Final Results - Part 2

5th Mar 2008 07:01

PartyGaming Plc05 March 2008 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 information. 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 2007 or the year ended 31 December 2006, but isderived from those accounts. Statutory accounts for the year ended 31 December 2007 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 2006 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 both 2006 and 2007, withoutqualifying the opinion therein, draws attention to the issue set out in note 18on Contingent Liabilities in the financial information. The following standards and interpretations, issued by the IASB or theInternational Financial Reporting Interpretations Committee (IFRIC), areeffective for the first time in the current financial year and have been adoptedby the Group with no significant impact on its consolidated results or financialposition: 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). IFRIC 10 - Interim financial reporting and impairment (effective for annualperiods beginning on or after 1 November 2006). IAS 1 (Amendment) - Capital disclosures (effective for annual periods beginningon or after 1 January 2007). IFRS 7 - Financial Instruments: Disclosure (effective for accounting periodsbeginning on or after 1 January 2007). Additional disclosure has been providedwithin this financial information to comply with this standard. IFRS 8 - Operating segments (effective for annual periods beginning on or after1 January 2009) which has been early adopted by the Group. IFRS 8 containsrequirements for the disclosure of information about an entity's operatingsegments and also about the entity's products and services, the geographicalareas in which it operates, and its major customers. The standard is concernedonly with disclosure and replaces lAS 14 - Segment reporting. In accordancewith best practice the Group has adopted the new accounting standard early.Further explanation is provided below. The following interpretations were issued by the IFRIC before the year end butwere not effective for the 2007 year end: 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). IFRIC 13 - Customer Loyalty Programmes (effective for annual periods beginningon or after 1 July 2008). IFRS 2 (Amendment) - Vesting conditions and cancellations (effective for annualperiods beginning on or after 1 January 2009). IFRS 3 (Revised) - Business combinations (effective for annual periods beginningon or after 1 July 2009). IAS 1 - Presentation of financial statements (effective for annual periodsbeginning on or after 1 January 2009). IAS 23 - Borrowing costs (effective for annual periods beginning on or after 1January 2009). IAS 27 - Consolidated and separate financial statements (effective for annualperiods beginning on or after 1 July 2009). The Group is currently assessing the impact, if any, that these standards willhave on the presentation of its consolidated results. Critical accounting policies, estimates and judgements The preparation of consolidated financial information under IFRS requires theGroup to make estimates and judgements that affect the application of policiesand reported amounts. Estimates and judgements are continually evaluated andare based 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 foundbelow: Revenue Recognition note 3 Tax note 7 Intangible assets and impairment of goodwill note 9 Payment processor receivables note 13 Provisions note 17 Regulatory compliance and contingent note 18liabilities Share-based payments note 22 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 and presentational currency used in the preparation of thisConsolidated Financial Information is United States Dollars (USD). 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 minority of Group companies operate in local currencies but theamounts involved are not material. Assets, liabilities and expenses of the Group are translated from localcurrencies 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, the financial information ofsubsidiaries is included in the Consolidated Financial Information using theacquisition method of accounting, and are consolidated from the date ofacquisition (i.e. the date on which control of the subsidiary effectivelycommences) to the date of disposal (i.e. the date on which control over thesubsidiary effectively ceases). On the date of acquisition the assets and liabilities of the relevantsubsidiaries are measured at their fair values. The interest of minorityshareholders is stated at the minority's proportion of the fair values of theassets 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-ownedsubsidiary, PartyGaming Holdings Limited (formerly Headwall Ventures Limited),was acquired 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. 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 Practices 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 thefunctional currency are recorded at the rate ruling when the transaction occurs. 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 (including emerging games), casino,sports betting and 'skins' (third party entities that use the Group's platformand certain services), is recognised in the accounting periods in which thegaming transactions occur. Net revenue consists of net gaming revenue andrevenue generated from foreign exchange gains on customer deposits andwithdrawals and account fees. Poker (including emerging games) revenue represents the commission charged ortournament entry fees where the player has concluded his participation in thetournament. Casino and Sports Betting revenue represents net house win adjustedfor the fair market value of gains and losses on open betting positions.Revenue in respect of 'skin' arrangements where the skin owns the relationshipwith the customer, is the net commission invoiced. Revenue is measured at thefair value of the consideration received or receivable and is net of certainpromotional bonuses and the value of PartyPoints accrued. Revenue generatedfrom foreign exchange gains on customer deposits and withdrawals and accountfees is allocated to each reporting segment. 