1st Mar 2007 07:06
PartyGaming Plc01 March 2007 PART 2 Notes to consolidated financial information 1. Accounting policies Basis of preparation The financial information has been prepared in accordance with thoseInternational Financial Reporting Standards including International AccountingStandards (IASs) and interpretations, (collectively IFRS), published by theInternational Accounting Standards Board (IASB) which have been adopted by theEuropean Commission and endorsed for use in the EU for the purposes of theGroup's full year financial statements. The consolidated financial information complies with the Gibraltar Companies(Consolidated Accounts) Act 1999 and the Gibraltar Companies Act. The financial information does not constitute the Group's statutory accounts forthe year ended 31 December 2006 or the year ended 31 December 2005, but isderived from those accounts. Statutory accounts for the year ended 31 December 2006 will be made availablefollowing the Company's Annual General Meeting. The auditors have reported onthose accounts and their report was unqualified and did not contain statementsunder section 10(2) of the Gibraltar Companies (Accounts) Act 1999 or section182(1) (a) of the Gibraltar Companies Act. Statutory accounts for the yearended 31 December 2005 have been delivered to the Registrar of Companies inGibraltar together with a report under section 10 of the Gibraltar Companies(Accounts) Act 1999. The audit report for 2006, without qualifying the opiniontherein, draws attention to the issue set out in note 17(a) in the financialinformation The following interpretations, issued by the International Financial ReportingInterpretations Committee (IFRIC), are effective for the first time in thecurrent financial year and have been adopted by the Group with no significantimpact on its consolidated results or financial position: IFRIC 4 - Determining whether an arrangement contains a lease (effective forannual periods beginning on or after 1 January 2006). IFRIC 5 - Rights to interests arising from decommissioning, restoration andenvironmental rehabilitation funds (effective for annual periods beginning on orafter 1 January 2006). IFRIC 6 - Liabilities arising from participating in a specific market: wasteelectrical and electronic equipment (effective for annual periods beginning onor after 1 December 2005). The following standards and interpretations, issued by the IASB or IFRIC, havenot been adopted by the Group and the Group is currently assessing the impactthese standards and interpretations will have on the presentation of itsconsolidated results in future periods: IFRS 8 - Operating segments (effective for annual periods beginning on or after1 January 2009). IFRIC 7 - Applying the restatement approach under lAS 29 - Financial reportingin hyperinflationary economies (effective for annual periods beginning on orafter 1 March 2006). IFRIC 8 - Scope of IFRS 2 - Accounting for share-based payments (effective forannual periods beginning on or after 1 May 2006). IFRIC 9 - Reassessment of embedded derivatives (effective for annual periodsbeginning on or after 1 June 2006). IFR1C 10 - Interim financial reporting and impairment (effective for annualperiods beginning on or after I November 2006). IFRIC 11 - Group and treasury share transactions (effective for annual periodsbeginning on or after 1 March 2007). IFRIC 12 - Service concession arrangements (effective for annual periodsbeginning on or after 1 January 2008). IFRS 8 contains requirements for the disclosure of information about an entity'soperating segments and also about the entity's products and services, thegeographical areas in which it operates, and its major customers. The standardis concerned only with disclosure and replaces lAS 14 - Segment reporting TheGroup is currently assessing the impact this standard will have on thepresentation of its consolidated results. Critical accounting policies, estimates and judgements The preparation of consolidated financial statements under IFRS requires theGroup to make estimates and judgements that affect the application of policiesand reported amounts. Estimates and judgements are continually evaluated and arebased on historical experience and other factors including expectations offuture events that are believed to be reasonable under the circumstances. Actualresults may differ from these estimates. Included in this note are accounting policies which cover areas that theDirectors consider require estimates and assumptions which have a significantrisk of causing a material adjustment to the carrying amount of assets andliabilities within the next financial year. These policies together withreferences to the related notes to the financial information can be found below: Taxation note 6 Intangible assets and impairment of goodwill note 8 Payment processor receivables note 12 Provisions notes 12 and 16 Regulatory compliance and contingent liabilities note 17 Share-based payments note 21 Basis of accounting The Consolidated Financial information has been prepared under the historicalcost convention other than for the valuation of certain financial instruments. The functional currency used in the preparation of this Consolidated FinancialStatements is United States Dollars (USD) as is the presentation currency. Thefunctional currency is the currency in which the parent company operates and itreflects the economic substance of the underlying events and circumstances ofthe Group. A small minority of Group companies operate in Pounds Sterling,Indian Rupees, Euros and Bulgarian Lev but the amounts involved are notmaterial. Assets, liabilities and expenses of the Group are translated from PoundsSterling, Euros, Indian Rupees and Bulgarian Lev into USD as follows: • assets and liabilities are translated at the closing rateexisting at the balance sheet date; • income and expenses are translated at the exchange ratesexisting at the dates of the transactions or at a rate that approximates theactual exchange rates; • equity items other than the net profit or loss for the periodthat are included within retained earnings are translated at the closing rateexisting at the balance sheet date; and • any exchange differences arising from the above translationsare recognised in the income statement. Basis of consolidation Subsidiaries are those companies controlled, directly or indirectly byPartyGaming Plc. Control exists where the Company has the power to govern thefinancial and operating policies of an enterprise so as to obtain benefits fromits activities. Except as noted below, subsidiaries are consolidated from thedate of acquisition (i.e. the date on which control of the subsidiaryeffectively commences) to the date of disposal (i.e. the date on which controlover the subsidiary effectively ceases). Except as noted below, the financial information of subsidiaries is included inthe Consolidated Financial Statements using the acquisition method ofaccounting. On the date of acquisition the assets and liabilities of therelevant subsidiaries are measured at their fair values. The interest ofminority shareholders is stated at the minority's proportion of the fair valuesof the assets and liabilities recognised. Under Section 10(2) of the Gibraltar (Consolidated Accounts) Act 1999, theCompany is exempt from the requirement to present its own income statement. All intra-Group transactions, balances, income and expenses are eliminated onconsolidation. Accounting for the Company's acquisition of the controlling interest inPartyGaming Holdings Limited The Company's controlling interest in its directly held, wholly owned,subsidiary PartyGaming Holdings Limited (formerly Headwall Ventures Limited) wasacquired through a transaction under common control, as defined in IFRS 3Business Combinations. The Directors note that transactions under commoncontrol are outside the scope of IFRS 3 and that there is no guidance elsewherein IFRS covering such transactions. IFRS contain specific guidance to be followed where a transaction falls outsidethe scope of IFRS. This guidance is included at paragraphs 10 to 12 of IAS 8Accounting Policies, Changes in Accounting Estimates and Errors. This requires,inter alia, that where IFRS does not include guidance for a particular issue,the directors may also consider the most recent pronouncements of other standardsetting bodies that use a similar conceptual framework to develop accountingstandards. In this regard, it is noted that the United States FinancialAccounting Standards Board (FASB) has issued an accounting standard coveringbusiness combinations (FAS 141) that is similar in a number of respects to IFRS3. Further there is currently a major project being run jointly by the IASB andFASB to converge IFRS and US GAAP. In contrast to IFRS 3, FAS 141 does include, as an Appendix, limited accountingguidance for transactions under common control which, as with IFRS 3, areoutside the scope of that accounting standard. The guidance contained in FAS141 indicates