now represents approximately 8% of Group total revenue, up from just 1% in 2008.

 

A summary of the key performance indicators for bingo are shown below:

 

Bingo - Key Performance Indicators

Year ended 31 December	2009	2008	% change
Active player days (000s)	3,324.3	396.4	739%
Daily average players (000s)	9.1	1.1	727%
Yield per active player day ($)	9.9	14.9	(34%)
New real money sign-ups (000s)	88.7	22.4	296%
Average daily net revenue ($000)	89.9	16.1	458%

 

All of the key performance indicators for bingo showed strong growth over the prior year with the exception of yield per active player day that reflects the different business model adopted by Cashcade with higher volume and lower value players. Bonuses and other fair value adjustments to revenue increased sharply post-acquisition and the average for the year increased to 57% of gross revenue (2008: 23%), again reflecting Cashcade's business model. However, despite this sharp increase, average daily revenue was still up over five-fold to $89,900 (2008: $16,100). Revenue would have been even higher but for the introduction of additional payment security measures by Cashcade's software provider during the second half that impacted player deposits and revenues during the third quarter of 2009.

 

Historically, the Cashcade business has tended to incur the majority of its marketing expenditure during the first half with the result that Clean EBITDA margins tend to be weighted to the second half of the year. 2009 was no different with Clean EBITDA margins more than doubling in the second half of 2009 to over 43% following the contribution from Cashcade. As a result, bingo Clean EBITDA was $13.4m with an average Clean EBITDA margin of 40.0% (2008: 5.1%). We anticipate a more balanced spread of marketing expenditure throughout the year in 2010.

 

Sports Betting

Year ended 31 December	2009 $million	2008 $million	% change
Total stakes	494.4	538.8	(8%)
Gross win margin	5.5%	4.7%
Gross revenue	27.2	25.1	8%
Bonuses and other fair value adjustments to revenue	(8.2)	(7.1)	(15%)
	17.9	16.1	11%
Net and total revenue	19.0	18.0	6%
Clean EBITDA	5.8	5.1	14%
Clean EBITDA margin	30.5%	28.3%

 

The Group's sports betting business, comprising PartyBets.com and Gamebookers.com, delivered a robust performance in 2009 with a marked improvement in the second half of the year. The amount wagered declined by 8% overall due to currency movements, steps taken to scale back unprofitable players, as well as the prior year benefiting from the Euro 2008 football tournament. Operational improvements as well as a favourable run of results helped to increase the gross win margin to 5.5% (2008: 4.7%). Our drive to increase the volume of combination bets rather than singles also helped to raise gross win margins - 'combis' tend to attract higher gross win margins and represented approximately 22% of the amount wagered versus 13% in 2008. Tighter controls over bonuses, that fell from 2.0% of the amount wagered to 1.2% in the second half also helped to improve overall performance.

 

Live betting continues to represent a significant proportion of total betting volume at approximately 47% of total stakes (2008: 41%) and while this tends to attract lower margins than the main book, through the deployment of our own mathematical models, we have begun to see an improvement in the gross win margin on live betting that was 2.3% in 2009, up from 1.9% in 2008. The increase in net revenue and the operational leverage of the business helped to boost Clean EBITDA margins to 30.5% (2008: 28.3%) and Clean EBITDA rose by 14% to $5.8m (2008: $5.1m).

 

Sports Betting - Key Performance Indicators

Year ended 31 December	2009	2008	% change
Active player days (000s)	3,552.5	3,456.9	3%
Daily average players (000s)	9.7	9.4	3%
Yield per active player day ($)	5.3	5.2	2%
New real money sign-ups (000s)	115.0	82.6	39%
Average daily net revenue ($000)	52.1	48.8	7%

 

Despite the challenging macroeconomic environment, active player days and the daily average number of players both increased by 3%, driven by a 39% increase in new player sign-ups. Soccer remains the most popular sport representing 54% of the amount wagered with tennis, basketball and ice hockey being the Group's other major sports.

 

Distribution costs

Year ended 31 December	2009 $million	2008 $million	% change
Customer acquisition and retention	71.2	71.9	1%
Affiliates	65.5	69.8	6%
Other customer bonuses (not netted from revenue)	7.4	6.1	(21%)
Customer bad debts	6.1	2.1	(190%)
Webhosting and technical services	36.1	29.6	(22%)
Distribution costs	186.3	179.5	(4%)
Distribution costs as a % of total revenue	41.8%	38.0%

 

Customer acquisition and retention spend fell in nominal terms but remained within the 15-16% range of net revenue that we have seen in recent years. Affiliate expenses were steady at 14.7% of net revenue and we are continuing to expand our network whilst ensuring that we maintain a healthy balance between the direct and affiliate channels. Other customer bonuses increased from 1.3% to 1.7% of net revenue reflecting an increase in tournament top-ups that was successful in attracting more tournament players. The increase in bad debts, that comprise chargebacks net of fraud recovery, from 0.4% to 1.4% of revenue, reflects a conscious decision to make it easier for customers to deposit. The resultant increase in bad debts is an acceptable side-effect of a drive to increase deposits. A 22% increase in webhosting and technical service costs reflects the inclusion of the contractual fee payable to 888 Holdings for hosting and supporting Cashcade's bingo games, as well as increased royalty payments attributable to our third-party providers of slots and branded content on the back of higher slot revenues.

 

Whilst this meant that distribution expenses increased to 41.8% as a proportion of revenue (2008: 38.0%), this was within the guidance given following the acquisition of Cashcade in July 2009.

 

Administrative expenses

Year ended 31 December	2009 $million	2008 $million	% change
Transaction fees	27.3	31.2	13%
Staff costs	68.6	82.1	16%
Other overheads	27.4	33.1	17%
Clean EBITDA administrative expenses	123.3	146.4	16%
Depreciation	12.0	18.6	35%
Amortisation	30.5	23.0	(33%)
Impairment losses - assets held for sale	0.6	1.3	54%
Reorganisation costs	1.9	1.7	(12%)
Administrative expenses before share-based payments	168.3	191.0	12%
Share-based payments	8.9	21.7	59%
Administrative expenses	177.2	212.7	17%
Clean EBITDA administrative expenses as a % of total revenue	27.6%	31.0%
Administrative expenses before share-based payments as a % of total revenue	37.7%	40.4%
Administrative expenses as a % of total revenue	39.7%	45.0%

 

Administrative expenses tend to represent more fixed costs within the business. Despite the decline in revenue year-on-year, through careful management of the cost base, both Clean EBITDA administrative expenses and administrative expenses before share-based payments declined both in absolute terms but also as a percentage of total revenue. 2009 represents the fourth year in succession that we have continued to reduce administrative expenses before share-based payments as a proportion of revenue, reaching 37.7% of total revenue in 2009 versus 40.4% in 2008.

 

This reduction was achieved despite a significant increase in amortisation costs associated with the acquisitions of both Cashcade and WPT that added $9.9m of additional costs, albeit non-cash in nature. Having renegotiated a number of agreements with some of our key payment processors, transaction fees fell in both absolute terms and as a proportion of revenue. With an extended pay freeze across almost all areas of the business including executive management, together with the benefits of a reorganisation that took place in the second half of 2009, staff costs fell to 15.4% of revenue having been 17.4% of revenue in 2008 and 21.0% of revenue back in 2006. Depreciation fell to 2.7% of revenue reflecting that a number of the Group's assets are now fully depreciated.