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). In accordance with bestpractice, the Group has early adopted IFRS 8 - 'Operating segments'. Thisstandard is concerned with the way in which companies report information aboutoperating segments in annual and interim financial disclosures. The method fordetermining what information to report is based on the way management organisesthe business segments within the Group for decision-making purposes and for theassessment of financial performance. The Group reviews financial informationpresented by product type which is supplemented by some information aboutgeographic regions for the purposes of making operating decisions and assessingfinancial performance. Therefore, the Group has determined that it isappropriate to report according to product 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 information and the corresponding tax basesused in the computation of taxable profit. It is accounted for using thebalance sheet liability method. Deferred tax liabilities are generallyrecognised for all taxable temporary differences other than where IAS 12 'IncomeTaxes' contains specific exemptions. Deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if thetemporary difference arises from goodwill or from the initial recognition (otherthan in a business combination) of other assets and liabilities in a transactionthat affects neither the taxable profit nor the accounting 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, with the exception of freehold land and buildings, which arestated at cost and are not depreciated. 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 IFRS 3 are recognised at their fair value atthe acquisition 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. TheGroup issues 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 low. 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. Derivative financial instruments The Group uses derivative financial instruments to manage currency cashflows andto hedge foreign exchange risk on non-US dollar denominated financial assets andliabilities. The derivative instruments used by the Group consist mainly ofspot and forward foreign exchange contracts. Derivative financial instruments are recognised in the balance sheet at fairvalue calculated using either discounted cash flow techniques or by reference tomarket prices supplied by banks. Changes in the fair value of derivativefinancial instruments are recognised in the income statement. The Group presently does not adopt any form of hedge accounting as described inIAS 39 and does not anticipate any requirement to do so in the foreseeablefuture. Financial assets The Group's financial assets which are financial instruments are categorised asloans and receivables. These include trade (and other receivables), cash andcash equivalents. There are no financial assets that are classified as "held tomaturity" or "available for sale". A category for "in the money" derivativefinancial instruments was not required since there were no derivative financialinstruments held as at 31 December 2007 or 31 December 2006. Unless otherwise indicated, the carrying values of the Group's financial assetsrecorded in the Group's consolidated balance sheet are a reasonableapproximation to their fair values. Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted on an active market. They ariseprincipally through the amounts due from payment processors that remit funds onbehalf of customers, the prepayment of suppliers and other types of contractualmonetary asset and cash (and cash equivalents). They are initially recognisedat fair value, plus transaction costs directly attributable to their acquisitionor issue. They are subsequently carried at amortised cost using the effectiveinterest rate method, less any provisions for impairment. Impairment provisions are recognised when there is objective evidence (primarilydefault or significant delay in payment) that the Group will be unable tocollect all of the amounts due. The amount of such a provision is thedifference between the net carrying amount and the present value of the futureexpected cashflows associated with the impaired receivable. Financial liabilities: The Group's financial liabilities are all categorised as financial liabilitiesmeasured at amortised cost. Financial liabilities include the following items: • Client liabilities, including amounts due from progressive prizepools. • Trade payables and other short-term monetary liabilities which areinitially recognised at fair value and subsequently carried at amortised costusing the effective interest rate method, which ensures that interest expenseover the period to repayment is at a constant rate on the balance of theliability carried in the balance sheet. • Bank borrowings and overdrafts which are initially recognised at fairvalue, net of any transaction costs directly attributable to the issue of theinstrument. Such interest bearing liabilities are subsequently valued atamortised cost using the effective interest rate method. Interest expense inthis context includes initial transaction costs, as well as any interest orcoupon payable while the liability is outstanding. • A category for "out of the money" derivative financial instruments wasnot required since there were no derivative financial instruments as at 31December 2007 or 31 December 2006. Share capital Financial instruments issued by the Group are treated as equity only to theextent that they do not meet the definition of a financial liability. TheGroup's ordinary shares are classified as equity instruments. 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. 2. Discontinued operations Income statement Year ended 31 Dec 07 31 Dec 06 $m $m Notes Revenue - net revenue 3 - 779.9 Administrative expenses• Other administrative expenses (13.6) (68.7)• Share-based payments 5 (2.0) (22.3) ------ ------Total administrative expenses (15.6) (91.0) Distribution expenses (11.1) (229.4) ------ ------Loss from operating activities before reorganisation (26.7) 459.5costs Reorganisation costs 4 0.7 (243.2) ------ ------Loss before tax (26.0) 216.3 Tax 7 53.7 (4.5) ------ ------Profit after tax 27.7 211.8 ------ ------Earnings per shareBasic (cents) 8 0.7 5.6Diluted (cents) 8 0.7 5.4 Statement of cashflows Year ended 31 Dec 07 31 Dec 06 $m $m Net cash from operating activities (17.0) 404.2Net cash used in investing activities - (115.3)Net cash used in financing activities - -Net increase in cash and cash equivalents (17.0) 288.9 Discontinued operations refers to operations located outside of the US but whichrelate to customers in the US and were terminated following the enactment of theUIGEA on 13 October 2006. Revenue allocated to Discontinued operations represents revenue generated fromplayers located in the US. Other administrative expenses allocated to Discontinued operations in the yearprimarily represent legal fees incurred in respect of the Group's ongoingdiscussions with the DoJ regarding its activities before the enactment of theUIGEA. The Group is discussing with its insurers reimbursement of certain ofthese fees. However, as the policy allowing the recovery of these fees has notyet formally been triggered, these costs have been expensed in full during theperiod. Distribution expenses allocated to Discontinued operations in the year representa commitment made in respect of a product placement agreement with Harrah'sLicense Company LLC for The World Series of Poker. Following the enactment ofthe UIGEA, the Group sought to renegotiate the product placement agreement inorder to amend its scope and cost, specifically looking to focus on non-USmarkets only. However, mutually acceptable commercial terms could not be agreedbetween the parties and so the contract remained in place resulting in a chargebeing incurred in 2007. Reorganisation costs allocated to Discontinued operations relate toreorganisation costs arising from the decision to terminate all real money gamesto customers in the US following the enactment of the UIGEA. Tax allocated to Discontinued operations relates to provisions made in respectof non-US corporate taxes attributable to income from Discontinued operations. 