Final Results

11th Mar 2009 07:00



11 March 2009

PartyGaming Plc

Audited results for the year ended 31 December 2008

Year ended 31 December	2008 $million	2007 $million
Net revenue
Poker	274.0	295.0
Casino^	176.0	144.2
Sports Betting	18.0	16.1
Bingo	4.9	2.5
Net revenue before non-recurring adjustments	472.9	457.8
Non-recurring adjustment to net revenue	-	18.2
Total net revenue	472.9	476.0
Clean EBITDA*
Poker	76.1	62.4
Casino^	66.1	43.5
Sports Betting	5.1	3.4
Bingo	(0.1)	0.1
Unallocated Corporate	(3.0)	2.3
Clean EBITDA* from Continuing operations	144.2	111.7
Clean EBITDA* from Discontinued operations#	(10.9)	(24.7)
Total Clean EBITDA*	133.3	87.0
Profit from operating activities - Continuing operations	77.9	5.3
Profit before tax - Continuing operations	82.4	6.7
Profit after tax - Continuing operations	77.8	13.9
Basic EPS (cents) - Continuing operations	19.2	3.5
Clean EPS* (cents) - Continuing operations	24.9	16.1
Basic EPS (cents)	16.5	10.4
Clean EPS* (cents)	22.2	9.9

^ Casino revenues and Clean EBITDA have been adjusted to exclude bingo which is now disclosed as a separate business segment.

* EBITDA/EPS before reorganisation income and costs, non-cash charges relating to share-based payments, non-recurring adjustment to revenue and release of tax provision (see reconciliation of Clean EBITDA to operating profit from Continuing operations below).

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

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

"We are pleased to announce another strong set of results with Clean EBITDA from Continuing operations up 29% to $144.2m. Our business model is both flexible and robust with a capacity to generate strong cashflow. Our brands and market position are strong and we have a healthy balance sheet with which to execute our business strategy. I believe that we are in an excellent position, not just to withstand the macroeconomic challenges that may lie ahead, but also to execute our strategy, create value for all of our stakeholders and achieve our long-term objective of becoming the world's most valuable online gaming company."

Regarding current trading he added:

"In the 5 weeks ended 4 February 2009, average gross daily revenue was $1,442,900. In poker, new player sign-ups increased to an average of 1,494 per day, and there were on average 51,000 active players per day generating average gross daily poker revenue of $756,700. In casino, gross revenue was $597,200 per day.  In sports betting gross win per day was $75,700 and in bingo, average gross daily revenue was $13,200.

In the 4 weeks ended 4 March 2009, average gross daily revenue was $1,536,200. In poker, new player sign-ups averaged 1,550 per day and there were on average 51,100 active players per day, generating average gross daily revenue of $738,500. In casino, average gross daily revenue was $662,500, in sports betting, average gross win per day was $123,000 while in bingo it was $12,200. 

"The Group has continued to make good progress in the first few weeks of 2009 despite the pressures of a highly competitive market and substantial year-on-year currency movements. We are focused on executing our stated strategy and remain confident about the Group's prospects."

Contacts:

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

Analyst meeting, webcast, dial-in and conference call details: 11 March 2009

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

 

In addition, there will be an interactive conference call for international investors and analysts starting at 2.30pm GMT, details of which are set out below.

 

An interview with Jim Ryan, Chief Executive Officer, and Martin Weigold, Group Finance Director, in video/audio and text will also be available from 7.00am GMT on 11 March 2009 on: http://www.partygaming.com and on http://www.cantos.com.

 

Dial-in details to listen to the analyst presentation: Wednesday 11 March 2009

9.20 am	Please call +44 (0)20 8609 1270 (UK)
Title	PartyGaming 2008 Results
9.30 am	Meeting starts

 

A recording of the meeting will be available for a period of seven days from 11 March 2009. To access the recording please dial the following replay telephone number:

 

Replay telephone number	+44 (0)20 8609 0289
Replay passcode:	252445#

 

  Conference call: Wednesday 11 March 2009

For analysts and investors there will be a further opportunity to put questions to Jim Ryan, Chief Executive Officer, and Martin Weigold, Group Finance Director, by way of a conference call.  The details of the call are as follows:

 

2.20 pm	Please call +44 (0)20 8609 0581 (UK)
2.30 pm	Conference call starts

 

A recording of the conference call will be available for a period of seven days from 11 March 2009. To access the recording please dial the following replay telephone number:

 

UK Replay telephone number	+44 (0)20 8609 0289
UK Replay passcode:	252447#

All times are Greenwich Mean Time.

About PartyGaming Plc

PartyGaming Plc is the world's leading listed online gaming company. The Group is a constituent of the FTSE 250 share index with its shares listed on The London Stock Exchange under the ticker: PRTY. In the year to 31 December 2008, PartyGaming's Continuing operations generated revenues of $472.9m and Clean EBITDA of $144.2m. PartyGaming's principal brands are PartyPoker.com, one of the world's largest online poker rooms, EmpirePoker.com, PartyCasino.com, PartyBingo.com, PartyGammon.com, PartyBets.com, PartyMarkets.com and Gamebookers.com. None of the Group's sites accept real money customers located in the US.

PartyGaming is regulated and licensed by the Government of Gibraltar and by the Alderney Gambling Control Commission and is certified by GamCare as a responsible gaming operator. For more information, please visit www.partygaming.com.