 

Share-based payments

The vesting of nil-cost options granted in earlier periods was the key driver behind the reduction in share-based payments during the year, partially off-set by the issuance of fair market value options as part of the Group's overall incentive scheme.

 

Further details are contained in note 3 to the Financial Information below.

 

Taxation

 

The tax charge for the year is $5.9m (2008: $4.6m) reflecting an effective tax rate for Continuing operations of 7.1% (2008: 5.6%). The effective tax rate for Continuing operations before share-based payments is 6.4% (2008: 4.4%). The increase from the prior year is attributable to Cashcade, whose operations are subject to UK tax at 28.0%. There is no tax associated with Discontinued operations.

 

Net cash (including amounts held by processors)

 

Year ended 31 December	2009 $million	2008 $million
Cash and cash equivalents	208.8	193.1
Short-term investments	11.6	8.3
Loans and borrowings	(55.7)	-
Net cash	164.7	201.4
Payment service providers	23.4	23.8
	188.1	225.2
Less: Client liabilities and progressive prize pools	(125.5)	(131.1)
	62.6	94.1

 

Cashflow

 

Year ended 31 December	2009 $million	2008 $million
Net cashflow from Continuing operations	120.5	125.2
Net cashflow from Discontinued operations	(15.8)	(10.9)
Net cashflow from operating activities	104.7	114.3
Issue of ordinary shares	2.3	-
Purchase of own shares	(4.1)	-
Proceeds from bank borrowings	55.7	-
Acquisitions	(132.8)	-
Acquisitions - deferred payment	-	(30.7)
Capital expenditure	(6.0)	(8.4)
Purchases of intangible assets	(4.2)	(4.3)
Other	0.1	2.9
Net cashflow	15.7	73.8

 

Net cashflow from Continuing operations decreased to $120.5m (2008: $125.2m) reflecting the reduction in Clean EBITDA. The net cashflow from Discontinued operations in 2009 relates primarily to payments made to the US authorities in association with the Group's NPA. Proceeds from bank borrowings represent a loan of £35m from the Royal Bank Of Scotland plc that was drawn in late December 2009 and becomes repayable by the end of 2012, with capital repayments starting in 2011. Acquisitions comprise the cash purchase of both Cashcade and World Poker Tour.

 

Principal risks

The principal risks facing the Group are unchanged from those reported in the Group's Annual Report for the year ended 31 December 2008, save for the additional risks of failure to comply with the terms of the Group's Non-Prosecution Agreement with the USAO and loan covenants associated with the bank borrowings referred to above. These risks will be set out in the Group's Annual Report for the year ended 31 December 2009, due for release in the first half of April 2010.

 

By order of the Board of Directors

Robert Hoskin

Company Secretary

4 March 2010

Audited Financial Information

 

Consolidated statement of comprehensive income

 

Year ended 31 December		Notes	2009 $million	2008 $million
Continuing operations
Net revenue			444.7	472.9
Other revenue			1.5	-
Total revenue		2	446.2	472.9
Cost of sales			(0.5)	-
Gross profit			445.7	472.9
Other operating expense			(1.1)	(2.8)
Administrative expenses excluding share-based payments			(168.3)	(191.0)
Share-based payments		3	(8.9)	(21.7)
Administrative expenses			(177.2)	(212.7)
Distribution expenses			(186.3)	(179.5)
Profit from operating activities		4	81.1	77.9
Finance income			1.8	4.7
Finance expense			(0.3)	(0.2)
Profit before tax			82.6	82.4
Tax		5	(5.9)	(4.6)
Profit after tax from Continuing operations			76.7	77.8
Loss after tax from Discontinued operations		6	(103.2)	(10.9)
(Loss) profit for the year attributable to the equity holders of the parent			(26.5)	66.9
Other comprehensive expense:
Exchange differences on translation of foreign operations, net of tax			(1.7)	(2.7)
Total comprehensive (expense) income for the year attributable to the equity holders of the parent			(28.2)	64.2
(Loss) earnings per share (cents)
Basic		7	(6.5)	16.5
Diluted		7	(6.3)	16.2
Continuing earnings per share (cents)
Basic		7	18.8	19.2
Diluted		7	18.2	18.8

 

Consolidated statement of financial position

 

As at 31 December	Notes	2009 $million		2008 $million
Non-current assets
Intangible assets	8	335.0		184.5
Property, plant and equipment		12.3		16.7
		347.3		201.2
Current assets
Assets held for sale		5.7		5.9
Short-term investments		11.6		8.3
Trade and other receivables	9	50.5		48.8
Cash and cash equivalents		208.8		193.1
		276.6		256.1
Total assets		623.9		457.3
Current liabilities
Trade and other payables	10	(83.1)		(44.1)
Income taxes payable		(6.9)		(2.8)
Client liabilities and progressive prize pools	11	(125.5)		(131.1)
		(215.5)		(178.0)
Non-current liabilities
Trade and other payables	10	(78.8)		-
Loans and borrowings	12	(55.7)		-
Deferred tax		(15.7)		-
		(150.2)		-
Total liabilities		(365.7)		(178.0)
Total net assets		258.2		279.3
Equity
Share capital	14	0.1		0.1
Share premium account		68.7		66.4
Own shares	14	(4.1)		-
Capital contribution reserve		34.7		34.7
Retained earnings		986.2		1,003.8
Other reserve		(825.4)		(825.4)
Currency reserve		(2.0)		(0.3)
Equity attributable to equity holders of the parent		258.2		279.3

 

Consolidated statement of changes in equity

 

Year ended 31 December 2009	As at 1 January $million	Issue of shares $million	Purchase of shares $million	Total comprehensive expense for the year $million	Share-based payments $million	As at 31 December $million
Share capital	0.1	-	-	-	-	0.1
Share premium account	66.4	2.3	-	-	-	68.7
Own shares	-	-	(4.1)	-	-	(4.1)
Capital contribution reserve	34.7	-	-	-	-	34.7
Retained earnings	1,003.8	-	-	(26.5)	8.9	986.2
Other reserve	(825.4)	-	-	-	-	(825.4)
Currency reserve	(0.3)	-	-	(1.7)	-	(2.0)
Total equity	279.3	2.3	(4.1)	(28.2)	8.9	258.2

 

Year ended 31 December 2008	As at 1 January $million	Total comprehensive income (expense) for the year $million	Share-based payments $million	As at 31 December $million
Share capital	0.1	-	-	0.1
Share premium account	66.4	-	-	66.4
Capital contribution reserve	34.7	-	-	34.7
Retained earnings	915.2	66.9	21.7	1,003.8
Other reserve	(825.4)	-	-	(825.4)
Currency reserve	2.4	(2.7)	-	(0.3)
Total equity	193.4	64.2	21.7	279.3

 

Share premium is the amount subscribed for share capital in excess of nominal value. Capital contribution reserve is the amount arising from share-based payments made by parties associated with the Principal Shareholders and cash held by the Employee Trust.