that a form of accounting that is similar to pooling of interestsaccounting, which was previously set out in Accounting Principles Board (APB)Opinion 16, may be used when accounting for transactions under common control. Having considered the requirements of IAS 8, and the guidance included withinFAS 141, it is considered appropriate to use a form of accounting which issimilar to pooling of interests when dealing with the transaction in which theCompany acquired its controlling interest in PartyGaming Holdings Limited. Associates Where the Group has the power to exercise significant influence over (but notcontrol) the financial and operating policy decisions of another entity, it isclassified as an associate. Associates are initially recognised in theconsolidated balance sheet at cost. The Group's share of post-acquisitionprofits and losses is recognised in the consolidated income statement, exceptthat losses in excess of the Group's investment in the associate are notrecognised unless there is an obligation to make good those losses. Profits and losses arising on transactions between the Group and its associatesare recognised only to the extent of unrelated investors' interests in theassociate. The investor's share in the associate's profits and losses resultingfrom these transactions is eliminated against the carrying value of theassociate. Any premium paid for an associate above the fair value of the Group's share ofthe identifiable assets, liabilities and contingent liabilities acquired iscapitalised and included in the carrying amount of the associate. The carryingamount of the associate is tested under IAS 36 for impairment wherever theapplication of the requirements of IAS 39 indicate that the carrying value ofthe associate might be impaired. Investments in subsidiaries Investments in subsidiaries held by the Company are carried at cost less anyimpairment in value. Foreign currency Transactions entered into by Group entities in a currency other than thecurrency of the primary economic environment in which it operates (the "Functional Currency") are recorded at the rate ruling when the transactionoccurs. The assets and liabilities of foreign operations, including goodwill and fairvalue adjustments arising on acquisition, are translated into the Group'sfunctional and presentational currency (US Dollars) at exchange rates ruling atthe reporting date. The income and expenses of foreign operations aretranslated to US Dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised directly in equity, and arerecognised in the foreign currency translation reserve. When a foreignoperation is disposed of, in part or in full, the relevant amount in the foreigncurrency translation reserve is transferred to the income statement. Revenue Revenue from online gaming, comprising poker, casino and 'white label/skins'(third party entities that use the Group's platform and certain services), isrecognised in the accounting periods in which the gaming transactions occur. Poker and Emerging Games revenue represents the commission charged or tournamententry fees where the player has concluded his participation in the tournament.Casino and Sports Betting revenue represents net house win adjusted for the fairmarket value of gains and losses on open betting positions. Revenue in respectof 'white label/skin' arrangements is the net commission invoiced. Revenue ismeasured at the fair value of the consideration received or receivable and isnet of certain promotional bonuses. Interest income is recognised on an accruals basis. Segment information A segment is a distinguishable component of the Group that is engaged either inproviding products or services (business segment), or products or serviceswithin a particular economic environment (geographical segment). Taxation Income tax expense represents the sum of the Directors' best estimate oftaxation exposures and deferred tax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using rates that have beenenacted or substantively enacted by the balance sheet date. Deferred Tax Deferred tax is recognised on differences between the carrying amounts of assetsand liabilities in the financial statements and the corresponding tax bases usedin the computation of taxable profit. It is accounted for using the balancesheet liability method. Deferred tax liabilities are generally recognised forall taxable temporary differences other than where IAS 12 'Income Taxes'contains specific examples. Deferred tax assets are recognised to the extentthat it is probable that taxable profits will be available against whichdeductible temporary differences can be utilised. Such assets and liabilitiesare not recognised if the temporary difference arises from goodwill or from theinitial recognition (other than in a business combination) of other assets andliabilities in a transaction that affects neither the taxable profit nor theaccounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset realised. Deferred tax ischarged or credited to profit or loss, except when it relates to items chargedor credited directly to equity, in which case the deferred tax is also dealtwith in equity. Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current assets against current tax liabilities andwhen they relate to income taxes levied by the same taxation authority and theGroup intends to settle its current tax assets and liabilities on a net basis. Property, plant and equipment All property, plant and equipment are stated at cost less accumulateddepreciation. Assets in the course of construction are carried at cost, less any recognisedimpairment loss. Cost includes directly attributable costs incurred in bringingthe asset to working condition for its intended use, including professionalfees. Depreciation commences when the assets are ready for their intended use. Depreciation is provided to write off the cost, less estimated residual values,of all property, plant and equipment, evenly over their expected useful lives.It is calculated at the following rates: Leasehold improvements - over length of leasePlant, machinery, computer equipment - 33% per annumFixtures, fittings, tools and equipment, vehicles - 20% per annum Where an item of property, plant or equipment comprises major components havingdifferent useful lives, they are accounted for as separate items of property,plant and equipment. Subsequent expenditure is capitalised where it is incurred to replace acomponent of an item of plant, property or equipment where that item isaccounted for separately including major inspection and overhaul. All othersubsequent expenditure is expensed as incurred, unless it increases the futureeconomic benefits to be derived from that item of plant, property and equipment. Goodwill Goodwill represents the excess of the cost of an acquisition over the Group'sshare of the fair value of the identifiable assets and liabilities of anacquired subsidiary, associate or jointly controlled entity. For acquisitions where the agreement date is on or after 31 March 2004, goodwillis not amortised and is reviewed for impairment at least annually. Anyimpairment is recognised immediately in the income statement and is notsubsequently reversed. Goodwill arising on earlier acquisitions was beingamortised over its estimated useful life of 20 years. In accordance with thetransitional provisions of IFRS 3 Business Combinations, the unamortised balanceof goodwill at 31 December 2004 was frozen and reviewed for impairment, and willbe reviewed for impairment at least annually. Intangible assets Identifiable assets, liabilities and contingent liabilities that meet theconditions for recognition under IFRS3 are recognised at their fair value at theacquisition date. The identified intangibles are amortised over the usefuleconomic life of the assets. For acquisitions during the year, the usefuleconomic life of the intangible assets acquired is estimated to be betweeneighteen months and five years. Internally generated assets - research and development expenditure Expenditure incurred on development activities, including the Group's softwaredevelopment, is capitalised only where the expenditure will lead to new orsubstantially improved products or processes, the products or processes aretechnically and commercially feasible and the Group has sufficient resources tocomplete development. The expenditure capitalised includes the cost ofmaterials, labour and an appropriate proportion of overheads. All otherdevelopment expenditure is expensed as incurred. Subsequent expenditure on capitalised intangible assets is capitalised onlywhere it clearly increases the economic benefits to be derived from the asset towhich it relates. All other expenditure, including that incurred in order tomaintain the related intangible asset's current level of performance, isexpensed as incurred. Impairment of tangible and intangible assets At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Where the asset does not generate cashflows that are independent from other assets, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs. Anintangible asset with an indefinite useful life is tested for impairmentannually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cashflows are discountedto their present value using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to theasset for which the estimates of future cashflows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. An impairment lossis recognised as an expense immediately, unless the relevant asset is carried ata revalued amount, in which case the impairment loss is treated as a revaluationdecrease. Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of animpairment loss is recognised as income immediately, unless the relevant assetis carried at a revalued amount, in which case the reversal of the impairmentloss is treated as a revaluation increase. Trade and other receivables Trade and other receivables are stated at amortised cost less provision forimpairment. Cash and cash equivalents Cash comprises cash in hand and balances with financial institutions. Cashequivalents are short term, highly liquid investments that are readilyconvertible to known amounts of cash. They include unrestricted short-term bankdeposits originally purchased with maturities of three months or less. Trade and other payables Trade and other payables are stated at amortised cost. Share-based payments The Group has applied the requirements of IFRS 2 Share-based Payments. The Groupissues equity settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date of the equity-settledshare-based payments is expensed on a straight line basis over the vestingperiod based, for those share options which contain only non-market vestingconditions, on the Group's estimate of the shares that will eventually vest.Fair value is measured by use of a suitable option pricing model. The expectedlife used in the model has been adjusted, based on management's best estimate,for the effects of non-transferability, exercise restrictions, and behaviouralconsiderations. For cash-settled share-based payment transactions, the goods or servicesreceived and the liability incurred are measured at the fair value of theliability. Up to the point at which the liability is settled, the fair value ofthe liability is re-measured at each reporting date and at the date ofsettlement, with changes being recorded in the income statement. The Grouprecords the expense based on the fair value of the share-based payments on astraight-line basis over the vesting period. For cash payments made by TheBonita Trust, the charge is recorded when the Trustees commit to make thepayment. Where equity instruments of the parent company or a subsidiary are transferred,or cash payments based on the company's (or a subsidiary's) share price aremade, by shareholder(s) or entities that are effectively controlled by one ormore shareholder(s), the transaction is accounted for as a share-based payment,unless the transfer or payment is clearly for a purpose other than payment forgoods or services supplied to the Group. Where equity instruments are transferred by one or more shareholder(s), theamount recorded in reserves is included in the share-based payment reserve.Where a cash payment is made, this is recorded as a capital contribution. Treasury shares The consideration paid or received for the purchase or sale of treasury sharesis recognised directly in equity. The cost of treasury shares held is presentedas a separate reserve. Any excess of the consideration received on the sale oftreasury shares over the weighted average cost of the shares sold is credited tothe share premium account. Provisions and contingent liabilities The Group recognises a provision in the balance sheet when it has a legal orconstructive obligation as a result of a past event and it is probable that anoutflow of economic benefits will be required to settle the obligation. Where the Group has a possible obligation as a result of a past event that may,but probably will not, result in an outflow of economic benefits, no provisionis made. Disclosures are made of the contingent liability including, wherepracticable, an estimate of the financial effect, uncertainties relating to theamount or timing of outflow of resources, and the possibility of anyreimbursement. Where time value is material, the amount of the related provision is calculatedby discounting the cashflows at a pre-tax rate that reflects market assessmentsof the time value of money and any risks specific to the liability. Leased assets Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at theirfair value or, if lower, at the present value of the minimum lease payments,each determined at the inception of the lease. The corresponding liability tothe lessor is included in the balance sheet as a finance lease obligation.Lease payments are apportioned between finance charges and reduction of thelease obligation so as to achieve a constant rate of interest on the remainingbalance of the liability. Finance charges are charged directly against income. Rentals payable under operating leases are charged to income on a straight-linebasis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operatinglease are also spread on a straight-line basis over the lease term. Financial instruments A substantial portion of the Group's revenue is received in its functionalcurrency. As such, currency exposure on revenues is minimal. Further, the Groupminimises foreign currency exposure by netting non-US$ deposits and payments ofwinnings in the respective currency. Additionally, other exposures include interest rate risk from borrowing and theinvestment of cash balances. The Group seeks to limit these risks by investingcash in short-term instruments and interest income is recognised on an accrualsbasis. Dividends Dividends are recognised when they become legally payable. In the case ofinterim dividends to equity shareholders, this is when declared by thedirectors. In the case of final dividends, this is when approved by theshareholders at the Annual General Meeting. Bank borrowings Interest bearing bank loans and overdrafts are recorded at the fair value of theproceeds received. Finance charges, including premiums payable on settlement orredemption and direct issue costs, are charged to the income statement using theeffective interest method and are added to the carrying amount of the instrumentto the extent that they are not settled in the period in which they arise. 2. Business and geographical segment information For management purposes and transacting with customers, the Group's operationscan be segmented into the following four operating divisions: • Poker; • Casino (including Bingo); • Sports Betting; and • Emerging Games, currently comprising Backgammon. These divisions are the basis on which the Group reports its primary segmentinformation. Unallocated corporate expenses, assets and liabilities relate tothe entity as a whole and cannot be allocated to individual segments. Year ended Sports Emerging Unallocated31 December 2006 Poker Casino Betting Games Corporate Consolidated$m Continuing operationsRevenue 266.4 51.0 5.6 2.0 - 325.0Clean EBITDA 42.7 8.2 2.3 0.3 (2.6) 50.9Profit before tax 26.8 7.8 (4.7) (0.2) (107.1) (77.4) Discontinued operationsRevenue 559.2 219.2 - 1.5 - 779.9Clean EBITDA 341.7 160.1 - (2.0) - 499.8Profit before tax 332.3 159.9 - (2.3) (273.6) 216.3 Total operationsRevenue 825.6 270.2 5.6 3.5 - 1,104.9Clean EBITDA 384.4 168.3 2.3 (1.7) (2.6) 550.7Profit before tax 359.1 167.7 (4.7) (2.5) (380.7) 138.9 Other informationCapital additions and intangibles acquired 126.3 0.4 138.3 4.0 42.0 311.0Depreciation and amortisation 25.3 0.6 7.0 0.8 14.7 48.4 Balance sheetTotal assets 81.0 9.3 134.1 1.0 103.8 329.2Total liabilities 181.5 34.7 3.8 1.3 105.6 326.9 Impairment lossesIntangible fixed assets 115.5 - - - - 115.5Tangible fixed assets - - - 2.9 4.9 7.8Trade receivables - processors 45.8 18.0 - 0.1 - 63.9Trade receivables - bad debts 40.8 6.4 0.1 - - 47.3 Cashflows from operating activities 546.4 183.2 2.6 2.1 (419.5) 314.8 from investing activities (126.3) (0.4) (100.0) (4.0) (40.1) (270.8) from financing activities - - - - (190.8) (190.8) Year ended Sports Emerging Unallocated31 December 2005 Poker Casino Betting Games Corporate Consolidated$m Continuing operationsRevenue 139.7 13.5 - - - 153.2Clean EBITDA 19.0 1.8 - - (1.1) 19.7Profit before tax (132.3) 1.4 - - (85.7) (216.6) Discontinued operationsRevenue 719.4 105.1 - - - 824.5Clean EBITDA 490.2 73.8 - - - 564.0Profit before tax 487.1 73.6 - - (19.2) 541.5 Total operationsRevenue 859.1 118.6 - - - 977.7Clean EBITDA 509.2 75.6 - - (1.1) 583.7Profit before tax 354.0 75.0 - - (104.1) 324.9 Other informationCapital additions and intangibles acquired 39.3 0.3 - - 24.1 63.7Depreciation and amortisation 8.6 0.6 - - 8.1 17.3 Balance sheetTotal assets 187.6 10.2 - - 200.6 398.4Total liabilities 329.2 10.1 - - 105.0 444.3 Impairment lossesIntangible fixed assets - - - - - -Tangible fixed assets - - - - - -Trade receivables - processors 5.3 0.7 - - - 6.0Trade receivables - bad debts 43.7 5.2 - - - 48.9 Cashflows from operating activities 558.6 78.6 - - (17.0) 620.2 from investing activities (36.8) (0.3) - - (27.4) (64.5) from financing activities - - - - (494.7) (494.7) Revenue by geographical segment The following table provides an analysis of the Group's revenue by geographicalsegment: Year ended 31 Dec 06 31 Dec 05 $m $m EMEA 216.7 86.8Americas (non-US) 86.1 56.2Asia Pacific 22.2 10.2 ------ ------Continuing operations 325.0 153.2Discontinued operations 779.9 824.5 ------ ------Total revenue 1,104.9 977.7 ------ ------ Carrying value of total assets by geographical segment Year ended 31 Dec 06 31 Dec 05 $m $m EMEA 153.9 36.6Americas (non-US) 170.3 357.0Asia Pacific 5.0 4.8 ------ ------Total assets 329.2 398.4 ------ ------ Capital expenditure and intangibles acquired by geographical segment Year ended 31 Dec 06 31 Dec 05 $m $m EMEA 275.2 32.0Americas (non-US) 34.4 27.1Asia Pacific 1.4 4.6 ------ ------Total capital expenditure and intangibles acquired 311.0 63.7 ------ ------ 3. Reorganisation costsYear ended 31 Dec 06 31 Dec 05 $m $mReorganisation costs relating to Continuing operationsImpairment of The Poker Channel Limited (0.7) -Impairment of fixed assets (4.3) -Impairment of technology licenses (0.7) -Impairment of committed marketing expenditure prepayments (1.5) - ------ ------Total reorganisation costs relating to Continuing operations (7.2) - Reorganisation costs relating to Discontinued operationsImpairment of intangible assets (115.5) -Impairment of fixed assets (3.5) -Impairment of committed marketing expenditure prepayments (32.3) -Impairment of technology licenses (10.3) -Impairment of payment processor receivables (63.9) -Share-based payments (note 4) (0.7) -Redundancy and other costs (17.0) - ------ ------Total reorganisation costs relating to Discontinued operations (243.2) - ------ ------Total reorganisation costs (250.4) - ------ ------ During the year, reorganisation costs totalling $250.4m were incurred. Of thisamount, $243.2m related to reorganisation costs arising from the decision tosuspend all real money games to customers in the US following the enactment ofthe UIGEA and has been included in Discontinued operations. Due to thesignificance of Discontinued operations on the business, costs relating to thereorganisation have been disclosed as a separate line item within the incomestatement. The primary components of these reorganisation costs related to theconsequent impairment of intangible assets, principally Empire Poker, totalling$115.5m; provisions made in respect of potential payment processor bad debts of$63.9m are detailed in note 12; the write-off of committed marketingexpenditures of $32.3m relating to contracts entered into before the enactmentof the UIGEA for which no benefit to the Group arises; impairment of technologylicences relating to onerous contracts; and redundancy and other costs totalling$17.0m. 3 (a) IPO-related expenses The 2005 total IPO-related expenses were $88.0m of which the Company incurred$22.6m. Given that no new money was being raised for the Company, theIPO-related expenses were apportioned between the selling shareholders and theCompany based on contractual arrangements. There were no IPO-related expensesincurred in 2006. 3 (b) Skin-related settlement costs At the time of the IPO, the Group made it clear that it would seek to change thebasis of its relationships with its skins partners, the rationale for themhaving diminished following the Group's rapid expansion since 2003. In November 2005, the Group announced the acquisition of the player database andintellectual property of MultiPoker for US$14.5m in cash. MultiPoker was aleader in online poker in Scandinavia with more than 255,000 registered players.The Group also announced the termination of its skin arrangement withIntertopsPoker.com which has since become an affiliate of PartyPoker, allowingPartyPoker to market its services to IntertopsPoker.com players. At the sametime the Group announced that it had agreed to terminate its skin arrangementwith Coral Eurobet. Also in November 2005, the Group announced that it was in discussions regardinga possible offer to acquire the business and assets of Empire Online Limited ("EOL"). Those discussions were terminated on 21 November 2005 and EOL announcedthat it was proposing to commence legal proceedings against the Group for, interalia, breach of contract following the separation of PartyPoker from the rest ofthe Group's skins. On 14 February 2006, the Group announced that it had agreedto acquire the business and assets of EmpirePoker.com, its last remaining skin,from EOL as well as some other associated assets, for a total cash considerationof $250m. As part of the transaction, EOL agreed to withdraw all legal claimsagainst the Group. As required under International Financial Reporting Standards, a non-recurringcharge of $145.8m was included in the 2005 financial year within administrativeexpenses to reflect the settlement of disputes arising from the separation ofPartyPoker players from EmpirePoker and all of the other third party skins. 4. Share based payments Prior to flotation, the founding shareholders established a share option planfor the benefit of the current and future workforce. Under the terms of theplan, employees were granted a number of nil-cost options to be satisfied byexisting shares which had been issued to a dedicated employee trust. As such,the exercise of these options had no dilutive effect on shareholders whosubscribed at the IPO and will have no cash impact on the Company. IFRSrequires that the fair value of the options be amortised through the incomestatement over the life of the options. The share-based payments reflectpayments made by the Bonita Trust to certain employees (see note 20). As aresult there is a charge of $113.9m (2005: $65.6m), which has been includedwithin the income statement in the period. Year ended 31 December 2006 2005 $m $mCharge relating to - nil-cost options issued pre-IPO (25.5) (63.4) - nil-cost options issued post-IPO (60.9) (2.2) - Bonita Trust charge* (see note 20) (26.8) - ------ ------ (113.2) (65.6)Included in reorganisation costs (0.7) - ------ ------Total (113.9) (65.6) ------ ------ * A corresponding credit of $26.8m in respect of this charge has been includedin reserves Following the enactment of the Unlawful Internet Gambling Enforcement Act, theCompany implemented on 29 December 2006 a one-off adjustment to existingincentive awards and also granted new incentive awards by using an additional 40million Shares gifted to the Employee Trust by certain founders of the Company.As part of a key employee retention programme, the Company waived the totalshareholder return performance targets that were applicable to 20 million out ofthe 27 million shares over which an option was granted to Mitch Garber, ChiefExecutive Officer, on 19 April 2006 under the PartyGaming Plc Share Option Plan(the "Plan"). The vesting schedule was also accelerated so that these 20 millionshares will now vest in eight monthly tranches of 1.25 million shares from 19May 2007 to 19 December 2007 with the remainder vesting on 19 April 2008. Mitch Garber was also granted a new option under the Plan over 15 millionShares, vesting in 30 equal monthly tranches until 1 May 2009. Provided heremains in employment until 1 May 2009 he will also be awarded 2 million sharesfrom the Employee Trust. Mitch Garber is also entitled to £3 million payable bythe Employee Trust in 30 equal monthly instalments until 1 May 2009 provided heremains in employment on each payment date. The £3 million has been realisedfrom the net proceeds of sale of Shares from the Trust. As part of the key employee retention exercise the Company also accelerated thevesting of the option granted to Martin Weigold, Group Finance Director, on 6April 2005 under the Plan, so that the balance of his unvested shares (8,897,776shares) would vest in 9 equal quarterly tranches until 31 December 2008. Anadditional grant over 8,897,776 shares was also made which vests in the sameinstalments as the aforementioned option. Further nil-cost options over approximately 50 million shares have been grantedto other key employees of the Group. 