  Business Review

Introduction

PartyGaming offers a broad range of games and owns some of the biggest and best known brands in online gaming, including PartyPoker.com, one of the world's largest online poker rooms, EmpirePoker.com, PartyCasino.com, PartyBingo.com, PartyGammon.com, PartyBets.com, PartyMarkets.com and Gamebookers.com.

While full details of the consolidated performance of Continuing and Discontinued operations are contained in the financial information and the accompanying notes, all references to financial performance or key performance indicators throughout this document refer to the Continuing operations only, unless expressly stated otherwise. All references to net revenue exclude a non-recurring adjustment to revenue that was made in 2007.

Results

Net revenue was up by 3% year-on-year to $472.9m (2007: $457.8m). Poker revenue was down 7% versus the prior year with increased promotion costs around the launch of the next generation of PartyPoker, a delay in the launch of a new loyalty programme and continued competitive pressures, particularly from sites still accepting US players, also impacting the second half performance. Casino revenue grew by 22% year-on-year through an increase in player activity on the back of higher new player sign-ups and an increase in player yields. Bingo and sports betting revenues also grew strongly year-on-year.

The majority of the Group's customer deposits continue to be made in US dollars which remains the Group's functional currency. However, the majority of the Group's costs are incurred in currencies other than US dollars, particularly pounds sterling, which meant that whilst sterling revenue was adversely impacted by currency movements, there was a corresponding reduction in operating costs which mitigated the impact on Clean EBITDA. This, together with continued careful management of the Group's costs meant that Clean EBITDA grew by 29% to $144.2m (2007: $111.7m) and Clean EBITDA margins rose from 24.4% to 30.5%. This was despite including costs of $5.1m (2007: $nil) associated with the change of Chairman and Chief Executive Officer during the year. 

Discontinued operations produced a loss at the Clean EBITDA level of $10.9m (2007: loss of $24.7m) which primarily represents legal costs incurred in respect of the Group's US legal matters and ongoing discussions with the United States Attorney's Office for the Southern District of New York. This was substantially lower than the total figure for 2007 that also included a write-off of committed marketing expenditure relating to contracts entered into before the enactment of the UIGEA for which no benefit to the Group arose.

Total Clean EBITDA (including Discontinued operations) was up 53% to $133.3m (2007: $87.0m) driven by revenue growth, a reduction in both distribution and administration costs, as well as lower charges relating to Discontinued operations. Total profit from operating activities grew by $87.7m to $67.0m (2007: loss of $20.7m) reflecting increased Clean EBITDA and a reduced share-based payments charge. The total profit before tax was $71.5m (2007: loss before tax of $19.3m) and the total profit after tax was $66.9m (2007: $41.6m).

Continuing Clean EPS was up by 55% to 24.9 cents (2007: 16.1 cents) and Basic EPS from Continuing operations was up by 449% to 19.2 cents (2007: 3.5 cents). Total Clean EPS was up by 124% to 22.2 cents (2007: 9.9 cents) and Basic EPS was up by 59% to 16.5 cents (2007: 10.4 cents). 

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

  Reconciliation of Clean EBITDA* to operating profit

Year ended 31 December	2008 $million	2007 $million
Clean EBITDA* - Continuing operations	144.2	111.7
Depreciation	(18.6)	(23.6)
Amortisation	(23.0)	(21.7)
Impairment losses - assets held for sale	(1.3)	-
Share-based payments	(21.7)	(79.3)
Non-recurring adjustment to net revenue	-	18.2
Reorganisation costs - Continuing operations	(1.7)	-
Profit from operating activities - Continuing operations	77.9	5.3

*EBITDA before reorganisation income and costs, non-cash charges relating to share-based payments, non-recurring adjustment to revenue and release of tax provision. Reorganisation costs comprise redundancy costs following a Group review in 2008.

Objectives and strategy

Our objective is to become the world's most valuable online gaming company. The Group already has scale in each of its core markets, market-leading technology and gaming expertise as well as some of the best online gaming brands in the world. PartyGaming has an exceptional business model, capable of producing high profit margins and strong cashflow, supported by a healthy balance sheet and we therefore continue to believe that the Group has enormous potential.

Over the past 18 months the structure and dynamics of the non-US online gaming market have shifted and the market is now much more competitive. Sites that continue to take bets and generate profits from customers located in the US are now redeploying those profits into European and international markets. The consequent increase in competition for player liquidity, particularly in poker, has driven many smaller operators on to poker networks that have grown in popularity, exacerbating the competitive threat; the product set and customer demands are more sophisticated - greater consumer awareness and improved technology mean that consumers are more discerning than ever before; and finally, the regulatory environment continues to develop around the globe.

It was against this background, that in July 2008 we instituted a review of the business strategy, a process that involved all of the Group's senior management team. After much debate and discussion it was concluded that the four elements of the existing strategy remain sound namely: 

Grow the player base

Localise the customer offer

Broaden the product base

Act responsibly

Each of these elements is focused on optimising our Key Performance Indicators ('KPIs') so as to drive long-term revenue and profit.

Despite the headwinds created by adverse currency movements, an unlevel competitive landscape and challenging macroeconomic conditions, we believe that our results for 2008 are a testament to the strength of our business strategy.