3. Revenue and business segment information For management purposes and transacting with customers, the Group's operationscan be segmented into the following three operating divisions: • Poker (including Emerging Games); • Casino (including Bingo); • Sports Betting; These divisions are the basis on which the Group reports its segmentinformation. Unallocated corporate expenses, assets and liabilities relate tothe entity as a whole and cannot be allocated to individual segments. Following a reorganisation of the management and internal reporting of thebusiness to place more emphasis on vertical product groups at the end of 2006,the majority of marketing costs are now allocated to each business segment basedon the revenue generated by new sign-ups in that period. The 2006 data has beenrestated on a consistent basis. In the latter part of 2007, the Group implemented geographic operational changesand has also been able to undertake a further review of developments in theapproaches that may be taken by tax authorities in major jurisdictions. As aconsequence there has been a reversal of a creditor in the Group's balancesheet, the charge for which had historically been deducted from revenue,resulting in a corresponding one-off credit of $18.2m to revenue in 2007. Thisadjustment is non-cash and non-recurring in nature. During 2007, $9.6m has been derived from inactive fees and similar itemsincluded in net revenue. In prior years, these were netted against operatingcosts as they were not material. Year ended Poker Casino Sports Unallocated Consolidated31 December 2007 Betting Corporate$m Continuing operationsNet revenue beforenon-recurring adjustment tonet revenue 295.0 146.7 16.1 - 457.8Non-recurring adjustment 15.8 2.4 - - 18.2Net revenue 310.8 149.1 16.1 - 476.0Clean EBITDA 62.4 43.6 3.4 2.3 111.7Profit before tax 70.0 40.4 (9.4) (94.3) 6.7 Discontinued operationsNet revenue - - - - -Clean EBITDA (11.1) - - (13.6) (24.7)Profit before tax (16.6) 2.9 - (12.3) (26.0) Total operationsNet revenue beforenon-recurring adjustment tonet revenue 295.0 146.7 16.1 - 457.8Non-recurring adjustment 15.8 2.4 - - 18.2Net revenue 310.8 149.1 16.1 - 476.0Clean EBITDA 51.3 43.6 3.4 (11.3) 87.0Profit before tax 53.4 43.3 (9.4) (106.6) (19.3) Total assets 60.2 81.6 121.9 169.0 432.7 Year ended Poker Casino Sports Unallocated Consolidated31 December 2006 Betting Corporate$m Continuing operationsNet revenue 268.4 51.0 5.6 - 325.0Clean EBITDA 39.1 15.9 (1.6) (2.5) 50.9Profit before tax 22.7 15.5 (8.6) (107.0) (77.4) Discontinued operationsNet revenue 560.7 219.2 - - 779.9Clean EBITDA 355.7 144.1 - - 499.8Profit before tax 346.0 143.9 - (273.6) 216.3 Total operationsNet revenue 829.1 270.2 5.6 - 1,104.9Clean EBITDA 394.9 159.9 (1.6) (2.5) 550.7Profit before tax 368.8 159.3 (8.6) (380.6) 138.9 Total assets 81.9 9.3 134.2 103.8 329.2 Geographical analysis of net revenue Non current assets located within Gibraltar total $18.7m (2006: $27.7m) and noncurrent assets in other locations total $259.9m ($233.4m). Year ended 31 Dec 07 31 Dec 06 $m $m Canada 86.3 78.9Germany 83.2 33.4United Kingdom 55.7 41.3Other 232.6 171.4 ------ ------Continuing operations 457.8 325.0Discontinued operations - 779.9 ------ ------Total net revenue 457.8 1,104.9 ------ ------ Non current assets located within Gibraltar total $18.7m (2006: $27.7m) and noncurrent assets in other locations total $222.2m (2006: $178.8m). 4. Reorganisation costs Year ended 31 Dec 07 31 Dec 06 $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 - (1.5) ------ ------Total reorganisation costs relating to Continuing operations - (7.2) Reorganisation costs relating toDiscontinued operationsImpairment of intangible assets - (115.5)Impairment of fixed assets - (3.5)Impairment of committed marketing expenditure (1.7) (32.3)Impairment of technology licenses - (10.3)Repayment (impairment) of payment 2.7 (63.9)processor receivablesShare-based payments (note 5) - (0.7)Redundancy and other costs (0.3) (17.0) ------ ------Total reorganisation costs relating toDiscontinued operations 0.7 (243.2) ------ ------Total reorganisation costs 0.7 (250.4) ------ ------ In 2007 a net $2.7m was received from payment processors that had previouslybeen provided for as part of the 2006 reorganisation charge. The creditreflected in reorganisation costs of $0.7m includes this recovery net of $2.0massociated with changes in estimates made in respect of the 2006 reorganisationcharge. 5. Share-based paymentsYear ended 31 Dec 07 31 Dec 06 $m $mCharge relating to nil-cost options: - issued pre-IPO (0.9) (25.5) - issued post-IPO (70.7) (60.9) ------ ------Total charge relating to nil-cost options (71.6) (86.4) Charge relating to new option plans: - FMV Plan (7.1) - - PSP Plan (0.1) - - Executive FMV Plan (0.3) - ------ ------Total charge relating to new options (7.5) - Bonita Trust charge* (see note 21) (2.2) (26.8) Included in reorganisation costs - (0.7) ------ ------Total charge (81.3) (113.9) ------ ------ * A corresponding credit of $2.2m (2006: $26.8m) in respect of this charge hasbeen included in reserves. Of this $2.2m, some $2.0m relates to discontinuedoperations and $0.2m relates to continuing operations. Prior to flotation, the Principal Shareholders established the PartyGaming PlcShare Option Plan (the "Nil-Cost Plan") for the benefit of the current andfuture workforce. Under the terms of the Nil-Cost Plan each option takes theform of a right, exercisable at nil-cost, to acquire Shares in the Company, thevesting of which are satisfied by existing Shares which had been issued to theEmployee Trust. Following the enactment of the UIGEA, the Company implemented on 29 December2006 a one-off adjustment to existing incentive awards and also granted newincentive awards by using an additional 40 million Shares gifted to the EmployeeTrust by certain founders of the Company. As such, the exercise of theseoptions has no dilutive effect on shareholders who subscribed at the IPO andwill have no cash impact on the Company. IFRS requires that the fair value ofthe options be amortised through the income statement over the life of theoptions. 