 

Retained earnings represent cumulative profit / (loss) for the year, share-based payments and any other items of other comprehensive income not disclosed as separate reserves in the table above.

 

Currency reserve represents the gains/losses arising on retranslating the net assets of overseas operations into US dollars.

 

The other reserve of $825.4 million is the amount arising from the application of accounting which is similar to the pooling of interests method, as set out in the Group's accounting policies. Under this method of accounting, the difference between the consideration for the controlling interest and the nominal value of the shares acquired is taken to other reserves on consolidation. As a result, the retained earnings reflect the cumulative profits as if the current Group structure had always been in place.

 

Consolidated statement of cashflows

 

Year ended 31 December	2009 $million	2008 $million
(Loss) profit for the year	(26.5)	66.9
Adjustments for:
Depreciation of property, plant and equipment	12.0	18.6
Amortisation of intangibles	30.5	23.0
Impairment of assets held for sale	0.6	1.3
Interest expense	0.3	0.2
Interest income	(1.8)	(4.7)
Increase in reserves due to share-based payments	8.9	21.7
(Profit) loss on sale of property, plant and equipment	(0.1)	0.2
Currency translation movements	(3.7)	0.7
Income tax expense	5.9	4.6
Operating cashflows before movements in working capital and provisions	26.1	132.5
Decrease in trade and other receivables	5.7	12.1
Increase (decrease) in trade and other payables	77.0	(23.0)
Increase (decrease) in provisions	0.2	(3.0)
Cash generated from operations
Cash generated from operations	109.0	118.6
Income taxes paid	(4.3)	(4.3)
Net cash inflow from operating activities	104.7	114.3
Investing activities
Purchases of property, plant and equipment	(6.0)	(8.4)
Sale of property, plant and equipment	0.2	-
Acquisition of subsidiaries and businesses, net of cash acquired	(132.8)	-
Acquisition of subsidiaries and businesses, net of cash acquired - deferred payment	-	(30.7)
Purchases of intangible assets	(4.2)	(4.3)
Interest received	1.8	4.7
(Increase) decrease in short-term investments	(1.8)	0.2
Net cash used in investing activities	(142.8)	(38.5)
Financing activities
Issue of ordinary shares	2.3	-
Purchase of own shares	(4.1)	-
Proceeds from bank borrowings	55.7	-
Interest paid	(0.1)	(2.0)
Net cash generated by (used in) financing activities	53.8	(2.0)
Net increase in cash and cash equivalents	15.7	73.8
Cash and cash equivalents at beginning of year	193.1	119.3
Cash and cash equivalents at end of year	208.8	193.1

 

Notes to the consolidated financial information

 

1. Basis of preparation

 

Except as described below, the full year results are prepared on the basis of the accounting policies stated in the Group's Annual Report 2008 which is available on the Group's website at www.PartyGaming.com. The financial information has been prepared in accordance with those International Financial Reporting Standards including International Accounting Standards ('IASs') and interpretations, (collectively 'IFRS'), published by the International Accounting Standards Board ('IASB') which have been adopted by the European Commission and endorsed for use in the EU for the purposes of the Group's full year financial statements.

 

The consolidated financial information complies with the Gibraltar Companies (Consolidated Accounts) Act 1999 and the Gibraltar Companies Act 1930 (as amended).

 

The financial information does not constitute the Group's statutory accounts for the year ended 31 December 2009 or the year ended 31 December 2008, but is derived from those accounts.

 

Statutory accounts for the year ended 31 December 2009 will be filed with Companies House Gibraltar following the Company's Annual General Meeting. The auditors have reported on those accounts and their report was unqualified and did not contain statements under section 10(2) of the Gibraltar Companies (Accounts) Act 1999 or section 182(1) (a) of the Gibraltar Companies Act. Statutory accounts for the year ended 31 December 2008 have been delivered to the Registrar of Companies in Gibraltar together with a report under section 10 of the Gibraltar Companies (Accounts) Act 1999.

 

The following relevant standards and interpretations, issued by the IASB or the International Financial Reporting Interpretations Committee ('IFRIC'), are effective for the first time in the current financial year and have been adopted by the Group with no significant impact on its consolidated results or financial position:

 

IFRIC 16 - Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008).

 

IAS 1 - Presentation of Financial Statements (effective for annual periods beginning on or after 1 January 2009). This standard changed the presentation of the primary statements but had no impact on the consolidated results or financial position.

 

IAS 32 and IAS 1 (Amended) - Puttable Financial Instruments and Obligations Arising on Liquidation (effective for annual periods beginning on or after 1 January 2009).

 

IFRS 1 and IAS 27 (Amended) - Cost of an Investment in a Subsidiary, Jointly-Controlled Entity or Associate (effective for annual periods beginning on or after 1 January 2009).

 

The following relevant standards and interpretations, issued by the IASB or the IFRIC have been early adopted by the Group in line with best practice with no significant impact on its consolidated results or financial position:

 

IFRIC 17 - Distributions of Non-cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009).

 

IAS 27 (Amended) - Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009).

 

IAS 39 (Amended) - Financial Instruments: Recognition and Measurement: Eligible Hedged Items (effective for annual periods beginning on or after 1 July 2009).

 

The following relevant interpretations were issued by the IASB or the IFRIC before the year end but were not effective for the 2009 year end:

 

IFRS 2 (Amended) - Group Cash-settled Share-based Payment Transactions (effective for annual periods beginning on or after 1 January 2010).

 

IAS 32 (Amended) - Classification of Rights Issues (effective for annual periods beginning on or after 1 February 2010).

 

IAS 24 (Revised) - Related Party Disclosures (effective for annual periods beginning on or after 1 January 2011).

 

IFRS 9 - Financial Instruments (effective for annual periods beginning on or after 1 January 2013).

 

IFRS 3 (Revised) - Business Combinations (effective for annual periods beginning on or after 1 July 2009).

 

1. Basis of preparation (continued)

 

The Group is currently assessing the impact, if any, that these standards will have on the presentation of its consolidated results.

 

Other revenue

Other revenue consists primarily of revenue from network services, and fees from broadcasting, hosting and subscriptions. Revenue in respect of network service arrangements where the third-party owns the relationship with the customer is the net commission invoiced, measured at the fair value of the consideration received or receivable, and set-up fees from white-label agreements.

 

Cost of sales

Cost of sales consists primarily of broadcasting costs. Broadcasting costs are expensed over the applicable life-cycle of each programme based upon the ratio of the current year's revenue to the estimated remaining total revenues.

 

Treasury shares

The consideration paid or received for the purchase or sale of treasury shares is recognised directly in equity. The cost of treasury shares held is presented as a separate reserve ('own shares'). Any excess of the consideration received on the sale of treasury shares over the weighted average cost of the shares sold is credited to the share premium account.

 

Loans and borrowings

Loans and borrowings, comprising bank borrowings and overdrafts, which are initially recognised at fair value, net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently valued at amortised cost using the effective interest rate method. Interest expense in this context includes initial transaction costs, as well as any interest or coupon payable while the liability is outstanding.