Delivering the strategy

Our marketplace is very dynamic and requires us to challenge and adjust our business operations and procedures almost continuously. This process identified a need to refine the way in which we were executing each element of the strategy. The market dynamics had shifted and we needed to change our approach. Simply doing things like we had always done them before was not going to be good enough. In response, the senior management team developed a series of tactical plans across all aspects of our business that drew upon one or more of the following factors that we have identified as being key to our success:

Operational excellence - Having restructured the business into a diverse and international enterprise, we believe we can further improve the execution of our customer proposition. Drawing upon their considerable industry experience, the management team is taking steps to increase our operational focus and raise our already high standards even further.

Delighting the customer - As well as changes in market structure, consumer tastes have also evolved - online customers have become more discerning and are prepared to shop around to find what they want. This means that the strength of individual brands can be expected to become increasingly important as will the ability to differentiate our customer offer.

Leveraging our core assets - The prevailing macro and microeconomic environments mean that we need to derive maximum value from all of our assets and resources. Having already established a white label operation in the UK in 2007, we plan to extend this through additional white label opportunities but also through licensing our services to third-party gaming groups. Our recently announced deals with CIRSA and DM plc confirm that our customer offer represents a highly attractive alternative to other gaming suppliers and networks.

Leveraging the assets of others - Having pioneered the use of Hollywood brands to develop some of the most popular online slots, we have also secured licensing deals for one of the world's biggest video games as well as the right to use the Frank Sinatra name and music catalogue which we hope will also prove popular.

2008 business developments 

The Group has made good progress during 2008. We have grown the player base and seen the number of unique active players increase to over 1.2 million. We have continued to localise our customer offer through multi-lingual and multi-currency versions of our games. We have broadened the product base with the addition of new casino games as well as the launch of the next generation of PartyPoker. Acting responsibly has also brought rewards with the Group winning both the Socially Responsible Operator of the Year and Operator of the Year awards at the 2008 eGaming Awards, as well as a place in the FTSE4Good Index of companies.

A key area of focus during the year has been on expanding our games portfolio through the development of new slot games using international brands as well as the development of our business to business ('B2B') strategy, in particular white labels. During 2008 we released a number of new slot games including Saturday Night Fever, Top Gun, Mission:Impossible, The Godfather, The Terminator and Gone With The Wind.  Taken together, these movie-branded slots attracted total wagers in the period of $143 million. Following deals with Cryptologic, WagerWorks and NextGen, we have over 50 additional games being added to our casino over the next few months and will continue to expand the portfolio with additional branded games in 2009.

Having announced our intent to expand our B2B portfolio in August 2008, our efforts have begun to bear fruit with the announcement of two deals since the year end - namely CIRSA and DM plc.

Our alliance with CIRSA, one of Spain's largest land-based gaming operators that also has a substantial presence in Latin America, will seek to exploit online gaming opportunities in Spanish speaking countries. Our initial focus will be on bingo and casino games, followed by poker.

DM plc ("DM") is the UK's leading direct marketing group specialising in customer recruitment and database management. It also designs and promotes a range of games, competitions and promotions that are distributed via mass-market channels. This alliance is another white label under which DM will create a fresh bingo and casino brand powered by PartyGaming's proprietary software and technology platform.

Each of these relationships is expected to become operational during the second half of 2009.

A further key development in 2008 was the launch of the next generation of PartyPoker that took place at the end of September. With many new features and a complete redesign of the poker table and lobby, the new software has proven highly popular and is now being used by approximately three quarters of our active players with the balance preferring to use 'PartyPoker Classic' which remains available as an option for all of our players.

An update on each of the Group's three key operational areas during 2008 is provided below. 

1. Sales and player marketing

The Group's sales and player marketing function has again succeeded in attracting a large number of new players to our system with almost 630,000 new players added in 2008. Whilst this is less than in 2007, the prior year total reflected the strategic need to rebuild player liquidity following the enactment of the UIGEA. As a result, the number of poker sign-ups was down 22% year-on-year to just under 445,000 (2007: 573,000), although the other segments delivered strong growth in new player sign-ups. In casino, sign-ups increased by 83% to just under 80,000 reflecting a concerted marketing push to increase the number of core casino players and reduce the proportion of players coming from poker via cross-selling. Bingo sign-ups also grew strongly, quadrupling to over 22,000 for the year whilst sports betting sign-ups grew by 34% to over 82,000. Germany, Canada and the UK remain significant markets for the Group, but a number of developing markets in Continental and Eastern Europe also proved attractive in 2008 and we plan to continue to develop these and other territories in 2009. Our localisation strategy continued in 2008 with Romanian and Polish versions of our poker software added during the year as well as a Portuguese version of our casino software. Increasing the localisation of our games remains a core part of our strategy to broaden their appeal and attract players to our sites from around the globe.

The addition of a number of new and exclusive branded slot machines during 2008, together with many other new features, sustained our momentum in improving our casino offering and helped to attract an increasing number of dedicated casino players to our platform. While 77% of the active daily casino customers still came from poker, our increasing focus on casino marketing should help to further reduce our reliance on poker as the main source of casino players during 2009. In bingo, our white label partnership with ITV helped to drive bingo sign-ups on the back of Bingo Night Live, a television programme dedicated to promoting bingo in the UK.  This was a major factor behind the quadrupling of bingo sign-ups. We believe that white labels represent an important new distribution channel, one that we are already seeking to exploit further.