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 Nil-Cost Plan. The vestingschedule was also accelerated so that these 20 million shares vested in eightmonthly tranches of 1.25 million shares from 19 May 2007 to 19 December 2007with the remainder vesting on 19 April 2008. Mitch Garber was also granted a new option under the Nil-Cost Plan over 15million Shares, vesting in 30 equal monthly tranches until 1 May 2009. Providedhe remains in employment until 1 May 2009 he will also be awarded 2 millionshares from the Employee 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 Nil-Cost Plan, so that the balance of his unvested shares(8,897,776 shares) would vest in 9 equal quarterly tranches until 31 December2008. An additional grant over 8,897,776 shares was also made which vests in thesame instalments as the aforementioned option. Further nil-cost options over approximately 50 million shares have been grantedto other key employees of the Group. The charge associated with the nil-cost options decreased from $86.4m to $71.6m. Mitch Garber is also entitled to £3 million payable by the Employee Trust in 30equal monthly instalments until 1 May 2009 provided he remains in employment oneach payment date. The £3 million has been realised from the net proceeds ofsale of Shares from the Trust. Following the introduction during the first half of 2007 of two fair marketvalue option plans, the PartyGaming Plc All-Employee Option Plan ("FMV Plan")and PartyGaming Plc Executive Share Option Plan ("Executive FMV Plan"), and anequity plan, the PartyGaming Plc Performance Share Plan ("PSP Plan"), the totalcharge during the period relating to these options was $7.5m (2006: $nil). Thisprimarily reflected an issue of share options to the Group's employees under theFMV Plan. Under this plan, options vest over a three year period and themajority were granted at an exercise price of 45.75 pence per share. 6. Finance income and costsYear ended 31 Dec 07 31 Dec 06 $m $m Interest expense (1.6) (3.7)Interest income 3.0 4.2 ------ ------Net finance income 1.4 0.5 ------ ------ 7. Tax a) Analysis of tax chargeYear ended 31 Dec 07 31 Dec 06 $m $m Tax - Continuing operations 7.2 (6.0)Tax - Discontinued operations 53.7 (4.5) ------ ------Current tax credit (expense) for the year 60.9 (10.5) ------ ------Income tax credit (expense) for the year 60.9 (10.5) ------ ------ In Gibraltar, the Group benefits from the exempt company regime. Taxation forother jurisdictions is calculated at the rate prevailing in the relevantjurisdiction. There are no material deferred tax balances arising in the period. The effective tax rate based on the total tax charge is a credit of 315.5%(2006: charge of 7.6%). The effective tax rate for the period is 4.9% beforeshare-based payments (2006: 9.8% before share based payments). 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 07 31 Dec 06 $m $m Profit (loss) before tax - Continuing operations 6.7 (77.4)(Loss) profit before tax - Discontinued operations (note 2) (26.0) 216.3 ------ ------(Loss) profit before tax (19.3) 138.9 ------ ------Tax at the weighted average tax rate of the Group being tax credit(expense) at the effective tax rate for the period 1.0 (13.9) Effect of share-based payments, depreciation and amortisation (4.0) (10.9)Effect of adjustment to the weighted average tax rate of the Groupbeing tax credit at the effective tax rate for prior periods 63.9 14.3 ------ ------Income tax credit (expense) 60.9 (10.5) ------ ------ The Group's policy is to manage, control and operate Group companies only in thecountries in which they are registered. At the period end there were Groupcompanies registered in 12 countries including Gibraltar. However, the rulesand practice governing the taxation of e-commerce activity are evolving in manycountries. It is possible that the amount of tax that will eventually becomepayable may differ from the amount provided in the financial information. In calculating the tax provision, in addition to any amounts due in respect ofjurisdictions in which Group companies are currently incorporated or domiciled,provisions have been made to cover the Directors' best estimate of additionaltaxation exposures which may arise. Where the actual outcome differs from theamounts originally recorded, the tax and any deferred tax provisions will beaffected in the period(s) in which the determination is made. In the latterpart of 2007, the Group implemented geographic operational changes and has alsobeen able to undertake a further review of approaches that may be taken bytaxation authorities in major jurisdictions. Additionally, more detailedguidance has been published such that it is now the broad consensus of OECDmember countries that the automated nature of the functions performed bye-commerce equipment means that the assets or risks attributable to it are onlylikely to be those directly associated with technology hardware and that, in theabsence of personnel acting on behalf of an enterprise, little or no profitshould be attributed to e-commerce activity. Accordingly the Directors haverevised their estimate, resulting in a release in the 2007 financial year of atax provision brought forward of $64.5 million. 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 by 31 December 2010; assessable incomeis taxed in Gibraltar at the mainstream corporation tax rate. 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 33.7%. A Minimum Alternative Tax (MAT) of 10% wasintroduced in 2007 with effect from April 2007. Fringe benefit tax is payable atapproximately 33.7% on a proportion of specified benefits provided or deemed tohave been provided to past and present employees. 8. Earnings per share ("EPS")Year ended 31 December 2007 (Cents) Continuing Discontinued Total operations operations Basic EPS 0.3 0.7 1.0 Diluted EPS 0.3 0.7 1.0 Basic Clean* EPS 1.6 (0.6) 1.0 Diluted Clean* EPS 1.5 (0.6) 0.9 Year ended 31 December 2006 (Cents) Continuing Discontinued Total operations operations 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 *EPS before reorganisation costs, non-recurring adjustment to revenue, chargesrelating to share-based payments and release of tax provision. 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. 