 

2. Segment information

 

For management purposes and transacting with customers, the Group's operations can be segmented into the following reporting segments:

 

> poker (including backgammon),

 

> casino,

 

> bingo,

 

> sports betting and

 

> unallocated corporate (including World Poker Tour).

 

These segments are the basis upon which the Group reports its segment information. Unallocated corporate expenses, assets and liabilities relate to the Group as a whole and are not allocated to individual segments. The measure of reporting segment performance is Clean EBITDA and the basis for arriving at this is the same as the Group accounts.

 

Year ended 31 December 2009	Poker $million	Casino $million	Bingo $million	Sports betting $million	Unallocated corporate $million	Consolidated $million
Continuing operations
Net revenue	196.7	196.2	32.8	19.0	-	444.7
Other revenue	-	-	0.7	-	0.8	1.5
Total revenue	196.7	196.2	33.5	19.0	0.8	446.2
Clean EBITDA	42.8	74.4	13.4	5.8	(1.4)	135.0
Profit (loss) before tax	38.6	68.3	5.0	(3.8)	(25.5)	82.6
Discontinued operations
Clean EBITDA	-	-	-	-	(0.8)	(0.8)
Loss before tax	-	-	-	-	(103.2)	(103.2)
Total operations
Net revenue	196.7	196.2	32.8	19.0	-	444.7
Other revenue	-	-	0.7	-	0.8	1.5
Total revenue	196.7	196.2	33.5	19.0	0.8	446.2
Clean EBITDA	42.8	74.4	13.4	5.8	(2.2)	134.2
Profit (loss) before tax	38.6	68.3	5.0	(3.8)	(128.7)	(20.6)
Total assets	44.0	79.4	155.4	98.3	246.8	623.9

 

Year ended 31 December 2008	Poker $million	Casino $million	Bingo $million	Sports betting $million	Unallocated corporate $million	Consolidated $million
Continuing operations
Net revenue	274.0	175.0	5.9	18.0	-	472.9
Clean EBITDA	76.1	65.7	0.3	5.1	(3.0)	144.2
Profit (loss) before tax	73.1	60.1	0.3	(7.2)	(43.9)	82.4
Discontinued operations
Clean EBITDA	-	(4.2)	-	-	(6.7)	(10.9)
Loss before tax	-	(4.2)	-	-	(6.7)	(10.9)
Total operations
Net revenue	274.0	175.0	5.9	18.0	-	472.9
Clean EBITDA	76.1	61.5	0.3	5.1	(9.7)	133.3
Profit (loss) before tax	73.1	55.9	0.3	(7.2)	(50.6)	71.5
Total assets	59.4	76.0	-	109.6	212.3	457.3

 

In the annual accounts for the year ended 31 December 2008, net revenue generated by casino games on the bingo platform was classified as part of the casino business segment. These amounts are now

2. Segment information (continued)

 

shown as bingo. As a result, bingo net revenue for 2008 has been increased by $1.0 million and bingo Clean EBITDA and Profit before tax by $0.4 million, with a corresponding decrease in casino.

 

Geographical analysis of total revenue

The following table provides an analysis of the Group's total revenue by geographical segment:

 

Year ended 31 December	2009 $million	2008 $million
Germany	81.9	93.2
United Kingdom	68.9	48.4
Canada	60.9	78.5
Other	234.5	252.8
Total revenue	446.2	472.9

 

3. Share-based payments

 

Year ended 31 December	2009 $million	2008 $million
Charge relating to nil-cost options:
Issued pre-IPO	-	1.3
Issued post-IPO	2.3	15.8
Total charge for the year relating to nil-cost options	2.3	17.1
FMV Plan	3.4	4.3
PSP Plan	2.3	0.2
Executive FMV Plan	0.9	0.1
Total charge for the year	8.9	21.7

 

Prior to flotation, the Principal Shareholders established the PartyGaming Plc Share Option Plan (the 'Nil-Cost Plan') for the benefit of the current and future workforce. Under the terms of the Nil-Cost Plan each option takes the form of a right, exercisable at nil-cost, to acquire shares in the Company, the vesting of which are satisfied by existing shares which had been issued to the Employee Trust.

 

Following the enactment of the UIGEA, the Company implemented on 29 December 2006 a one-off adjustment to existing incentive awards and also granted new incentive awards by using an additional 40 million shares gifted to the Employee Trust by certain founders of the Company. As such, the exercise of these options will have no cash impact on the Company. However, IFRS requires that the fair value of the options be amortised through the consolidated statement of comprehensive income over the life of the options.

 

Details of the share option plans are shown in note 16.

 

4. Profit from operating activities

 

Year ended 31 December	2009 $million	2008 $million
This has been arrived at after charging (crediting):
Directors emoluments	7.2	23.1
Other staff costs	70.3	82.4
Amortisation of intangibles	30.5	23.0
Depreciation on property, plant and equipment	12.0	18.6
Product development (including staff cost)	6.7	2.2
(Profit) loss on disposal of fixed assets	(0.1)	0.2
Transaction fees	27.3	31.2
Reorganisation costs	1.9	1.7
Impairment losses - assets held for sale	0.6	1.3
Auditors’ remuneration - audit services	0.7	1.1
Auditors’ remuneration - non-audit services	1.1	0.2

5. Tax

 

Analysis of tax charge

Year ended 31 December		2009 $million	2008 $million
Current tax expense for the year		8.3	4.6
Deferred tax credit for the year		(2.4)	-
Income tax expense for the year		5.9	4.6

 

The effective tax rate for Continuing operations for the year based on the associated tax expense is 7.1% (2008: 5.6%). The effective tax rate for Continuing operations before share-based payments for the year based on the associated tax expense is 6.4% (2008: 4.4%). There is no tax associated with Discontinued operations and other comprehensive income.

 

The total expense for the year can be reconciled to accounting profit as follows:

 

Year ended 31 December	Notes	2009 $million	2008 $million
Profit before tax from Continuing operations		82.6	82.4
Loss before tax from Discontinued operations	6	(103.2)	(10.9)
(Loss) profit before tax		(20.6)	71.5
Effect of different tax rates applied in overseas jurisdictions		8.3	4.6
Effect of deferred tax originating in overseas jurisdictions		(2.4)	-
Income tax expense for the year		5.9	4.6

 

Factors affecting the tax charge for the year

The Group's policy is to manage, control and operate Group companies only in the countries in which they are registered. At the period end there were Group companies registered in 13 countries including Gibraltar. However, the rules and practice governing the taxation of eCommerce activity are evolving in many countries. It is possible that the amount of tax that will eventually become payable may differ from the amount provided in the financial information.

 

Factors that may affect future tax charges

In Gibraltar, the Group benefits from the exempt company regime. The Gibraltar exempt company regime will be phased out on 31 December 2010. Assessable income will taxed in Gibraltar at the rate of 10% thereafter.

 

In India, the Group benefits from a tax holiday on income from qualifying activities, which has been extended until March 2011; under current rules assessable income is taxed in India at approximately 34%.  The Minimum Alternative Tax has increased from 11.33% to 17% from 1 April 2009. Fringe benefit tax, which is payable at approximately 34% on a proportion of specified benefits provided or deemed to have been provided to past and present employees in India, has been abolished with effect from 1 April 2009.