An analysis of sign-ups, unique active players and consolidated active player days in each of our key international regions is provided below:

New player sign-ups (000)

Year ended 31 December	2008	2007	% change
EMEA*	536.6	572.3	(6%)
Americas (non-US)	66.3	77.8	(15%)
Asia Pacific	27.0	33.6	(20%)
Total	629.9	683.7	(8%)

Unique active players (000)

Year ended 31 December	2008	2007	% change
EMEA*	1,012.1	908.4	11%
Americas (non-US)	170.2	179.8	(5%)
Asia Pacific	59.0	57.4	3%
Total	1,241.3	1,145.6	8%

Active player days (m)

Year ended 31 December	2008	2007	% change
EMEA*	20.7	22.2	(7%)
Americas (non-US)	4.5	4.9	(8%)
Asia Pacific	1.2	1.3	(8%)
Total	26.4	28.4	(7%)

* Europe, Middle East and Africa

The number of unique active players for the year to 31 December 2008 increased by 8% to 1.2 million (2007: 1.1 million). While the size of the active player base increased, the number of average daily players fell by 8% reflecting a drop in player frequency. This is due to several reasons although the precise impact of each one is difficult to determine. The first reason is the increasingly casual nature of the Group's player base. While new players enjoy online gaming it is unlikely to be their primary leisure pursuit and on average they tend to play less than existing, more experienced players; second, the mix of player activity across different games is shifting towards games that players tend to play less frequently; and third, it also reflects the increasing awareness by players of a number of different online gaming sites and the fact that they are now more likely to play on a number of different gaming sites rather than remaining loyal to just one site.

2. Systems and product development

Proprietary technology lies at the heart of the Group's infrastructure and operating platform. During 2008 we introduced a number of new games, features and performance-enhancing upgrades to our systems, all of which are focused on delivering the very best customer experience. We have also continued to improve the level of reliability in our production systems and reduced time to market for new items. 

The largest single achievement for our technology team was the launch of the next generation of PartyPoker that took place at the end of September 2008. Having been meticulously designed and planned in-house over the previous ten months, the launch has attracted much favourable comment from across the industry.

As part of our plan to leverage our own assets as well as the assets of others, we have invested in building a dedicated team of software developers and engineers to deliver white label and services solutions for our B2B customers. We believe that this is an essential cost of being in the B2B business and will minimise the impact on our own operations.

3. Customer service

Ensuring that our customers have a great experience requires that we provide excellent customer support. Having reorganised the structure of this important activity, the vast majority of our customer service operation is focused in one location, providing assistance or responding to queries players may have regarding their account or game play. We have also undergone something of a transformation in terms of ethos. No longer do our service agents just wait for the phone to ring - we are increasingly pro-active, calling and emailing customers that we can see are having problems, to try and help them resolve their issue as quickly as possible.

With 170 full-time customer service agents, we provide support in 11 languages other than English (Danish, French, German, Greek, Italian, Polish, Romanian, Russian, Spanish, Swedish and Portuguese). Approximately 28% of the 694,000 customer contacts received during the period were conducted in languages other than English and 91% of the calls received were answered in 30 seconds or less. Never complacent we know we can continue to improve and are focused on doing so.

Regulation

Our discussions with the United States Attorney's Office for the Southern District of New York ('USAO') are continuing in line with the Board's expectations. These discussions have made good progress and the Company continues to negotiate the terms of a possible settlement with the USAO. However, the terms of any settlement have not yet been finalised and there can be no certainty that any agreement will be reached between the Company and the USAO. The fact that certain online gaming businesses continue to offer real money games to customers in the US is a frustration, particularly given their ability to deploy US generated profits into competitive international markets. However, we hope that this is a situation that will not last and believe that the US enforcement agencies will ultimately take action in this area.

In Europe, after some early progress with letters of formal notice being sent by the European Commission ("EC") to both Sweden and Germany and reasoned opinions being sent to both Greece and the Netherlands during the first half of 2008, the process of taking Member States to task for suspected breaches of EU law appears to have hit political obstacles, with little progress being made in the second half of the year. That said, following pressure from the EC, France has now announced its intention to introduce a regulatory framework for online gaming as have other countries such as Spain and Ireland.

Conversely, following an internal review, Sweden has stated that it intends to continue with its protectionist measures of having gambling being controlled by Government-owned entities while the Netherlands and others continue to threaten to enforce domestic laws that only permit online gaming to be offered by domestic government-controlled monopolies. Such a state of flux is likely to continue for some time until there is clarity regarding the legal position at the European Court of Justice. We remain committed to creating a level playing field for our products and services across Europe and continue to believe that a regulatory framework is the best way to strike the right balance between providing adults with a safe and secure online gaming environment that offers attractive payout rates, whilst ensuring protection for children and the vulnerable.

  Directors

There have been several changes to the Board over the past 12 months. Jim Ryan became Chief Executive Officer on 30 June 2008. Having joined the Group in 2006 and been appointed to the Board as Managing Director on 16 May 2008, John O'Malia resigned from the Company with effect from 28 February 2009 to pursue other business interests. Michael Jackson stepped down as Non-Executive Chairman and was replaced by Rod Perry on 29 August 2008. John Davy resigned from the Board on 4 March 2009 and was replaced by Rami Lerner.

Dividend

While the Group has made good progress during 2008, the Board is not recommending payment of a final dividend. The Board will continue to review the appropriate dividend policy for the Group, taking account of a possible settlement with the USAO in respect of the Group's pre-UIGEA activities and the need to retain sufficient financial flexibility to take advantage of consolidation opportunities that are expected to arise over the coming months.