2007 2006 Before Reorganisation Total Before Reorganisation reorganisation costs reorganisation costs costs costs Total Adjusted earnings ($m) 39.5 0.7 40.2 492.0 (250.4) 241.6 Weighted average numberof Ordinary shares (m) 3,985.1 3,985.1 3,985.1 3,807.6 3,807.6 3,807.6 Adjusted earnings (loss)per Ordinary share (cents) 1.0 0.0 1.0 12.9 (6.6) 6.3 Basic earnings (loss) ($m) 40.9 0.7 41.6 378.8 (250.4) 128.4 Weighted average numberof Ordinary shares (m) 3,985.1 3,985.1 3,985.1 3,807.6 3,807.6 3,807.6 Basic earnings (loss)per Ordinary share (cents) 1.0 0.0 1.0 9.9 (6.6) 3.4 Clean earnings per share Management believes that Clean earnings per share reflects the underlyingperformance of the business and assists in providing a clearer view of thefundamental performance of the Group. Clean EBITDA and Clean earnings per shareare performance measures used internally by management to manage the operationsof the business and remove the impact of one-off and non-cash items. They aretherefore calculated before reorganisation costs, non-cash charges relating toshare-based payments, non-recurring adjustment to revenue and release of taxprovision. Clean net earnings attributable to equity shareholders is derived as follows: 2007 2006$m Continuing Discontinued Total Continuing Discontinued operations operations operations operations TotalEarnings (loss) for the purposes ofbasic and diluted earnings per sharebeing profit from ordinaryactivitiesattributable to equity holders ofthe parent 13.9 27.7 41.6 (83.4) 211.8 128.4 Reorganisation costs - (0.7) (0.7) 7.2 243.2 250.4 ----- ----- ----- ----- ----- -----Earnings before reorganisation costs 13.9 27.0 40.9 (76.2) 455.0 378.8Share-based payments 79.3 2.0 81.3 90.9 22.3 113.2 Non-recurring adjustment to revenue (18.2) - (18.2) - - - Release of tax provision (10.8) (53.7) (64.5) - - - ----- ----- ----- ----- ----- -----Clean net earnings 64.2 (24.7) 39.5 14.7 477.3 492.0 ----- ----- ----- ----- ----- ----- Year ended 31 Dec 07 31 Dec 06Number of shares for basic earnings per share m m Number of shares in issue as at 1 January 4,000.0 4,000.0Number of shares issued to the Employee Trust (264.0) (264.0)Weighted average number of shares issued 109.2 -during the yearNumber of shares sold by the Employee Trust 10.1 10.1Number of share options vested in previous 92.5 36.2periodsEffect of share options which vested during 37.3 25.3the period ------ ------Weighted average number of ordinary shares 3,985.1 3,807.6for the purposes of basic earnings per share ------ ------ 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. Year ended 31 Dec 07 31 Dec 06Number of shares for diluted earnings per share m m Number of shares in issue as at 1 January 4,000.0 4,000.0Number of shares issued to the Employee Trust (264.0) (264.0)Weighted average number of shares issued 109.2 -during the yearNumber of shares sold by the Employee 10.1 10.1TrustNumber of share options vested in the 92.5 36.2previous periodsEffect of share options which vested during 37.3 25.3the periodEffect of potential dilutive vested and 193.1 114.6unvested shares ------ ------Weighted average number of ordinary shares 4,178.2 3,922.2 for the purposes of diluted earnings per share ------ ------ 9. Intangible assets Other Goodwill Development Total intangibles expenditure $m $m $m $mCost or valuationAs at 1 January 2006 26.9 10.1 - 37.0Additions 101.7 161.0 - 262.7 ------ ------ ------ ------As at 31 December 2006 128.6 171.1 - 299.7Additions 29.0 37.6 6.4 73.0 ------ ------ ------ ------As at 31 December 2007 157.6 208.7 6.4 372.7 ------ ------ ------ ------AmortisationAs at 1 January 2006 4.3 2.4 - 6.7Charge for the year 25.6 - - 25.6Impairment 41.8 73.7 - 115.5 ------ ------ ------ ------As at 31 December 2006 71.7 76.1 - 147.8Charge for the year 21.2 - 0.5 21.7 ------ ------ ------ ------As at 31 December 2007 92.9 76.1 0.5 169.5 ------ ------ ------ ------Carrying amounts:As at 31 December 2006 56.9 95.0 - 151.9 ------ ------ ------ ------As at 31 December 2007 64.7 132.6 5.9 203.2 ------ ------ ------ ------ The other intangible assets primarily include the customer lists, brands andother intangibles acquired in respect of Gamebookers and the acquisitions fromEOL and IOG which are being amortised over their estimated useful economic livesof between 18 months and 5 years. The values are based on cashflow projectionsfrom existing customers taking into account the expected impact of attrition. Development expenditure represents software infrastructure assets that have beendeveloped and generated internally. They are being amortised over theirestimated useful economic lives of between three and five years. In accordance with IAS 36, the Group regularly monitors the carrying value ofits intangible assets. A review was undertaken at 31 December 2007 to assesswhether the carrying value of assets was supported by the net present value offuture cash flows derived from those assets using cashflow projections for a 3to 5 year period. The discount rates for the review were based on company specific pre-taxweighted average cost of capital percentages and ranged from 9% to 15%. Thefuture cashflows have been modelled to decline in line with historic playerattrition patterns which are consistent with those experienced by the Group inrecent 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. 10. Property, plant and equipment Land and Plant, Fixtures, Total buildings machinery fittings, and vehicles tools and equipment $m $m $m $mCost or valuationAs at 1 January 2006 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 83.6 104.7Exchange movements 0.1 0.2 0.8 1.1Additions 0.1 0.2 8.8 9.1Disposals (1.8) (0.2) (3.4) (5.4) ------ ------ ------ ------As at 31 December 2007 14.6 5.1 89.8 109.5 ------ ------ ------ ------ As at 1 January 2006 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 50.1Charge for the year 0.9 1.2 21.5 23.6Disposals (0.0) (0.0) (1.9) (1.9) ------ ------ ------ ------As at 31 December 2007 3.3 3.7 64.8 71.8 ------ ------ ------ ------Carrying amount As at 31 December 2006 13.8 2.4 38.4 54.6 ------ ------ ------ ------As at 31 December 2007 11.3 1.4 25.0 37.7 ------ ------ ------ ------ 11. Commitments for capital expenditure:Year ended 31 Dec 07 31 Dec 06 $m $mContracted but not provided for 0.4 2.8 ------ ------ 12. Investment in associates There were no new investments in associated companies during the period. In2006, the Group impaired a previously acquired 35% interest in the ordinaryshare capital of The Poker Channel Ltd, a company incorporated in England. 13. Trade and other receivables $m $mYear ended 31 Dec 07 31 Dec 06 $m $m Trade receivables 29.7 36.8Prepayments 19.4 20.3Other receivables 14.9 10.2 ------ ------ 64.0 67.3 ------ ------ In 2006, $69.9 million due from payment processors was considered to be at riskof which $63.9 million arose following the enactment of the UIGEA on 13 October2006, but which related to transactions completed before this date. Given theissues around current regulatory matters (see note 18) there was a degree ofuncertainty as to actions that the Group might be able to undertake to enforcecollection of these debts, and as a result the Directors assessed their bestestimate of the recoverability of these debts as $nil. During 2007, a net totalof $2.7 million of the amount previously written-off has been recovered andcredited to reorganisation costs 14. Cash and cash equivalents Year ended 31 Dec 07 31 Dec 06 $m $mCash in hand and current account 119.3 46.3 ------ ------ 119.3 46.3 ------ ------ 15. Short term investments Year ended 31 Dec 07 31 Dec 06 $m $mCash on deposit for more than 3 months 5.4 3.4Restricted cash 3.1 5.7 ------ ------ 8.5 9.1 ------ ------ Restricted cash relates to the remaining cash held in the Employee Trust payableto Mitch Garber relating to incentive awards over a 30-month period fromDecember 2006. 