5. Finance income and costsYear ended 31 Dec 06 31 Dec 05 $m $m Interest payable (3.7) (10.2)Interest on bank deposits 4.2 3.5 ------ ------Net finance income (cost) 0.5 (6.7) ------ ------ 6. Tax a) Analysis of tax chargeYear ended 31 Dec 06 31 Dec 05 $m $m Income tax expense for the year (10.5) (31.7) ------ ------ Domestic income tax is calculated at 35% (2005: 35%) of the estimated assessableprofit for the year. Taxation for other jurisdictions is calculated at the rateprevailing in the relevant jurisdiction. There are no material deferred tax balances arising in the period. The effective tax rate based on the total tax charge is 7.6% (2005: 9.8%). Theeffective tax rate for the period is 9.8% before share-based payments (2005:5.7% before share-based payments, IPO-related expenses and skin-relatedsettlement costs). b) Factors affecting the tax charge for the year The total charge for the year can be reconciled to accounting profit as follows: Year ended 31 Dec 06 31 Dec 05 $m $m Profit before tax 138.9 324.9 ------ ------ Tax at the weighted average tax rate of the Group being tax expense at the effective tax rate for the period (13.9) (18.5)Effect of IPO-related expenses, share-based payments, skin-related settlement costs, depreciation and amortisation (10.9) (13.2)Effect of adjustment to the weighted average tax rate of the Group being tax expense at the effective tax rate for prior periods 14.3 - ------ ------Income tax expense (10.5) (31.7) ------ ------ The Group's policy is to manage, control and operate Group companies only in thecountries in which they are registered. At the year end there were Groupcompanies registered in Gibraltar, India, the UK, Alderney, Bulgaria, Bermudaand Antigua. However, the rules and practice governing the taxation ofe-commerce activity are evolving in many countries. It is possible that theamount of tax that will eventually become payable may differ from the amountprovided in these financial statements. In calculating the tax provision, inaddition to any amounts due in respect of jurisdictions in which Group companiesare currently incorporated or domiciled, a provision has been made to cover theDirectors' best estimate of additional taxation exposures which may arise. Wherethe actual outcome differs from the amounts originally recorded, the tax anddeferred tax provisions will be affected in the period(s) in which thedetermination is made. The Group has received indemnities from the Principal Shareholders in connectionwith certain potential historic corporate taxation liabilities. The Directorsconsider the likelihood of any such liability arising to be remote.Accordingly, neither has a provision for any such potential taxation been made,nor has an asset been recognised in respect of the indemnity. c) Factors that may affect future tax charges In Gibraltar, the Group benefits from the exempt company regime. The Gibraltarexempt company regime will be phased out between 1 July 2006 and 31 December2010; under current rules, assessable income is taxed in Gibraltar at 35.0%. In India, the Group benefits from a tax holiday on income from qualifyingactivities until March 2009; under current rules assessable income is taxed inIndia at approximately 36.7%. 7. Earnings per share ("EPS") Continuing DiscontinuedYear ended 31 December 2006 operations operations TotalCents Basic EPS (2.2) 5.6 3.4 Diluted EPS (2.2) 5.4 3.3 Basic Clean* EPS 0.4 12.5 12.9 Diluted Clean* EPS 0.4 12.2 12.5 Continuing DiscontinuedYear ended 31 December 2005 operations operations TotalCents Basic EPS (5.9) 13.6 7.7 Diluted EPS (5.9) 13.3 7.5 Basic Clean* EPS (0.1) 14.0 13.9 Diluted Clean* EPS (0.1) 13.7 13.6 *EPS before restructuring costs, IPO-related expenses, non-recurring costsassociated with the settlement of legal claims by certain skins, as well ascharges relating to share-based payments. Basic earnings per share Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of Ordinary sharesoutstanding during the year, excluding those held by the Company. 2006 2005 Before Before reorganisation Reorganisation reorganisation Reorganisation costs costs Total costs costs Total Adjusted earnings ($m) 492.0 (250.4) 241.6 527.2 - 527.2 Weighted average number of Ordinary shares (m) 3,807.6 3,807.6 3,807.6 3,791.6 3,791.6 3,791.6 Adjusted earnings per Ordinary share (cents) 12.9 (6.6) 6.3 13.9 - 13.9 Basic earnings (loss) ($m) 378.8 (250.4) 128.4 293.2 - 293.2 Weighted average number of Ordinary shares (m) 3,807.6 3,807.6 3,807.6 3,791.6 3,791.6 3,791.6 Basic earnings (loss) per Ordinary share (cents) 9.9 (6.6) 3.4 7.7 - 7.7 Clean earnings per share Management believes that clean earnings per share reflects the underlyingperformance of the business and assists in providing a clearer view of thefundamental performance of the Group. Clean EBITDA and Clean earnings per shareare performance measures used internally by management to manage the operationsof the business and remove the impact of one-off and non-cash items. They aretherefore calculated before reorganisation costs, IPO-related expenses,non-recurring costs associated with the settlement of legal claims by certainskins as well as non-cash charges relating to share-based payments which are tobe satisfied by existing shares that were effectively gifted to the EmployeeTrust by the Principal Shareholders and share-based payments to employees madeby The Bonita Trust (see note 20). Clean net earnings attributable to equity shareholders is derived as follows: 2006 2005($m) Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total Earnings (loss) for the purposesof basic and diluted earnings pershare being profit from ordinaryactivities attributable to equityholders of the parent (83.4) 211.8 128.4 (223.1) 516.3 293.2 Reorganisation costs 7.2 243.2 250.4 - - - ------ ------ ------ ------ ------ ------ Earnings before reorganisationcosts (76.2) 455.0 378.8 (223.1) 516.3 293.2 Share-based payments 90.9 22.3 113.2 49.3 16.3 65.6 IPO-related expenses - - - 22.6 - 22.6 Skin-related settlement costs - - - 145.8 - 145.8 ------ ------ ------ ------ ------ ------ Clean net earnings 14.7 477.3 492.0 (5.4) 532.6 527.2 ------ ------ ------ ------ ------ ------ In accordance with IAS 33, the weighted average number of shares for basic anddiluted earnings per share takes into account the one to four ordinary sharesub-division that occurred on 5 May 2005 and the number of options which vestedfollowing flotation (see note 21). Year ended 31 Dec 06 31 Dec 05Number of shares for basic earnings per share Number Number m mNumber of shares in issue 4,000.0 4,000.0Number of shares issued to the Employee Trust (264.0) (224.0)Number of shares sold by the Employee Trust 10.1 -Number of shares vested in the previous periods 36.2 -Effect of shares which vested during the period 25.3 15.6 ------ ------Weighted average number of ordinary shares for the purposes of basic earnings per share 3,807.6 3,791.6 ------ ------ The shares held by the Employee Trust are accounted for as treasury shares. In accordance with IAS 33, the weighted average number of shares for dilutedearnings per share takes into account all potentially dilutive shares granted,which are not included in the number of shares for basic earnings per shareabove. Although the unvested potentially dilutive shares are contingentlyissuable, in accordance with IAS 33 the period end is treated as the end of theperformance period. Those option holders who were employees at that date aredeemed to have satisfied the performance requirements and their relatedpotentially dilutive shares have been included for the purpose of diluted EPS(see note 21). Year ended 31 Dec 06 31 Dec 05Number of shares for diluted earnings per share Number Number m mNumber of shares in issue 4,000.0 4,000.0Number of shares issued to the Employee Trust (264.0) (224.0)Number of shares sold by the Employee Trust 10.1 -Number of shares vested in the previous periods 36.2 -Effect of shares which vested during the period 25.3 15.6Effect of potential dilutive vested and unvested shares 114.6 92.6 ------- -------Weighted average number of ordinary shares for the purposes of diluted earnings per share 3,922.2 3,884.2 ------- ------- 8. Intangible assets Other intangibles Goodwill Total $m $m $mCost or valuationAs at 1 January 2005 - 10.1 10.1Additions 26.9 - 26.9 ----- ----- -----As at 31 December 2005 26.9 10.1 37.0Additions 101.7 161.0 262.7 ----- ----- -----As at 31 December 2006 128.6 171.1 299.7 ----- ----- -----Amortisation and impairment lossesAs at 1 January 2005 - 2.4 2.4Charge for the year 4.3 - 4.3 ----- ----- -----As at 31 December 2005 4.3 2.4 6.7Charge for the year 25.6 - 25.6Impairments 41.8 73.7 115.5 ----- ----- -----As at 31 December 2006 71.7 76.1 147.8 ----- ----- -----Carrying amounts:As at 31 December 2006 56.9 95.0 151.9 ----- ----- -----As at 31 December 2005 22.6 7.7 30.3 ----- ----- ----- The other intangible assets primarily include the customer database andrelationships acquired in respect of Empire Poker, Gamebookers, MultiPoker,PokerNOW and IntertopsPoker. The values are based on cash flow projections fromexisting customers taking into account the expected impact of attrition. In accordance with IFRS 3, the Group regularly monitors the carrying value ofits intangible assets. A review was undertaken at 31 December 2006 to assesswhether the carrying value of assets was supported by the net present value offuture cash flows derived from those assets using cash flow projections for a 5year period. The discount rates for the review were based on company specific pre-taxweighted average cost of capital percentages and ranged from 9% to 12%. Thefuture cash flows have been modelled to decline in line with historic playerattrition patterns which are consistent with those experienced by the Group as awhole in recent years. The results of the review undertaken at 31 December 2006 indicated thatimpairment totalling $115.5m, predominantly in respect of Empire Poker, wasnecessary in respect of the intangible assets, arising due to the enactment ofthe UIGEA. Other intangibles assets represent customer lists, brands and other intangibleswhich are being amortised over their estimated useful economic lives of between18 months and 5 years. 