Key objectives for 2009

During 2009 we will continue to execute our strategic plan and will seek to capitalise on a number of regulatory, strategic and operational developments.

Regulatory and strategic developments

The shifting political and economic landscape around the globe may present the Group with a number of exciting opportunities for the future. US Congressman Barney Frank, Chairman of the House of Representatives Financial Services Committee, has announced his intention to introduce a bill that will seek to repeal the UIGEA, laying the ground for a legislative framework to license and regulate online gaming in the US. While there remain many hurdles to overcome before such a framework could become law, this would represent an important first step towards the Group being able to once again offer its services to customers in the US, which remains the world's largest online gaming market. With a huge database of over two million real money US players that were active before the enactment of the UIGEA, as well as over 10 million free play gaming customers in the US, the Group should be well placed to benefit from such a development. Even before then, we are exploring opportunities to monetise the strength of the Group's brands, in particular PartyPoker.com, through alternative business models that do not raise regulatory concerns under US law such as state-licensed intra-state online gaming. 

In Europe, the French government has published proposals for its own regulatory framework for online gaming, which is a positive development that we welcome in the context of the implicit recognition of the wider rights enshrined in the EC Treaty.  Whilst the exact details have yet to be finalised, we believe that this represents a significant growth opportunity for us as an EU-licensed and regulated gaming company.  We expect other European countries will recognise the merits of a proper regulatory framework for online gaming and look to adopt similar proposals.  Elsewhere, Spain is also believed to be considering a proposal to license and regulate online gaming. With an estimated annual gross gaming yield from land-based activities in Spain of over €5 billion per annum1, the opportunity for online gaming operators is expected to be significant.

As governments around the world recognise the benefits of regulation, we believe they will also seek to participate in the online gaming market, just as they have done in lotteries. As such, we are seeking to ensure that we are well-positioned to win government-sponsored business that we believe will become an increasingly important segment of the overall online gaming market.

Finally, the online gaming market is ripe for consolidation and we are determined that PartyGaming plays an active part as a consolidator - making a transformational acquisition remains a key objective. 

Operational developments

Delighting the customer remains at the heart of everything we do and has already set the agenda for our development roadmap in 2009. Over the next six months we will be introducing a range of new features and functions across all of our business segments, as well as continuing to improve the overall customer experience through improved performance and platform stability.

 

 

In poker, throughout the year we plan to introduce new features every month including increased functionality for our multi-tabling capability, improved personalisation and many new tournament structures. We look forward to the launch of white label version of our product for CIRSA and to the development of our poker network in Italy.

In casino, we will launch the Rambo, Frank Sinatra, Naked Gun and High Noon slots as well as over 60 games provided by third-party suppliers such as Cryptologic, WagerWorks and NextGen. By the end of the first half of 2009 we are planning to have over 130 games and we will be releasing more language versions of our casino product to broaden its international appeal even further.

In bingo, our focus during the year will be on delivering solutions for CIRSA and DM plc and other third party customers as well as continuing to expand the portfolio of side games and casino games available through the bingo client.

Our focus in sports betting will be on improving the gross win margin in both the main and live books whilst maintaining the strong turnover growth that we have achieved in recent years.

Following an initial soft launch, we will now be starting to promote PartyMarkets for the first time. The PartyMarkets customer interface has been specifically designed to simplify financial trading and spread betting so as to make it more user friendly to regular online gamers as opposed to financial traders. Included within the emerging games segment within poker, PartyMarkets has yet to make a meaningful contribution to revenue or profit but we believe it is an opportunity for the future.

Current trading and outlook

In the 5 weeks ended 4 February 2009, average gross daily revenue was $1,442,900. In poker, new player sign-ups increased to an average of 1,494 per day, and there were on average 51,000 active players per day generating average gross daily poker revenue of $756,700. In casino, gross revenue was $597,200 per day.  In sports betting gross win per day was $75,700 and in bingo, average gross daily revenue was $13,200.

In the 4 weeks ended 4 March 2009, average gross daily revenue was $1,536,200. In poker, new player sign-ups averaged 1,550 per day and there were on average 51,100 active players per day, generating average gross daily revenue of $738,500. In casino, average gross daily revenue was $662,500, in sports betting, average gross win per day was $123,000 while in bingo it was $12,200. 

The Group has continued to make good progress in the first few weeks of 2009 despite the pressures of a highly competitive market and currency movements. We are focused on executing our stated strategy and remain confident about the Group's prospects.

SUMMARY OF RESULTS

	Net revenue		Clean EBITDA
Year ended 31 December	2008	2007	2008	2007
Poker	274.0	295.0	76.1	62.4
Casino	176.0	144.2	66.1	43.5
Sports Betting	18.0	16.1	5.1	3.4
Bingo	4.9	2.5	(0.1)	0.1
Unallocated Corporate	-	-	(3.0)	2.3
Total Continuing operations	472.9	457.8	144.2	111.7
Discontinued operations	-	-	(10.9)	(24.7)
Total	472.9	457.8	133.3	87.0

Having been up 17% year-on-year at the half year, a significant strengthening of the US dollar against other currencies during the second half, as well as competitive pressures meant that net revenue finished 2008 up 3% over the prior year at $472.9m. Increased promotional activity around the relaunch of PartyPoker that took place during the fourth quarter and a delay in the Group's new loyalty programme were also contributory factors. However, a significant part of our cost base is incurred in non-US currencies, and the appreciation of the US dollar had a beneficial impact on our reported costs in the second half with Clean EBITDA up 29% to $144.2m.