16. Bank debt and other loans Year ended 31 Dec 07 31 Dec 06 $m $m Bank debt and other loans - current - 14.1Bank debt and other loans - non-current - 3.7 ------ ------Total - 17.8 ------ ------ As at 31 December 2006 the amount drawn under the Group's five year $500mrevolving credit facility was $12m. This was repaid and cancelled on 12 April2007. The Group had no bank debt or other loans as at 31 December 2007. 17. Provisions Year ended 31 Dec 07 31 Dec 0 $m $m Provision at beginning of period 5.5 6.2Decrease in provision during period (0.5) (0.7) ------ ------Provision at end of period 5.0 5.5 ------ ------ 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. 18. 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 process, the Boardcontinues to monitor legal and regulatory developments and their potentialimpact on the business and continues to take appropriate advice in respect ofthese 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, theactions taken by certain US regulatory authorities suggest that there remains aresidual risk of an adverse impact arising from the Group having had customersin the US prior to the enactment of the UIGEA. Furthermore, the Group is aware that certain US regulatory authorities have madeenquiries of banks and other financial advisers that have had involvement withthe internet gaming industry. Certain customary indemnities have been given bythe Company to its advisers in connection with the Company's initial publicoffering in June 2005 and other assignments, and claims under such indemnitiescannot be ruled out. The Group has not, however, received notice of any suchclaim to date. On 4 June 2007, the Company announced that it had initiated discussions with theUnited States Attorney's Office for the Southern District of New York and is inthe process of voluntarily responding to requests for information issued by thatoffice. These discussions are progressing and it is possible that an agreementwill be reached in the foreseeable future. The Board believes that a sufficiently reliable estimate of the potentialliability in connection with this matter cannot be made. Furthermore, the Boardbelieves that the disclosure of any range of potential settlement would beprejudicial to the Group's interests. 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 action to be speculative, without merit and open tochallenge on a number of grounds. The Group had not hitherto submitted to USjurisdiction and therefore the action had not been contested. In light of anumber of factors, not all of which pertained at the time of the decision not tocontest, the Group has decided to seek to challenge the proceedings and willaccordingly seek to enter a defence and contest the action on the merits. The Board believes that the disclosure of a range of potential liability, ifany, would be prejudicial to the Group's interests. 19. Share capital Issued and fully paid Number $ mOrdinary sharesAs at 31 December 2006 100,452 4,000.0Issued during the year ended 31 December 2007 3,414 115.2 As at 31 December 2007 103,866 4,115.2 ------ ------ 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 $103,866 and is split into 4,115,193,842 ordinary shares. The share capitalin UK sterling is £61,727.91 and translates at an average exchange rate of$1.6822 USD to GBP. As at 31 December 2007, 112,226,649 (2006: 143,555,517)ordinary shares 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 the authorised share capital during theperiod. 20. Reserves Share Retained Other Share-based Capital Currency premium earnings reserves payment contribution reserve reserve reserve $m $m $m $m $m $m As at 1 January 2006 0.4 710.2 (825.4) 68.8 - -Profit from ordinary - 128.4 - - - -activities attributable toequity holders of the parent Share-based payments - - - 87.1 26.8 -Dividend - (200.0) - - - -Exchange differences on - - - - - 0.2translation of foreignoperations Increase in Employee Trust - - - - 5.7 -assets As at 1 January 2007 0.4 638.6 (825.4) 155.9 32.5 0.2Profit from ordinary - 41.6 - - - -activities attributable toequity holders of the parent Issue of shares 66.0 - - - - -Share-based payments - - - 79.1 2.2 -Transfer to retained earnings - 235.0 - (235.0) - -Exchange differences on - - - - - 2.2translation of foreignoperations As at 31 December 2007 66.4 915.2 (825.4) - 34.7 2.4 ------ ------ ------ ------ ------ ------ Share premium is the amount subscribed for share capital in excess of nominalvalue. Retained earnings are the cumulative net gains and losses recognised inthe consolidated income statement. The share-based payment reserve is theamount arising from share-based payments made by the Group. Capital contribution reserve is the amount arising from share-based paymentsmade by The Bonita Trust and cash held by the Employee Trust. Currency reserveis the gains/losses arising on retranslating the net assets of overseasoperations into sterling. 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 and reserves reflect PartyGamingPlc's share capital and the retained earnings for each of the periods ended 31December 2006 and 2007 and reflects the cumulative profits as if the currentGroup structure had always been in place. The Company issued 115,193,842 new shares on 19 January 2007 in connection withthe acquisition of the business and assets of Empire Online Limited andIntercontinental Online Gaming Limited. Further details are contained in note23 below. 21. Related parties Relationships Transactions between the Group companies have been eliminated on consolidationand 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, did not receive anyremuneration in the form of salary, bonuses or consulting fees (2006: $0.8m). 