9. Property, plant and equipment Fixtures, Plant, fittings, Land and machinery tools and buildings and vehicles equipment Total $m $m $m $mCost or valuationAs at 1 January 2005 1.5 0.9 17.4 19.8Additions 6.3 2.7 27.8 36.8Transfers (0.2) 0.2 - - ------ ------ ------ ------As at 31 December 2005 7.6 3.8 45.2 56.6Additions 8.6 1.2 38.5 48.3Disposals - (0.1) (0.1) (0.2) ------ ------ ------ ------As at 31 December 2006 16.2 4.9 83.6 104.7 ------ ------ ------ ------Depreciation and impairment lossesAs at 1 January 2005 0.0 0.5 6.0 6.5Charge for the year 0.7 0.8 11.5 13.0 ------ ------ ------ ------As at 31 December 2005 0.7 1.3 17.5 19.5Charge for the year 1.7 1.2 19.9 22.8Impairments - - 7.8 7.8 ------ ------ ------ ------As at 31 December 2006 2.4 2.5 45.2 50.1 ------ ------ ------ ------Carrying amount As at 31 December 2006 13.8 2.4 38.4 54.6 ------ ------ ------ ------As at 31 December 2005 6.9 2.5 27.7 37.1 ------ ------ ------ ------ 10. Commitments for capital expenditure:Year ended 31 Dec 06 31 Dec 05 $m $m Contracted but not provided for 2.8 3.7 ------ ------ 11. Investment in associates The Group acquired a 35% interest in the ordinary share capital of The PokerChannel Ltd, a company incorporated in England, in the year ended 31 December2005, for a cash consideration of $1.8m (this represents 35% of the votingrights). This is accounted for under the equity method. Based on the tradingresults of this company, this investment was impaired to nil. 12. Trade and other receivables Year ended 31 Dec 06 31 Dec 05 $m $m Trade receivables 36.8 108.7Prepayments 20.3 12.0Other receivables 10.2 7.6 ------ ------ 67.3 128.3 ------ ------ In aggregate, $69.9 million is considered to be at risk in respect of amountsdue from payment processors of which $63.9m arose following the enactment of theUIGEA. Due to issues around current regulatory matters (see note 17) there isa degree of uncertainty as to actions the Group is able to undertake to enforcecollection of these debts which may impact the eventual recoverable amounts.Accordingly, the Directors have assessed their best estimate of therecoverability of these debts as $nil. 13. Cash and cash equivalents Year ended 31 Dec 06 31 Dec 05 $m $mCash in hand and current account 46.3 194.9Bank overdrafts - (1.8) ------ ------ 46.3 193.1 ------ ------ 14. Short term investments Year ended 31 Dec 06 31 Dec 05 $m $mCash on deposit for more than 3 months 3.4 6.8Restricted cash 5.7 - ------ ------ 9.1 6.8 ------ ------ Restricted cash relates to the cash held in the Employee Trust payable to MitchGarber relating to incentive awards over a 30 month period from December 2006. 15. Bank debt and other loans Year ended 31 Dec 06 31 Dec 05 $m $m Bank debt and other loans - current 14.1 -Bank debt and other loans - non- current 3.7 - ------ ------Total 17.8 - ------ ------ The amount drawn under the revolving credit facility will be repaid on or before 30 April 2007. In October 2006 following the passing of the UIGEA in the US the Company put inplace arrangements for a short-term loan facility to be provided by founders ofthe Company, should the need arise. A $50m facility agreement was executed andplaced in escrow, undated, such that if required, the Company could chooseimmediately to date the document and to drawdown the facility which would be fora term of six months from the drawdown date. In the event that the loanagreement was taken out of escrow, an arrangement fee of 0.25% of the facilityamount would be payable and interest thereon would accrue at the rate of 6% perannum. There was no need for additional cash resources in 2006 and the facilityagreement remained in escrow as at 31 December 2006. 16. Provisions Year ended 31 Dec 06 31 Dec 05 $m $m Provision at beginning of period 6.2 4.7(Decrease) increase in provision during period (0.7) 1.5 ------ ------Provision at end of period 5.5 6.2 ------ ------ Provisions are expected to be settled within the next year and relate tochargebacks which are recognised at the Directors' best estimate of theprovision based on past experience of such expenses applied to the level ofactivity. 17. 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 andactions. a. Regulatory issues As part of the Board's ongoing regulatory compliance and operational riskassessment process, the Board continues to monitor legal and regulatorydevelopments, and their potential impact on the business, and continues to takeappropriate advice in respect of these developments. Following the enactment of the UIGEA on 13 October 2006, the Group stoppedtaking any deposits from customers in the US and barred such customers fromwagering real money on all of the Group's sites. Notwithstanding this, theaggressive public statements made by certain US regulatory authorities suggestthat there remains a residual risk of an adverse impact arising from the Grouphaving had customers in the US prior to the enactment of the UIGEA. Furthermore, the Group is aware of press speculation that certain US regulatoryauthorities have made enquiries of banks and other financial advisers that havehad involvement with the internet gaming industry. Certain customary indemnitieshave been given by the Company to its advisers in connection with the Company'sinitial public offering in June 2005 and other assignments, and claims undersuch indemnities cannot be ruled out. The Group has not, however, receivednotice of any such claim to date. b. Litigation The Group is the defendant in a US action which is based on alleged collusiontaking place on the Group's online poker tables. This action has been broughtby two individual plaintiffs who are seeking class certification. The classseeking to be represented comprises poker customers in the US who from 1 January2002 played real money games on the Group's sites. The Group believes the actionto be without merit, but has not submitted to US jurisdiction and therefore theaction has not been contested. The Group has received legal advice that, having not submitted to USjurisdiction, any eventual US default judgement could not be enforced interritories where the Group has its principal assets (including Gibraltar andthe UK) and new substantive proceedings would need to be brought on the meritsin such territories. The Group believes it has strong defences and any suchproceedings, if they were to be brought, would be vigorously defended. The Board believes that a sufficiently reliable estimate of the potentialliability in connection with each of the above matters cannot be made andconsequently no provision has been made. 18. Share capital Issued and fully paid Number $ mOrdinary sharesAs at 1 January 2005 and 31 December 2005 100,452 4,000.0Issued during the year ended 31 December 2006 - - ------ ------As at 31 December 2006 100,452 4,000.0 ------ ------ Shares issued are converted into US dollars at the exchange rate prevailing onthe date of issue. The issued and fully paid share capital of the Group amountsto $100,452 and is split into 4,000,000,000 ordinary shares. The share capitalin UK sterling is £60,000 and translates at an average exchange rate of $1.6742USD to GBP. As at 31 December 2006, 143,555,517 (2005: 194,104,622) ordinaryshares were held as treasury shares by the Employee Trust. Authorised share capital and significant terms and conditions The total authorised number of shares comprises 5,000 million ordinary shareswith a par value of 0.0015p. All issued shares are fully paid. The holders ofordinary shares are entitled to receive dividends when declared and are entitledto one vote per share at meetings of the Company. The Trustee has waived allvoting and dividend rights in respect of shares held by the Employee Trust. Theshare capital is shown on the basis that it has been in issue throughout theperiod. There were no changes to share capital during the year. 19. Reserves Share-based Capital Share Retained Other payments contributions Currency premium earnings reserves reserve reserve reserve $m $m $m $m $m $m As at 1 January 2005 0.4 417.0 (825.4) 3.2 - -Profit from ordinary activities attributableto equity holders ofthe parent - 293.2 - - - -Share-based payments - - - 65.6 - -As at 1 January 2006 0.4 710.2 (825.4) 68.8 - -Profit from ordinaryactivities attributableto equity holders ofthe parent - 128.4 - - - -Share-based payments - - - 87.1 26.8 -Dividend - (200.0) - - - -Exchange differenceson translation offoreign operations - - - - - 0.2Increase in EmployeeTrust assets - - - - 5.7 - ------ ------ ------ ------ ------ ------As at 31 December2006 0.4 638.6 (825.4) 155.9 32.5 0.2 ------ ------ ------ ------ ------ ------ Share premium is the amount subscribed for share capital in excess of nominalvalue. Retained earnings is the cumulative net gains and losses recognised inthe consolidated income statement. Share-based payments reserve is the amountarising from share-based payments made by the Group. Capital contributionsreserve is the amount arising from the cash settled share-based payments made byThe Bonita Trust and cash held by the Employee Trust. Currency reserve is thegains/losses arising on retranslating the net assets of overseas operations intosterling. The other reserve of $825.4m is the amount arising from the application ofaccounting which is similar to the pooling of interests method, as set out inthe Group's accounting policies. Under this method of accounting, thedifference between the consideration for the controlling interest and thenominal value of the shares acquired is taken to other reserves onconsolidation. As a result, the share capital reflects PartyGaming Plc's sharecapital and the retained earnings for each of the periods ended 31 December2006, reflects the cumulative profits as if the current Group structure hadalways been in place. 