The overall Clean EBITDA margin increased from 24.4% to 30.5% due to the growth in revenues and continued control of our cost base. Poker was the largest contributor to Group EBITDA, with a 22% increase to $76.1m. Our casino segment grew Clean EBITDA by 52% to $66.1m on the back of a 22% increase in revenue. Our sports segment also grew Clean EBITDA by 50% whereas bingo incurred a small loss due to costs associated with the ITV white label in the UK.

Clean earnings per share from Continuing operations increased by 55% to 24.9 cents (2007: 16.1 cents). Total Clean earnings per share increased by 124% to 22.2 cents per share (2007: 9.9 cents).

The consolidated key performance indicators underlying this performance are highlighted below:

Consolidated Key Performance Indicators

Year ended 31 December	2008	2007	% change
Active player days (million)	26.4	28.4	(7%)
Daily average players (000s)	72.0	77.9	(8%)
Yield per active player day ($)	17.9	16.1	11%
Yield per unique active player in the year ($)	381.0	399.7	(5%)
New real money sign-ups (000s)	629.9	683.7	(8%)
Unique active players in the year (000s)	1,241.3	1,145.6	8%
Average daily net revenue ($000)	1,292.0	1,254.4	3%

The number of unique active players increased by 8% to over 1.2 million driven by the addition of 629,900 new real money sign-ups. However, the daily average number of players fell by 8% to 72,000 as the frequency of play fell and this also impacted the yield per unique active player. While the yield per active player day was up 11% year-on-year to $17.9 on the back of operational enhancements and an increasing proportion of casino play, the yield per unique active player fell by 5% to $381.0 due to reduced frequency of play.

The net effect was that over the 12 months to 31 December 2008, average net daily revenue was $1,292,000 per day, up 3% from $1,254,400 in 2007.

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

Poker

Year ended 31 December	2008 $million	2007 $million	% change
Gross revenue	327.6	339.1	(3%)
Bonuses and other fair value adjustments to revenue	(53.6)	(44.1)	(22%)
Net revenue before non-recurring adjustment to revenue	274.0	295.0	(7%)
Non-recurring adjustment to revenue	-	15.8	n/a
Net revenue	274.0	310.8	(12%)
Continuing Clean EBITDA	76.1	62.4	22%
Clean EBITDA margin*	27.8%	21.2%

* Excluding non-recurring adjustment to revenue

Gross poker revenue fell by 3% year-on-year due to a reduction in the frequency of play, partly driven by a delay in the launch of a new loyalty programme and competitive pressures from sites that continue to accept US players. Currency movements also impacted performance, particularly in the final quarter.  In terms of market share, PartyPoker.com has successfully held its position in the global market, although the larger US facing sites have managed to increase their share at the expense of other operators. It is estimated that in the week ended 8 March 2009 PartyPoker.com had 

8%1 of the global online poker market (unchanged since we last provided an update in August 2008).

 

 

Increased competition, particularly from US-facing sites, the launch of a new loyalty programme, as well as an increase in marketing activity around the launch of the next generation of PartyPoker that took place in September 2008, meant that bonuses and other fair value adjustments to revenue increased from 13.0% in 2007 to 16.4% of 2008 gross revenue. Although net poker revenue fell by 7% versus the previous year to $274.0m (2007: $295.0m), Clean EBITDA grew by 22% to $76.1m (2007: $62.4m) driven by reduced but more effective marketing spend and lower administration costs which meant that Clean EBITDA margins increased to 27.8% (2007: 21.2%).

As mentioned above, in terms of key performance indicators, the year-on-year comparisons have been distorted by the major drive to boost poker player liquidity that took place during the first half of 2007.

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

Poker - Key Performance Indicators

Year ended 31 December	2008	2007	% change
Active player days (million)	21.0	23.9	(12%)
Daily average players (000s)	57.3	65.4	(12%)
Yield per active player day ($)	13.1	12.4	6%
Yield per unique active player in the year ($)	289.1	319.1	(9%)
New real money sign-ups (000s)	444.9	573.0	(22%)
Unique active players in the year (000s)	947.9	924.7	3%
Average daily net revenue ($000)	748.8	808.3	(7%)

The number of unique active players increased by 3% to 947,900 driven by the addition of 444,900 new real money sign-ups. The daily average number of players fell by 12% due to reduced frequency of play reflecting an increased willingness of players to play on multiple sites as well as competitive pressures, principally from those sites that still accept US players. Real money sign-ups were down 22% reflecting the exceptional marketing push in the first quarter of 2007 to preserve liquidity immediately following the UIGEA.

The trends in player retention experienced in previous years have continued with an increasing proportion of casual players amongst new player sign-ups, as evidenced by higher attrition rates. Approximately 19.2% of all 2008 poker sign-ups remained active after six months versus 24.6% of all 2007 sign-ups. As at 31 December 2008, across all real money poker sign-ups, the proportion of players remaining active after six months was approximately 24% (2007: 27%), after 12 months it was 19% (2007: 21%) and after 18 months it was 15% (2007: 17%).