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 expenses 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 2006 14.7 - 56.1 70.8Year ended 31 December 2007 18.0 - 63.0 81.0 Transactions The following aggregate balances were due to/(from) key management at eachperiod end: As at 31 December 2007 2006 $m $mDue to 0.3 1.0Due from - (0.6) The wife of a Principal Shareholder owns a property and it is leased to theGroup's Indian subsidiary on an arm's length basis. Rentals paid were: $Year ended 31 December 2006 30,649Year ended 31 December 2007 61,231 Additionally an increased security deposit in the sum of $33,375 has been paid(2006:$13,800). The Group's subsidiaries continued to provide the following propertyarrangements during the period: - the lease of an unfurnished property to the Group Finance Director atan annual lease rental of £44,400 ($84,000), which the Directors believe is thefair rental value of the property. This property was sold at fair market valueof £1.2m to the Group Finance Director on 25 May 2007; - the Chief Executive Officer has two furnished properties availablefor his use in Gibraltar which the Directors believe have a fair rental value of approximately $150,000 per annum (plus service and utility costs); and - the Chief Executive Officer has an additional property available forhis use at fair rental value. The Chief Executive Officer has not availedhimself of the property and the property has been leased to other employees atfair 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. The Principal Shareholders have also given certain indemnities to the Group. On 20 June 2007 Mr Garber gifted 300,000 Shares to the Employee Trust. Therewere no conditions applying to this gift but Mr Garber recommended to theEmployee Trust that the Shares be awarded to those PartyGaming employeesdemonstrating an outstanding commitment to helping the Company achieve itsobjectives in 2007 or who come up with exemplary entrepreneurial ideas for theCompany's business. 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. The facility remained in escrow until March 2007 and was never utilised. The Group purchased telecommunication services of $4.7m from a company on anarm's length basis for whom a Board member is a director, with $0.2m owed tothat company at 31 December 2007. The Group also purchased utilities of $0.3mfrom companies on an arm's length basis for whom a Board member is a director.No amounts were owed to these companies at 31 December 2007. On 1 February 2008, the Group paid the final element of the consideration due toTrident Gaming Plc in respect of the acquisition of the business and assetsconnected with the Gamebookers.com website. This amounted to €21.0m and interestof €1.3m. John O'Malia, Chief Games Officer, was the former CEO of Gamebookersand received €2.1m of the total consideration. Additionally a loan of $5.8m dueto him at 31 December 2006 was repaid in the year. Share option arrangements Certain key management and certain Directors were granted nil-cost options underservice contracts, which were formally granted under a Group share option plan(see note 22). 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 objectivesand supports medical, cultural and educational programmes, principally directedto benefit the communities of Gibraltar, India and the UK. In addition,employees of PartyGaming and their families are a beneficiary class of TheBonita Trust. In December 2006 and subsequently, The Bonita Trust made or committed to makepayments to certain individuals that were employed or had previously beenemployed by the Group. These payments were made independently of the Group andwere over and above the amounts that the Board had already determined should bepaid by the Group to those employees and former employees. However, as thesepayments were based primarily on the Company's share price, the Board considersthese to fall under the criteria for Share-Based Payments under IFRS2 and in theyear to 31 December 2007 has charged an amount to the income statement totaling$2.2m (2006: $26.8m) as if such amounts had been paid by the Group itself. Acorresponding amount has been recorded as a capital contribution in the Group'sbalance sheet. Of the $2.2m, $2.0m (2006: $9.4m) relates to Discontinuedoperations. The Group has been informed that during 2007 the Bonita Trust made donations andother payments in respect of its other objectives totalling $1.4m (2006: $8.4m).Disclosure of these payments has been made as it is possible that the Group'sname may be linked with them. It is emphasised that neither The Bonita Trustnor any person or entity connected with The Bonita Trust sought any advice fromthe Group, its Directors or key management in deciding whether these paymentsshould be 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 information in respect of these payments. Further details on the Bonita Trust can be found at www.bonitatrust.org. 22. Share-based payments As disclosed in note 5 the Group has adopted and granted awards under theNil-Cost Plan, FMV Plan, PSP Plan and Executive FMV Plan as a reward andretention incentive for employees of the Group, including the ExecutiveDirectors (the "Participants"). The Group has used the binomial options pricingmodel. An appropriate discount has been applied to reflect the fact thatdividends are not paid on options that have not vested or have vested and havenot been exercised. (a) Nil-Cost Plan During the year, options over 6,256,565 Shares were granted to Participants,representing 0.15% of the total issued share capital. Options granted underthis plan during the period generally vest in instalments over a four to fiveyear period. There are no performance conditions attached to options issued bythe Group. Details of modifications to share options are set out in note 5. Year ended 31 Dec 07 31 Dec 06 Number (m) Number (m) Outstanding at beginning of period 170.3 126.7Options granted during the period 6.3 136.2Options lapsed during the period (26.4) (39.9)Exercised during the period (60.0) (52.7) ------ ------Outstanding at end of period 90.2 170.3 ------ ------Exercisable at the end of period 13.1 3.6 Weighted average share price for £0.34 £1.01options exercisedWeighted average remaining 3,152 days 3,366 dayscontractual life of options outstanding (b) FMV Plan During the year, options over 79,102,748 Shares were granted to Participants,representing 1.92% of the total issued share capital. Options granted under thisplan during the period generally vest in instalments over a three-year period.There are no performance conditions attached to options issued by the Group.Executive Directors are not eligible to receive any awards under this plan. Year ended 31 Dec 07 31 Dec 06 Number (m) Number (m) Outstanding at beginning of period - -Shares over which options granted 79.1 -during the periodShares in respect of options lapsed (6.3) -during the periodExercised during the period - - ----- -----Outstanding at end of period 72.8 - ----- -----Exercisable at the end of period 5.5 -Weighted average remaining contractual 3,445 days -life of options outstanding (c) PSP Plan During the year, awards over 4,374,588 Shares were granted to Participants,representing 0.11% of the total issued share capital. These awards vest subjectto the achievement of a total shareholder return ("TSR") performance target overthe 3 year period either from 1 January 2007 to 31 December 2009 or from 1 July2007 to 30 June 2010 compared to the median TSR of a sector comparator group. The threshold for vesting at which 25% will vest, will be TSR equalling themedian of the comparator group, rising on a straight-line basis to 100% vestingif the Company's TSR exceeds the median by 10% per annum calculated over the 3year period. It is estimated that