20. Related parties Group Relationships Transactions between the Group companies that have been eliminated onconsolidation are not disclosed in this note. Anurag Dikshit, Ruth Parasol and Russ DeLeon are the ultimate controllingshareholders of the Group. During the period the controlling shareholders, andcorporate entities controlled by controlling shareholders, received aggregateremuneration in the form of salary, bonuses and consulting fees as follows: $m Year ended 31 December 2005 0.5Year ended 31 December 2006 0.8 Remuneration of key management personnel Key management personnel are those individuals who the Directors believe havesignificant authority and responsibility for planning, directing and controllingthe activities of the Group. The aggregate short-term and long-term benefits,as well as share-based payments of the Directors and key management personnel ofthe Group are set out below: Short-term Long-term Share-based Total $m $m $m $mYear ended 31 December 2005 9.7 - 39.5 49.2Year ended 31 December 2006 14.7 - 56.1 70.8 Transactions The following aggregate balances were due to/(from) key management at eachperiod end: As at 31 December 2006 2005 $m $mDue to 1.0 2.5 ------ ------ Due from (0.6) (0.1) ------ ------ The wife of a Principal Shareholder owns a property leased to the Group's Indiansubsidiary. Rentals paid were: $ Year ended 31 December 2005 30,323Year ended 31 December 2006 30,649 Additionally a security deposit in the sum of $13,800 has been paid (2005:$13,800). In 2005, the total IPO-related expenses were $88.0m of which the Companyincurred $22.6m. Given that no new money was raised for the Company, theIPO-related expenses were apportioned between the selling shareholders and theCompany based on contractual arrangements. There were no IPO-related costs in2006. In terms of property related transactions, certain of the Group's subsidiarieshave entered into the following arrangements: - leased an unfurnished property to the Group Finance Director at anannual lease rental of £44,400 ($84,000), which the Directors believe is thefair rental value of the property; - acquired underleases over two furnished properties for the use of theChief Executive Officer which the Directors believe have a fair rental value of£84,000 ($158,800); and - acquired a property which is available for the use of the ChiefExecutive Officer at fair rental value. The Chief Executive Officer has notavailed himself of the property and the property has been leased to anotheremployee at fair rental value. Former directors and founders have leased their personal properties to employeesof the Group. The Directors believe that these lease arrangements are fairvalue personal arrangements between the parties involved and are independent ofthe Group. Principal Shareholders have also given certain indemnities to the Group. A Principal Shareholder provided a loan of €2.5million ($3.3million) to the GMGTrust in connection with the acquisition of a property. This property is rentedby one of the owners of a supplier. Subsequent to the loan being granted, therequirement to repay the loan has been forgiven. The enactment of the UIGEA resulted in a "prohibitive legislative occurrence",as defined under the terms of the Group's revolving credit facility, whichprevented further drawdown until discussions with lenders had determined whetherthere was a basis for the credit facility to be continued. Due to the fact thatcustomer redemptions are paid out more quickly than the receipt of customerdeposits, it was anticipated that the enactment of the UIGEA might result in atemporary constraint on cash flow. Therefore, the Company put in placearrangements for a short-term loan facility to be provided by the founders ofthe Company, should the need arise. A $50m facility agreement was executed andplaced in escrow, undated, such that if required, the Company could chooseimmediately to date the document and to drawdown the facility which would be fora term of six months from the drawdown date. In the event that the loanagreement was taken out of escrow, an arrangement fee of 0.25% of the facilityamount would be payable and interest thereon would accrue at the rate of 6% perannum. Whilst there was a substantial cash outflow post-UIGEA as customers in the USand elsewhere sought to withdraw their client balances (as evidenced by a $96.2mreduction in client liabilities in the fourth quarter of 2006), there was noneed for additional cash resources and the facility agreement remained in escrowas at 31 December 2006. Company PartyGaming Plc (the "Company") does not have its own bank account, with itscash obligations for operating expenditure, being discharged by its operatingsubsidiaries. Amounts paid by those subsidiaries are accounted for through anadjustment to the related inter-company balances. During the year, $20.9m ofcosts (2005: $31.0m including IPO-related costs of $22.7m) were incurred bysubsidiaries on behalf of the Company. The Company received in 2006 through inter-company account a dividend of $200.0m(2005: $285.0m) from its immediate subsidiary undertaking PartyGaming HoldingsLimited. In 2006, the Company declared a dividend to shareholders of $200m(2005: nil) which was paid through the bank account of PartyGaming HoldingsLimited. During the year, the Company entered into a revolving credit facility with itsbankers and $90.0m of the facility was drawn down directly by ElectraWorksLimited. As at year end the facility drawn was $12.0m. The Directors and certain key management of the company were remunerated throughcash payments made by other entities within the Group of $14.9m (2005: $4.1m)and share options issued by the Company with a share-based payment expense of$38.3m (2005: $10.4m). Additionally, the Company has granted options over itsshares to employees of certain subsidiaries. The share-based payments expensefor the year in respect of these share options of $48.8m (2005: $52.0m) has beenadded to the Company's cost of investment in those subsidiaries. Disclosuresrelating to share options are included in note 21. Share option arrangements Certain key management and certain directors were granted nil-cost options underservice contracts, which were formally granted under the Group's share optionplan (see note 21). Bonita Trust The Bonita Trust was established in Gibraltar in 2004 effectively by the Group'sPrincipal Shareholders to benefit the communities where the Group and itsemployees and service providers operate. The Bonita Trust is operated by anindependent professional trustee. The Bonita Trust has philanthropic objectives and supports medical, cultural andeducational programs. Principally directed to benefit the communities ofGibraltar, India and the UK. In addition, employees of PartyGaming and theirfamilies are a beneficiary class of The Bonita Trust. In December 2006, The Bonita Trust made or committed to make payments to certainindividuals that were employed or had previously been employed by the Group.These payments were made independently of the Group and were over and above theamounts that the Board had already determined should be paid by the Group tothose employees and former employees. However, as these payments were basedprimarily on the Company's share price, the Board considers these to fall underthe criteria for share-based payments under IFRS2 and in the year to 31 December2006 has charged an amount to the income statement totaling $26.8m as if suchamounts had been paid by the Group itself. A corresponding amount has beenrecorded as a capital contribution in the Group's balance sheet. Of the $26.8m,$9.4m relates to Discontinued operations. The