Despite the impact of higher bonus levels, yield per active player day increased by 6% due to the success of a number of revenue enhancing initiatives.  However, this was more than offset by a reduction in yield per unique active player that fell by 9% to $289.1 reflecting a reduction in player frequency. The delay in the relaunch of the Group's loyalty programme and the effect of increased competition with many poker players playing on more than one site were the main contributory factors to the reduction in frequency. The continued growth in the Group's casino, that sourced over 77% of its active players from poker, was also a factor that affected poker revenue in the period.

Casino

Year ended 31 December	2008 $million	2007 $million	% change
Gross revenue	242.3	188.8	28%
Bonuses and other fair value adjustments to revenue	(66.3)	(44.6)	(49%)
Net revenue before non-recurring adjustment to revenue	176.0	144.2	22%
Non-recurring adjustment to revenue	-	2.4	n/a
	176.1	146.6	20%
Net revenue	176.0	146.6	20%
Continuing Clean EBITDA	66.1	43.5	52%
Clean EBITDA margin*	37.6%	30.2%

* Excluding non-recurring adjustment to revenue

The Group's casino business delivered another strong performance in 2008, maintaining our position as the world's largest online casino. The total amount wagered increased by 25% to almost $8 billion with net revenue up by 20% versus the prior year. Casino represented 37% of Group revenues in 2008 (2007: 31%).

An improved revenue mix away from lower margin games such as blackjack towards slots and jackpot slots contributed to the growth in revenue although this was mitigated by an increase in bonuses and other fair value adjustments to revenue that increased from 23.6% in 2007 to 27.4% of gross revenue. This increase was as much a reflection of the shift in business mix as it was due to competitive pressures as higher yielding games tend to require higher bonus rates. Clean EBITDA increased by 52% to $66.1m reflecting the benefits of an initiative to optimise marketing spend and the impact of revenue growth given the inherent operating leverage of the business. A summary of the key performance indicators for the casino business during 2008 is shown in the table below:

Casino - Key Performance Indicators

Year ended 31 December	2008	2007	% change
Active player days (000s)	4,277.2	4,011.1	7%
Daily average players (000s)	11.7	11.0	6%
Yield per active player day ($)	41.2	36.0	14%
Yield per unique active player in the year ($)	323.9	276.2	17%
New real money sign-ups (000s)	80.0	43.7	83%
Unique active players in the year (000s)	543.5	522.3	4%
Average daily net revenue ($000)	481.0	395.3	22%

The benefits of previous investment and development continued to flow through into casino and all of the key performance indicators improved in 2008. In line with our strategy, new player sign-ups increased by 83% reflecting a desire to both reduce the reliance on poker as a source of casino customers and also to increase player yield as dedicated casino customers tend to spend more on casino games than poker players. While substantial progress was made in 2008, the fact that the majority of active casino customers in 2008 still came from poker, coupled with the softer trading performance in poker meant that the growth in active player days and daily average players was limited to 7% and 6% respectively. Yield per active player day and yield per unique active player increased strongly year-on-year driven by the introduction of a number of new and exclusive slot games such as Mission:Impossible, The Godfather, Top Gun  and The Terminator as well as an improvement in games mix with blackjack, now representing approximately 25% of the amount wagered in casino compared with over 33% in 2007. 

Sports Betting

Year ended 31 December	2008 $million	2007 $million	% change
Total stakes	538.8	349.9	54%
Gross win margin	4.7%	6.3%
Gross revenue	25.1	22.1	14%
Bonuses and other fair value adjustments to revenue	(7.1)	(6.0)	(18%)
Net revenue	18.0	16.1	12%
Continuing Clean EBITDA	5.1	3.4	50%
Clean EBITDA margin*	28.3%	21.1%

* Excluding non-recurring adjustment to revenue

The Group's sports betting business, comprising PartyBets.com and Gamebookers.com, continued to experience strong growth in business volume with the amount wagered increasing by 54% to $538.8m in 2008 (2007: $349.9m). The growth in turnover was due to a 48% increase in average bet size to $14.0 as well as a 15% increase in the number of active players. 

Whilst pleased with the growth in amounts wagered, the overall gross win margin at 4.7% (2007: 6.3%) needs to improve. Live betting represented an increasingly significant proportion of total betting volume at approximately 40% of total stakes (2007: 33%) and while this tends to attract lower margins than the main book, the gross win margin was still below expectations. As a result, and with a small increase in bonus rates to 28.3% of gross revenue (2007: 27.1%), net revenue increased by 12% to $18.0m. Operating leverage coupled with optimised marketing spend meant that Clean EBITDA margins increased to 28.3% (2007: 21.1%) and Clean EBITDA grew by 50% to $5.1m (2007: $3.4m). A summary of the key performance indicators for sports betting are shown below:

Sports Betting - Key Performance Indicators

Year ended 31 December	2008	2007	% change
Active player days (000s)	3,456.9	3,197.7	8%
Daily average players (000s)	9.4	8.8	7%
Yield per active player day ($)	5.2	5.0	4%
Yield per unique active player in the year ($)	92.0	95.4	(4%)
New real money sign-ups (000s)	82.6	61.6	34%
Unique active players in the year (000s)	194.3	168.5	15%
Average daily net revenue ($000)	48.8	44.0	11%

Player activity and daily average players both benefited from the Euro 2008 football tournament during the year that, coupled with dedicated marketing initiatives, helped to increase new player sign-ups by 34% over the previous year. Soccer remains the most popular sport representing 54% of the amount wagered with tennis, basketball and ice hockey being the Group's other major sports.