outperformance of the median by 10% per annumis broadly equivalent to upper quartile performance over 3 years. Year ended 31 Dec 07 31 Dec 06 Number (m) Number (m) Outstanding at beginning of period - -Shares over which options granted during the period 4.4 -Shares in respect of option lapsed during the period - -Exercised during the period - - ----- -----Outstanding at end of period 4.4 - ----- -----Exercisable at the end of period - -Weighted average remaining contractual life of options outstanding upon 779 days -satisfaction of performance conditions (d) Executive FMV Plan During the year, awards over 2,043,600 Shares were granted to Participants,representing 0.05% of the total issued share capital. These options vest subjectto the growth in the Company's Clean Earnings per Share equalling or exceeding15% per annum in the three year period from 1 January 2007 to 31 December 2009. Year ended 31 Dec 07 31 Dec 06 Number (m) Number (m) Outstanding at beginning of period - -Shares over which options granted during the period 2.0 -Shares in respect of options lapsed during the period - -Exercised during the period - - ----- -----Outstanding at end of period 2.0 - ----- -----Exercisable at the end of period - -Weighted average remaining contractual life of options outstanding 3,419 days - 23. Acquisitions made during the period Empire Online Limited ("EOL") On 19 January 2007 the Group acquired assets, players and gaming relatedcontracts associated with EOL, an exclusively non-US facing gaming business. Inconsideration for the acquisition, PartyGaming issued 83,325,934 new shares inPartyGaming with an average price of 29.32p over the 15 days prior to the dateof acquisition. In calculating the goodwill arising on acquisition, the provisional fair valueof the net assets of EOL was assessed and reported as a post balance sheet eventin the 2006 Annual Report and adjustments from book value have been made wherenecessary. In the investigation period since the date of acquisition furtheradjustments to the fair value of the net assets have been made. Adjustment hasalso been made to convert share capital issued using the foreign exchange rateprevailing on the date of acquisition. These adjustments are summarised asfollows: Book value on Fair value Fair value as Fair value Final fair acquisition adjustment as reported at adjustments in value to the reported at year year investigation Group ended 31 December ended 31 period 2006 December 2006 $m $m $m $m $m Intangible fixed assets(note 9) 221.8 (202.8) 19.0 - 19.0 ------ ------ ------ ------ ------Net assets 222.1 (202.8) 19.3 (0.3) 19.0 ------ ------ ------ ------ ------ 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 five years. As reported at Fair value Final fair value to year adjustments in the Group ended 31 December investigation 2006 period $m $m $m Fair value of net assets acquired 19.3 (0.3) 19.0Goodwill 28.3 0.7 29.0 ------ ------ ------Fair value of consideration including expenses 47.6 0.4 48.0 ------ ------ ------ This is represented by : As reported at year Adjustments in Final adjusted ended 31 December period value 2006 $m $m $m Share-based consideration to EOL 37.9 0.3 38.2Deferred share-based consideration to EOL 9.5 0.1 9.6Expenses 0.2 - 0.2 ------ ------ ------ 47.6 0.4 48.0 ------ ------ ------ The net revenue and operating profit generated from the EOL business in thepost-acquisition period to 31 December 2007 was $17.2m and $6.4m respectively.Had the business been owned for the entire year the revenue and operating profitwould have been $18.1m and $6.7m respectively. Intercontinental Online Gaming Limited ("IOG") On 19 January 2007 the Group acquired assets, players and gaming relatedcontracts associated with IOG, an exclusively non-US facing gaming business. Inconsideration for the acquisition PartyGaming issued 31,867,908 new shares inPartyGaming with an average price of 29.32p over the 15 days prior to the dateof acquisition. In calculating the goodwill arising on acquisition, the provisional fair valueof the net assets of IOG was assessed and reported as a post-balance sheet eventin the 2006 Annual Report and adjustments from book value have been made wherenecessary. In the investigation period since the date of acquisition furtheradjustments to the fair value of the net assets have made. Adjustment has alsobeen made to convert share capital issued using the foreign exchange rateprevailing on the date of acquisition. These adjustments are summarised asfollows: Book value on Fair value Fair value as Fair value Final fair acquisition adjustment as reported at adjustments in value to the reported at year year investigation Group ended 31 December ended 31 period 2006 December 2006 $m $m $m $m $m Intangible fixed assets(note 9) - 10.0 10.0 - 10.0 ------ ------ ------ ------ ------Net assets 3.4 10.0 13.4 (3.4) 10.0 ------ ------ ------ ------ ------ The fair value adjustments relate 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 five years. As reported at Fair value Final fair value to year adjustments in the Group ended 31 December investigation 2006 period $m $m $m Fair value of net assets acquired 13.4 (3.4) 10.0Goodwill 5.0 3.6 8.6 ------ ------ ------Fair value of consideration including expenses 18.4 0.2 18.6 ------ ------ ------ This is represented by : As reported at year Adjustments in Final adjusted ended 31 December period value 2006 $m $m $m Share-based consideration to IOG 15.3 0.2 15.5Deferred share-based consideration to IOG 2.9 - 2.9Expenses 0.2 - 0.2 ------ ------ ------ 18.4 0.2 18.6 ------ ------ ------ The net revenue and operating profit generated from the IOG business in thepost-acquisition period to 31 December 2007 was $24.1m and $6.3m respectively.Had the business been owned for the entire year the revenue and operating profitwould have been $25.4m and $6.6m respectively. As a result of these two transactions a total of 115,193,842 new shares havebeen issued in the period. 24. Post balance sheet events On 1 February 2008, the Group paid the final element of the consideration due toTrident Gaming Plc in respect of the acquisition of the business and assetsconnected with the Gamebookers.com website. This amounted to €21.0m andinterest of €1.3m. 25. Dividend The Group paid a final dividend in respect of the 2005 financial year on 19 May2006 totalling $200.0m (being 5.25 cents per share). Following the decision toterminate all real money games to customers located in the US and the consequentreorganisation of the business, the Board did not pay any dividend in respect of2006, nor an interim dividend in 2007. The Board is not recommending thepayment of a final dividend for the 2007 financial year. -------------------------- This information is provided by RNS The company news service from the London Stock Exchange

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