 

In 2009, the Group acquired businesses in the UK and the US. As the Group is involved in worldwide operations, future tax charges will be affected by the levels and mix of profitability in different jurisdictions.

 

Future tax charges will be reduced by a deferred tax credit in respect of amortisation of certain acquired intangibles.

6. Discontinued operations

 

Consolidated statement of comprehensive income

Year ended 31 December	Notes	2009 $million	2008 $million
Non-Prosecution Agreement		101.0	-
Other		0.8	10.9
Administrative expenses		101.8	10.9
Loss from operating activities		101.8	10.9
Finance costs		1.4	-
Loss after tax		103.2	10.9
Loss per share (cents)
Basic and diluted	7	25.3	2.7

 

Consolidated statement of cashflows

Year ended 31 December	2009 $million	2008 $million
Loss for the year	(103.2)	(10.9)
Adjustment for interest expense	1.4	-
Operating cashflows before movements in working capital and provisions	(101.8)	(10.9)
Increase in trade and other payables	86.0	-
Net cash outflow from operating activities	(15.8)	(10.9)
Net decrease in cash and cash equivalents	(15.8)	(10.9)

 

Discontinued operations refers to those operations located physically outside of the US but which relate to US customers that were no longer accepted following the enactment of the UIGEA.

 

On 6 April 2009 the Group entered into a Non-Prosecution Agreement with the US Attorney's Office for the Southern District of New York (the 'USAO'). Under the terms of the agreement, the USAO will not prosecute the Group for providing internet gaming services to customers in the US prior to the enactment of the UIGEA and the Group has agreed to pay $105 million, payable in semi-annual instalments over a period ending on 30 September 2012. The cost of the Non-Prosecution Agreement above of $101.0 million (2008: $nil) represents the present value of the settlement amount of $105 million. Finance costs relate to its accretion.

 

Other costs relate primarily to legal fees associated with the above, net of amounts reimbursed by the Group's insurers.

 

7. Earnings per Share ('EPS')

 

			2009			2008
Year ended 31 December	Continuing operations cents	Discontinued operations cents	Total cents	Continuing operations cents	Discontinued operations cents	Total cents
Basic EPS	18.8	(25.3)	(6.5)	19.2	(2.7)	16.5
Diluted EPS	18.2	* (25.3)	(6.3)	18.8	* (2.7)	16.2
Basic Clean EPS	21.5	(0.2)	21.3	24.9	(2.7)	22.2
Diluted Clean EPS	20.8	* (0.2)	20.6	24.5	* (2.7)	21.8

 

* A diluted EPS calculation may not increase a basic EPS calculation.

 

Basic earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those held as treasury shares.

7. Earnings per Share ('EPS') (continued)

 

 

Year ended 31 December	2009 Total	2008 Total
Basic EPS
Basic (loss) earnings ($million)	(26.5)	66.9
Weighted average number of ordinary shares (million)	406.9	406.2
Basic (loss) earnings per ordinary share (cents)	(6.5)	16.5
Basic Clean EPS
Adjusted earnings ($million)	86.7	90.3
Weighted average number of ordinary shares (million)	406.9	406.2
Adjusted earnings ($million)	21.3	22.2

 

Clean earnings per share

Management believes that Clean earnings per share reflects the underlying performance of the business and assists in providing a clearer view of the fundamental performance of the Group. Clean EBITDA and Clean earnings per share are performance measures used internally by management to manage the operations of the business and remove the impact of one-off and non-cash items. They are therefore calculated before the provision for items associated with the Group's Non-Prosecution Agreement, reorganisation costs and before non-cash charges relating to share-based payments.

 

Clean net earnings attributable to equity shareholders is derived as follows:

 

			2009			2008
Year ended 31 December	Continuing operations $million	Discontinued operations $million	Total $million	Continuing operations $million	Discontinued operations $million	Total $million
Earnings (loss) for the purposes of basic and diluted earnings per share being profit attributable to equity holders of the parent	76.7	(103.2)	(26.5)	77.8	(10.9)	66.9
Share-based payments	8.9	-	8.9	21.7	-	21.7
Provision for payments associated with the Group's Non-Prosecution Agreement	-	101.0	101.0	-	-	-
Unwinding of discount associated with the Group's Non-Prosecution Agreement	-	1.4	1.4	-	-	-
Reorganisation costs	1.9	-	1.9	1.7	-	1.7
Clean net earnings (loss)	87.5	(0.8)	86.7	101.2	(10.9)	90.3

 

Year ended 31 December	2009 Number million	2008 Number million
Weighted average number of shares
Number of shares in issue as at 1 January	411.5	411.5
Number of shares in issue as at 1 January held by the Employee Trust	(6.7)	(11.3)
Weighted average number of shares issued during the year	0.3	-
Weighted average number of shares purchased during the year	(0.2)	-
Effect of vested share options	2.0	6.0
Weighted average number of ordinary shares for the purposes of basic earnings per share	406.9	406.2
Effect of potential dilutive unvested shares	14.2	7.3
Weighted average number of ordinary shares for the purposes of diluted earnings per share	421.1	413.5

 

7. Earnings per Share ('EPS') (continued)

 

In accordance with IAS 33, the weighted average number of shares for diluted earnings per share takes into account all potentially dilutive shares granted which are not included in the number of shares for basic earnings per share above. Although the unvested, potentially dilutive shares are contingently issuable, in accordance with IAS 33, the year end is treated as the end of the performance period. Those option holders who were employees at that date are deemed to have satisfied the performance requirements and their related potentially dilutive shares have been included for the purpose of diluted EPS.

 

8. Intangible assets

 

Notes		Goodwill $million	Acquired intangibles $million	Other intangibles $million	Total $million
Cost or valuation
As at 1 January 2008		208.7	157.6	6.4	372.7
Additions		-	-	4.3	4.3
As at 31 December 2008		208.7	157.6	10.7	377.0
Acquired through business combinations	17	96.6	82.8	-	179.4
Additions		-	-	4.2	4.2
Exchange movements		(1.5)	(0.6)	(1.5)	(3.6)
As at 31 December 2009		303.8	239.8	13.4	557.0
Amortisation
As at 1 January 2008		76.1	92.9	0.5	169.5
Charge for the year		-	19.8	3.2	23.0
As at 31 December 2008		76.1	112.7	3.7	192.5
Charge for the year		-	27.3	3.2	30.5
Exchange movements		-	(0.1)	(0.9)	(1.0)
As at 31 December 2009		76.1	139.9	6.0	222.0
Carrying amounts
As at 31 December 2008		132.6	44.9	7.0	184.5
As at 31 December 2009		227.7	99.9	7.4	335.0

 

Acquired intangible assets are those intangible assets purchased as part of an acquisition and primarily include customer lists, brands, software and broadcast libraries. The value of acquired intangibles are based on cashflow projections at the time of acquisition. Customer lists from existing customers take into account the expected impact of player attrition.