Group has been informed that during 2006 the Bonita Trust made donations andother payments in respect of its other objectives totalling $8.4m (2005: nil).Disclosure of these payments has been made as it possible that the Group's namemay be linked with them. It is emphasised that neither The Bonita Trust nor anyperson or entity connected with The Bonita Trust sought any advice from, theGroup, its directors or key management in deciding whether these payments shouldbe made. In addition, none of the payments were made in respect of anyobligations incurred, or services received, by the Group, nor did they fallwithin the scope of IFRS 2 Share-Based Payments. Consequently, no entries havebeen made to the Group's financial statements in respect of these payments. Further details on the Bonita Trust can be found at www.bonitatrust.org. 21. Share-based payments The Group has designed a Share Option Plan ("the Plan") as a reward andretention incentive for employees and self-employed consultants of the Group,including the Executive Directors (the "Participants"). Certain individualshave nil-cost option arrangements under their service contracts, which wereformally granted under the Plan during the year. During the year, 136.2m optionsover the share capital were granted to Participants, representing 3.4% of thetotal issued share capital. Each option takes the form of a right, exercisableat nil-cost, to acquire shares in the Company. Options granted under the shareoption scheme during the period generally vest in instalments over a four tofive year period. The Group has used the binomial options pricing model. Anappropriate discount has been applied to reflect the fact that dividends are notpaid on options that have not vested or have vested and have not been exercised.There are no performance conditions attached to options issued by the Group.Details of modifications to share options are set out in note 4. Share options Year ended 31 Dec 06 31 Dec 05 Number (m) Number (m) Outstanding at beginning of period 126.7 40.0Options granted during the period 136.2 119.0Options lapsed during the period (39.9) (1.0)Exercised during the period (52.7) (31.3) ----- -----Outstanding at end of period 170.3 126.7 ----- ----- Exercisable at the end of period 3.6 4.9 Weighted average share price for options exercised £1.01 £1.18Weighted average remaining contractual life of options outstanding 1,077 days 756 days 22. Acquisitions made during the period Empire Poker On 14 February 2006 the Group acquired the business and assets of Empire Poker.In calculating the goodwill arising on acquisition, the fair value of the netassets of Empire Poker has been assessed and adjustments from book value havebeen made where necessary. These adjustments are summarised as follows: Book value on Fair value acquisition adjustment Fair value $m $m $m Intangible fixed assets - 52.0 52.0 ------ ------ ------Net assets - 52.0 52.0 ------ ------ ------ The fair value adjustment relates to the recognition of the customer lists,brands and other intangibles acquired as part of the acquisition. Theseintangibles are being amortised over their estimated useful economic lives ofbetween 18 months and 5 years. Fair value of net assets acquired 52.0Goodwill 73.9 ------Fair value of consideration including expenses 125.9 ------ Which is represented by: Cash consideration to Empire Online Limited 122.2Expenses 3.7 ------Total cash consideration 125.9 ------ The revenue and operating profit generated from this acquisition in thepost-acquisition period to December 2006 was $24.6m and $16.2m respectively.Had the business been owned for the entire period of 2006, the revenue andoperating profit would have been $31.1m and $20.6m respectively. An amount of $105.6m is included within the reorganisation costs in respect ofimpairment of these assets acquired following the enactment of the UIGEA. Gamebookers On 3 August 2006 the Group acquired the businesses and assets connected with theGamebookers.com website, an exclusively non-US facing online sports betting andcasino business, from Trident Gaming PLC for net cash consideration of €103.3million ($132.0m) after adjusting for working capital adjustments of €3.0million. These adjustments are summarised as follows: Book value on Fair value acquisition adjustment Fair value $m $m $m Intangible fixed assets 0.5 49.3 49.8 ------ ------ ------Net (liabilities) assets (3.0) 48.6 45.6 ------ ------ ------ The fair value adjustment relates to the recognition of the customer lists,brands and other intangibles acquired as part of the acquisition. Theseintangibles are being amortised over their estimated useful economic lives ofbetween 8 months and 5 years. $mFair value of net assets acquired 45.6Goodwill 86.4 ------Fair value of consideration including expenses 132.0 ------ Which is represented by : $mCash consideration to Trident Gaming PLC including expenses of $2.9m 98.5Deferred consideration 27.7Loan note 5.8 ------ 132.0 ------ The revenue and operating profit generated from the Gamebookers business in thepost-acquisition period to December 2006 was $9.0m and $4.4m respectively. Hadthe business been owned for the entire period of 2006, the revenue and operatingprofit would have been $21.6m and $10.6m respectively. 23. Post balance sheet events Empire Online Limited On 19 January 2007 the Group acquired the assets, players and gaming relatedcontracts associated with Empire Online Limited, an exclusively non-US facinggaming business. In consideration for the acquisition, PartyGaming issued83,325,934 new shares in PartyGaming with an average price of 29.32p over the 15days prior to the date of acquisition. In calculating the goodwill arising on acquisition, the fair value of the netassets of Empire Online Limited has been assessed and adjustments from bookvalue have been made where necessary. These adjustments are summarised asfollows: Book value on acquisition Fair value adjustment Fair value $m $m $m Intangible fixed assets 221.8 (202.8) 19.0 ------ ------ ------Net assets 221.1 (202.8) 19.3 ------ ------ ------ The fair value adjustment relates to the write-off of goodwill and theattributing of fair values of customer lists and brands acquired as part of theacquisition. These customer lists and brands are being amortised over theirestimated useful economic lives of up to 5 years. $mFair value of net assets acquired 19.3Goodwill 28.3 ------Fair value of consideration including expenses 47.6 ------ This is represented by: $mShare-based consideration to Empire Online Limited 37.9Deferred share-based consideration to Empire Online Limited 9.5Expenses 0.2 ------ 47.6 ------ Intercontinental Online Gaming Limited On 19 January 2007 the Group acquired the business and assets ofIntercontinental Online Gaming Limited, an exclusively non-US facing gamingbusiness. In consideration for the acquisition PartyGaming issued 31,867,908 newshares in PartyGaming with an average price of 29.32p over the 15 days prior tothe date of acquisition. In calculating the goodwill arising on acquisition, the fair value of the netassets of Intercontinental Online Gaming Limited has been assessed andadjustments from book value have been made where necessary. These adjustmentsare summarised as follows: Book value on Fair value acquisition adjustment Fair value $m $m $m Intangible fixed assets - 10.0 10.0 ------ ------ ------Net assets 3.4 10.0 13.4 ------ ------ ------ The fair value adjustment relates to the recognition of the customer lists andbrands acquired as part of the acquisition. These intangibles are beingamortised over their estimated useful economic lives of up to 5 years. $mFair value of net assets acquired 13.4Goodwill 5.0 ------Fair value of consideration including expenses 18.4 ------ This is represented by: $mShare-based consideration to Intercontinental Online Gaming Limited 15.3Deferred share-based consideration to Intercontinental Online Gaming Limited 2.9Expenses 0.2 ------ 18.4 ------ As a result of these two transactions a total of 115,193,842 new shares havebeen issued since the balance sheet date. 24. Dividend During 2006 the Group paid a final dividend in respect of the 2005 financialyear on 19 May 2006 totalling $200.0m (being 5.25 cents per share). Followingthe decision to suspend all real money games customers in the US and theconsequent reorganisation of the business that took place during the fourthquarter of 2006, the Board believed that it was inappropriate to pay an interimdividend in 2006. The Board also believes that in the current environment, itwould be imprudent to recommend the payment of a final dividend for the 2006financial year. 25. Cashflows from Discontinued operations 2006 2005 $m $m Net cash from operating activities 404.2 600.1Net cash used in investing activities (115.3) (22.6)Net cash used in financing activities - -Net increase in cash and cash equivalents 288.9 577.5 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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