 

Other intangibles primarily include development expenditure, long-term gaming and intellectual property licences and purchased domain names. Development expenditure represents software infrastructure assets that have been developed and generated internally.

 

In the annual accounts for the year ended 31 December 2008, intangible assets were classified as goodwill, development expenditure, and other intangibles. The carrying amount of development expenditure at 31 December 2008 was $6.4m and other intangibles was $45.5 million.

 

In accordance with IAS 36, the Group regularly monitors the carrying value of its intangible assets. A detailed review was undertaken at 31 December 2009 to assess whether the carrying value of assets was supported by the net present value of future cashflows derived from those assets using cashflow projections for a ten-year period. The review concluded that no impairments were required.

9. Trade and other receivables

 

As at 31 December			2009 $million	2008 $million
Payment service providers			25.6	25.8
Less: chargeback provision			(2.2)	(2.0)
Payment service providers - net			23.4	23.8
Prepayments			16.4	16.6
Other receivables			10.7	8.4
			50.5	48.8

 

The Directors consider that the carrying amount of trade and other receivables approximates to their fair values, which is based on estimates of amounts recoverable. The recoverable amount is determined by calculating the present value of expected future cashflows.

 

In previous years the provision for chargebacks was disclosed separately on the face of the statement of financial position. The Group has reclassified these balances to be in line with best practice. Given the immateriality of these balances no further disclosures are deemed necessary.

 

Provisions are expected to be settled within the next year and relate to chargebacks which are recognised at the Directors' best estimate of the provision based on past experience of such expenses applied to the level of activity.

 

Movements on the provision are as follows: 

 

As at 31 December	2009 $million	2008 $million
At beginning of year	2.0	5.0
Charged to consolidated statement of comprehensive income	7.1	2.6
Credited to consolidated statement of comprehensive income	(6.9)	(5.6)
At end of year	2.2	2.0

 

10. Trade and other payables

 

As at 31 December			2009 $million	2008 $million
Amounts due under Non-Prosecution Agreement			29.7	-
Deferred and contingent consideration			13.3	-
Other payables			40.1	44.1
Current liabilities			83.1	44.1
Amounts due under Non-Prosecution Agreement			57.7	-
Deferred and contingent consideration			17.5	-
Later than 1 year but not later than 5 years			75.2	-
Deferred and contingent consideration			3.6	-
More than 5 years			3.6	-
Non-current liabilities			78.8	-

 

On 6 April 2009 the Group entered into a Non-Prosecution Agreement with the USAO. Under the terms of the agreement the Group agreed to pay $105 million, payable in semi-annual instalments over a period ending on 30 September 2012.

 

Deferred and contingent consideration relates to amounts payable for the acquisitions of Cashcade and WPT (see note 17).

 

Other payables comprise amounts outstanding for trade purchases and other ongoing costs. The average credit period for trade purchases is 30 days. The carrying amount of other payables approximates to their fair value which is based on the net present value of expected future cashflows.

 

10. Trade and other payables (continued)

 

The amount due under the Non-Prosecution Agreement of $87.4 million is recognised at fair value and carried at amortised cost using an effective interest rate of 2%. The amount due for deferred and contingent consideration of $34.4 million is recognised at fair value and carried at amortised cost using effective interest rates of between 2% and 15%.

 

The non-discounted book values for these amounts are as follows:

 

	Amounts due under Non-Prosecution Agreement		Deferred and contingent consideration
As at 31 December	2009 $million	2008 $million	2009 $million	2008 $million
Within one year	30.0	-	13.4	-
Later than one year but not later than five years	60.0	-	19.7	-
More than five years	-	-	10.0	-
	90.0	-	43.1	-

 

11. Client liabilities and progressive prize pools

 

As at 31 December	2009 $million	2008 $million
Client liabilities	115.9	121.0
Progressive prize pools	9.6	10.1
	125.5	131.1

 

Client liabilities and progressive prize pools represent amounts due to customers including net deposits received, undrawn winnings, jackpots and tournament prize pools and certain promotional bonuses. The carrying amount of client liabilities and progressive prize pools approximates to their fair value which is based on the net present value of expected future cashflows.

 

12. Loans and borrowings

 

	Book value		Fair value
As at 31 December 2009	2009 $million	2008 $million	2009 $million	2008 $million
Secured bank loan	56.5	-	55.7	-
Non-current liabilities	56.5	-	55.7	-

 

Bank borrowings are recognised at fair value and subsequently carried at amortised cost based on their internal rates of return. The discount rate applied was 5.44%.

 

Principal terms and the debt repayment schedule of loans and borrowings before amortisation are as follows:

 

As at 31 December 2009	Amount	Nominal rate	Year of maturity	Security
The Royal Bank of Scotland plc	£35 million	6 months LIBOR plus 4.25%	2012	Floating charge over the assets of Cashcade Limited and its subsidiary undertakings

 

The maturity analysis of loans and borrowings, including interest and fees, is as follows:

 

As at 31 December	2009 $million	2008 $million
Within one year	3.2	-
Later than 1 year and not later than 5 years	60.3	-
	63.5	-

 

13. Contingent liabilities

 

From time to time the Group is subject to legal claims and actions against it. The Group takes legal advice as to the likelihood of success of such claims and actions.

 

As part of the Board's ongoing regulatory compliance process, the Board continues to monitor legal and regulatory developments and their potential impact on the business and take appropriate advice in respect of these developments.

 

The Board is not aware of any regulatory issue or litigation that would give rise to a contingent liability.

 

14. Share capital

 

Ordinary shares

	Issued and fully paid $	Number million
As at 1 January 2009	103,866	411.5
Employee share options exercised during the year	193	0.9
As at 31 December 2009	104,059	412.4

 

Shares issued are converted into US dollars at the exchange rate prevailing on the date of issue. The issued and fully paid share capital of the Group amounts to $104,059.32 and is split into 412,352,091 ordinary shares. The share capital in UK sterling is £61,852.81 and translates at an average exchange rate of 1.6824 US dollars to £1 sterling.

 

Authorised share capital and significant terms and conditions

On 7 May 2009 the Company's authorised share capital was increased from £75,000 divided into 500 million ordinary shares with a par value of 0.015 pence each to £105,000 divided into 700 million ordinary shares of 0.015 pence each. All issued shares are fully paid. The holders of ordinary shares are entitled to receive dividends when declared and are entitled to one vote per share at meetings of the Company. The Trustee of the Employee Trust has waived all voting and dividend rights in respect of shares held by the Employee Trust.

 

On 9 May 2008 the Company issued 8 additional ordinary shares in order to increase the total number of shares in issue to a number divisible by a factor of 10. At an Extraordinary General Meeting on 15 May 2008 an ordinary resolution was passed to consolidate the Company's 4,115,193,850 ordinary shares of 0.0015 pence each to 411,519,385 ordinary shares of 0.015 pence each with effect from 19 May 2008. The number of shares and earnings per share for prior years are calculated as if the consolidation had taken place at 1 January 2008.

 

Treasury shares

	Own shares reserve			Number
	2009 $million	2008 $million	2009 million	2008 million
As at 1 January	-	-	6.7	11.2
Purchase of own shares for the Employee Trust	(4.1)	-	1.0	-
Employee share options exercised during the year	-	-	(3.1)	(4.5)
As at 31 December	(4.1)	-	4.6	6.7

 

As at 31 December 2009 4,564,628 (2008: 6,684,959) ordinary shares were held as treasury shares by the Employee Trust. During the year the Company purchased 1,000,000 ordinary shares which were gifted to the Employee Trust. Shares held by the Employee Trust prior to 31 December 2008 had been gifted at par value.

 

15. Related parties

 

Group

Transactions between the Group companies have been eliminated on consolidation and are not disclosed in this note.

 

Principal Shareholders

During the year the Principal Shareholders, and corporate entities controlled by the Principal Shareholders, did not receive any remuneration in the form of salary, bonuses or consulting fees (2008: $nil).

 

15. Related parties (continued)

 

The wife of a former Principal Shareholder owns a property and it is leased to the Group's Indian subsidiary on an arm's length basis. Rentals paid during the year up to the date the Principal Shareholder divested his interest in the Group to under 10% were $52,000 (2008: $79,000). In 2008 an increased security deposit of $33,375 was paid. At 31 December 2008 there were no amounts outstanding.

 

Former Directors and Principal Shareholders have leased their personal properties to employees of the Group. The Directors believe that these lease arrangements are fair value personal arrangements between the parties involved and are independent of the Group.

 

A former Principal Shareholder and certain other Principal Shareholders have also given certain indemnities to the Group.

 

Directors and key management

Key management are those individuals who the Directors believe have significant authority and responsibility for planning, directing and controlling the activities of the Group. The aggregate short-term and long-term benefits, as well as share-based payments of the Directors and key management of the Group are set out below:

 

Year ended 31 December	2009 $million	2008 $million
Short-term benefits	10.1	16.4
Share-based payments	5.7	14.7
	15.8	31.1

 

At the year end an aggregate balance of $2.9 million (2008: $1.4 million) was due to Directors and key management.

 

The Group purchased telecommunication and utility services of $3.6 million (2008: $5.9 million) from companies on an arm's length basis for whom a Board member is a director, with amounts owed to that company at 31 December 2009 of $nil (2008: $0.3 million).

 

In 2009 furnished property was leased to a member of key management at an annual lease rental of €42,000 ($61,000), which the Directors believe is the fair rental value of the property. There were no amounts owed at 31 December 2009.

 

After the former Chairman of the Board stepped down as a Director on 29 August 2008, he was engaged by the Group under a consultancy agreement to provide services, as required, to the Group. The consultancy terminated on 29 August 2009 and for a further six months afterwards he is prevented from providing services to other gaming businesses. A fee of £110,000 was paid to the former Chairman under this consultancy agreement.

 

The Group made affiliate payments of less than $1,000 in both 2008 and 2009 to a company for whom a former Board member is a Director on an arm's length basis, with amounts owed at 31 December 2008 of less than $1,000.

 

In 2008 the Group's subsidiaries provided the following property arrangements to the former Chief Executive Officer:

 

> two furnished properties available for his use in Gibraltar which the Directors believe had a fair rental value of approximately $150,000 per annum (plus service and utility costs); and

 

> an additional property available for his use at fair rental value, but he did not avail himself of the property and the property has been leased to other employees and third parties at fair rental value.

 

In 2008, the Group paid the final element of the consideration due to Trident Gaming Plc in respect of the acquisition of the business and assets connected with the Gamebookers.com website. This amounted to €21.0 million and total interest of €1.3 million. The former Managing Director was the former CEO of Gamebookers and received €2.1 million of the total consideration.

 

Certain Directors and certain key management were granted share options under service contracts which were granted under a Group share option plan (see note 16).

 

16. Share options

 

As disclosed in note 3, the Group has adopted and granted awards under the Nil-Cost Plan, FMV Plan, PSP Plan and Executive FMV Plan as a reward and retention incentive for employees of the Group, including the Executive Directors. The Group has used the binomial options pricing model to value these options. An appropriate discount has been applied to reflect the fact that dividends are not paid on options that have not vested or have vested and have not been exercised.

 

Year ended 31 December 2009		Nil-Cost Plan Number million			FMV Plan Number million	PSP Plan Number million	Executive FMV Plan Number million
Outstanding at beginning of year		6.0			21.0	1.7	1.2
Shares over which options granted during the year		1.6			4.6	1.0	0.5
Shares in respect of options lapsed during the year		(0.1)			(5.6)	(0.4)	(0.3)
Exercised during the period		(3.2)			(0.8)	-	-
Outstanding at end of year		4.3			19.2	2.3	1.4
Exercisable at the end of year		1.7			4.1	0.2	0.1
Shares over which options granted during the year (number)		1,610,336			4,591,166	1,041,817	462,500
Percentage of total issued share capital		0.39%			1.11%	0.25%	0.11%
Weighted average share price for options exercised		£2.57			£2.62	-	-
Weighted average remaining contractual life of options outstanding upon satisfaction of performance conditions where relevant (days)		2,961			3,042	490	3,202

 

Year ended 31 December 2008		Nil-Cost Plan Number million			FMV Plan Number million	PSP Plan Number million	Executive FMV Plan Number million
Outstanding at beginning of year		9.0			7.3	0.4	0.2
Shares over which options granted during the year		2.3			17.5	1.5	1.1
Shares in respect of options lapsed during the year		(0.8)			(3.8)	(0.2)	(0.1)
Exercised during the year		(4.5)			-	-	-
Outstanding at end of year		6.0			21.0	1.7	1.2
Exercisable at the end of year		2.4			1.6	-	-
Shares over which options granted during the year (number)		2,250,000			17,457,240	1,471,598	1,090,602
Percentage of total issued share capital		0.55%			4.24%	0.36%	0.27%
Weighted average share price for options exercised		£2.42			-	-	-
Weighted average remaining contractual life of options outstanding upon satisfaction of performance conditions where relevant (days)		2,615			3,269	639	3,500

 

Terms and conditions

 

Nil-Cost Plan

Options granted under this plan during the period generally vest in instalments over a four to five year period. These awards are not generally subject to performance conditions as this is regarded as detracting from their attraction and retention capabilities and instead usually vest on a phased basis over a four- to five- year period. The main exception to this general policy are the awards made to key employees in the bingo segment, which will only vest subject to the satisfaction of a stretching EBITDA target for that business unit for 2012.

 

FMV Plan

Options granted under this plan during the period generally vest in instalments over a three year period. There are no performance conditions attached to options issued by the Group under the terms of the FMV Plan. Directors are not eligible to receive any awards under this plan.

 

16. Share options (continued)

 

PSP Plan

These options vest subject to the achievement of a total shareholder return ('TSR') performance target over the three year period commencing on 1 January or 1 July of 2007, 2008 and 2009 compared to the median TSR of a sector comparator group. The threshold for vesting at which 25% will vest, will be TSR equalling the median of the comparator group, rising on a straight-line basis to 100% vesting if the Group's TSR exceeds the median by 10% per annum calculated over the three year period. It is estimated that outperformance of the median by 10% per annum is broadly equivalent to upper quartile performance over three years.

 

Executive FMV Plan

These options vest subject to the growth in the Group's Clean Earnings per share equalling or exceeding 15% per annum in the three year period from 1 January of 2007, 2008 and 2009.

 

Outstanding share options issued under the FMV Plan and Executive FMV Plan have been granted at exercise prices between 155.0 pence and 457.5 pence (2008: between 155.0 pence and 457.5 pence).

 

17. Acquisitions made during the year

 

Cashcade

On 23 July 2009 the Group acquired 100% of the voting equity instruments of Cashcade Limited, an exclusively non-US facing business whose principal activity is the marketing of online bingo and casino and software services. Cash consideration was an initial £71.9 million paid upon completion and another £6.5 million paid before the year end for the excess working capital acquired. There is up to £15 million of contingent consideration payable relating to the profit performance in 2009 and a maximum of £9.0 million of contingent consideration payable depending on future profit performance in 2010. The acquisition was made on a debt-free / cash-free basis. Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows:

 

	Book value $million	Adjustment $million	Fair value $million
Intangible assets other than goodwill	-	65.0	65.0
Property, plant and equipment	0.3	-	0.3
Trade and other receivables	8.5	-	8.5
Cash and cash equivalents	9.9	-	9.9
Trade and other payables	(3.8)	-	(3.8)
Income taxes payable	(0.2)	-	(0.2)
Client liabilities and progressive prize pools	(0.9)	-	(0.9)
Deferred tax	-	(18.2)	(18.2)
Net assets acquired	13.8	46.8	60.6
Goodwill			96.6
Consideration paid			157.2
Cash			128.7
Contingent consideration - payable in cash			27.0
Costs of acquisition			1.5
Consideration paid			157.2

 

The fair value adjustments relate primarily to the attribution of fair values to customer lists and brands acquired as part of the acquisition and the resultant tax thereon. These intangible assets are being amortised over their estimated useful economic lives of up to five years.

 

The main factors leading to the recognition of goodwill are the growth and revenue synergies created by combining business activities and cost savings of the merged operations.

 

The amount included above for contingent consideration represents the Directors' current best estimate of the amount payable which they consider is likely to be paid, after the effects of discounting.

 

 

17. Acquisitions made during the year (continued)

 

World Poker Tour ('WPT')

On 9 November 2009 the Group acquired the business and substantially all of the assets of WPT Enterprises Inc. whose principal activities are the production and marketing of land-based poker events in the US and Europe and a US-facing subscription poker offering. Cash consideration was $12.3 million plus an ongoing revenue share agreement which is subject to a minimum aggregate payment of $3m over the next three years. The acquisition was made on a debt-free / cash-free basis. Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows:

 

	Book value $million	Adjustment $million	Fair value $million
Intangible assets other than goodwill	-	17.8	17.8
Property, plant and equipment	0.8	-	0.8
Trade and other receivables	2.1	-	2.1
Trade and other payables	(0.8)	-	(0.8)
Net assets acquired	2.1	17.8	19.9
Goodwill			-
Consideration paid			19.9
Cash			12.3
Contingent consideration - payable in cash			7.6
Consideration paid			19.9

 

 

The fair value adjustments relate primarily to the attribution of fair values to broadcast libraries, customer lists and brand acquired as part of the acquisition. These intangible assets are being amortised over their estimated useful economic lives of up to ten years.

 

The amount included above for contingent consideration represents the Directors' current best estimate of the amount payable which they consider is likely to be paid, after the effects of discounting.

 

Had the acquisitions been made on 1 January 2009, the results of the Group would have been as follows:

 

	$million
Total revenue	495.0
Profit from operating activities - Continuing operations	77.7
Loss from operating activities - Discontinued operations	(101.8)
Loss from operating activities	(24.1)

 

18. Events after the reporting year

 

There have been no material events after the reporting year which would require disclosure or adjustment to the financial information for the year ended 31 December 2009.

19. Dividend

 

The Board did not pay any dividend in respect of 2008 or an interim dividend in 2009. The Board is not recommending the payment of a final dividend for the 2009 financial year.

 

Glossary and definitions

'Active player days'	aggregate number of days in the given period in which active players have contributed to rake and/or placed a wager. This can be calculated by multiplying average active players by the number of days in the period
'Attrition'	the ratio of real money signups which are active during the period. The measure indicates the retention profile of the players
'Average active players' or 'Daily average players'	the daily average number of players who contributed to positive rake and/or placed a wager in the given period. This can be calculated by dividing active player days in that period, by the number of days in that period
'Cashcade'	Cashcade Limited and its subsidiaries
'Clean EBITDA/EPS'	EBITDA/EPS before charges associated with the Group's Non-Prosecution Agreement, reorganisation costs and non-cash charges relating to share-based payments.
'Company' or 'PartyGaming'	PartyGaming Plc
'Discontinued operations'	operations located physically outside of the US but which relate to customers in the US that were no longer accepted following the enactment of the UIGEA on 13 October 2006
'EBITDA'	earnings before interest, tax, depreciation and amortisation
'EMEA'	Europe, the Middle East and Africa
'Employee Trust'	the PartyGaming Plc Shares Trust, a discretionary share ownership trust established by the Company
'Gamebookers'	www.gamebookers.com, one of the Group's sports betting websites
'Group' or 'PartyGaming Group'	the Company and its consolidated subsidiaries and subsidiary 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
'IASB'	International Accounting Standards Board
'KPIs'	Key Performance Indicators, such as active player days and yield per active player day
'NPA'	The Non-Prosecution Agreement entered into by the Group and the US Attorney's Office for the Southern District of New York (the 'USAO') on 6 April 2009. Under the terms of the agreement, the USAO will not prosecute the Group for providing internet gambling services to customers in the US prior to the enactment of the UIGEA.
'PartyBets'	www.partybets.com, one of the Group's sports betting websites
'PartyBingo'	www.partybingo.com, one of the Group's bingo websites
'PartyCasino'	www.partycasino.com, the Group's principal casino website
'PartyGammon'	www.partygammon.com, the Group's backgammon website
'PartyPoker'	www.partypoker.com, the Group's principal poker website
'Principal Shareholders'	Anurag Dikshit (holding through Crystal Ventures Limited) until 25 January 2010, James Russell DeLeon (holding through Stinson Ridge Limited) and Ruth Parasol DeLeon (holding through Emerald Bay Limited)
'Real money sign-up' or 'sign-up'	a new player who has registered and deposited funds into an account with the company. Customers are categorised between lines of business according to where they first register on the gaming site to address the issues posed by shared wallets
'UIGEA'	The Unlawful Internet Gambling Enforcement Act that was enacted in the US on 13 October 2006
'Unique active player'	a player who has contributed to rake or placed a wager in the period
'USAO'	the United States Attorney's Office for the Southern District of New York
'WPT'	The business and substantially all of the assets of the World Poker Tour acquired by the Group on 9 November 2009
'Yield per unique active player'	net gaming revenue (net of customer bonuses and other fair value adjustments to revenues) divided by the number of unique active players in the period
Yield per active player day'	net gaming revenue (net of customer bonuses and other fair value adjustments to revenues) divided by the number of active player days in the period