The yield per unique active player fell by 4% to $92 reflecting the fall in gross win margin, partially mitigated by the growth in average bet size. 

Bingo

Year ended 31 December	2008 $million	2007 $million	% change
Gross revenue	6.7	2.8	139%
Bonuses and other fair value adjustments to revenue	(1.8)	(0.3)	(500%)
Net revenue	4.9	2.5	96%
Continuing Clean EBITDA	(0.1)	0.1	n/a
Clean EBITDA margin	n/a	4.0%

Bingo grew strongly during 2008 with net revenue almost doubling to $4.9m on the back of strong growth in both PartyBingo and ITV Bingo, our bingo white label. Bonus rates increased to 26.9% (2007: 10.7%) of gross revenue to enhance the competiveness of our bingo offering to players. Investment in the Group's white label with ITV meant that despite strong growth in revenue, there was no corresponding increase in Clean EBITDA.

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

Bingo - Key Performance Indicators

Year ended 31 December	2008	2007	% change
Active player days (000s)	396.4	301.4	32%
Daily average players (000s)	1.1	0.8	38%
Yield per active player day ($)	12.3	8.2	50%
Yield per unique active player in the year ($)	78.2	44.1	77%
New real money sign-ups (000s)	22.4	5.4	315%
Unique active players in the year (000s)	62.2	55.8	11%
Average daily net revenue ($000)	13.3	6.7	99%

All of the key performance indicators for bingo showed strong growth over the prior year and we believe that there will continue to be opportunities for growth in this segment in the future. The UK is currently the Group's largest bingo market and whilst the levels of activity have fallen since Bingo Night Live came off the air in November last year, the Group has introduced an improved bingo lobby and additional functionality that are expected to help to increase future revenue growth. White labels will be particularly important to this segment in 2009 and through our alliance with CIRSA we hope to build revenue from Spanish-speaking customers when the service launches later in the year.

  Distribution costs

Year ended 31 December	2008 $million	2007 $million	% change
Customer acquisition and retention	71.9	77.2	(7%)
Affiliates	69.8	76.5	(9%)
Other customer bonuses (not netted from revenue)	6.1	4.1	49%
Customer bad debts	2.1	1.7	24%
Webhosting and technical services	29.6	24.7	20%
Distribution costs	179.5	184.2	(3%)
Distribution costs as a % of ongoing net revenue*	38.0%	40.2%

* Excluding non-recurring adjustment to revenue

Improvements in the allocation of marketing spend together with the benefits of more effective campaigns contributed towards a 7% reduction in customer acquisition and retention costs versus the prior year. Affiliate expenses were lower due to the absence of a strategic push to increase new player sign-ups using the affiliate channel that took place in the first quarter of 2007. Consequently, affiliate costs fell by $6.7m year-on-year and also fell as a proportion of net revenue to 14.8% (2007: 16.7%).

An increasingly competitive environment resulted in other customer bonuses, that also include payments to cover certain guaranteed tournament prizes, increasing to $6.1m (2007: $4.1m). Customer bad debts increased by $0.4m but remained stable as a percentage of revenue at 0.4%. Webhosting and technical services costs increased by 20% to $29.6m due to the successful launch of a number of new branded slots as well as strong growth in the non-Party branded casinos, both of which resulted in higher royalty payments due to third parties. Overall, Continuing distribution costs fell to 38.0% of net revenue (2007: 40.2%), slightly better than previous guidance.

Administrative expenses (before reorganisation costs)

Year ended 31 December	2008 $million	2007 $million	% change
Transaction fees	31.2	32.1	(3%)
Depreciation	18.6	23.6	(21%)
Amortisation	23.0	21.7	6%
Staff costs	82.1	87.5	(6%)
Other overheads	34.4	44.6	(23%)
Administrative expenses before share-based payments	189.3	209.5	(10%)
Share-based payments	21.7	79.3	(73%)
Administrative expenses	211.0	288.8	(27%)
Administrative expenses before share-based payments as a % of net revenue*	40.0%	45.8%
Administrative expenses as a % of net revenue*	44.6%	63.1%

* Excluding non-recurring adjustment to revenue

The implementation of a programme to reduce costs and the benefit of currency movements during the second half of 2008 meant that administrative expenses before share-based payments fell by 10% to $189.3m (2007: $209.5m). They also fell as a proportion of net revenue to 40.0% (2007: 45.8%). Renegotiated payment processor contracts and a change in mix of deposit methods led to a 3% reduction in transaction fees year-on-year.

Depreciation fell by 21% to $18.6m due to certain fixed assets having been fully depreciated during the year. Amortisation increased by 6% to $23.0m primarily due to a full year's amortisation of intangible assets created in the previous year as well as some intangibles created during the year associated with the relaunch of PartyPoker in September 2008.

Despite the inclusion within staff costs of a $5.1m one-off charge associated with the change of Chairman and Chief Executive Officer, overall staff costs fell by 6% due to the implementation of a cost-reduction programme. This also reduced overheads which fell by over $10m to $34.4m, continuing a trend of falling overheads as seen in previous years following the enactment of the UIGEA.

  Share-based payments

The share-based payment charge fell by 73% to $21.7m primarily reflecting the vesting of nil-cost options granted in earlier periods. The exercise of these nil-cost options were satisfied by existing shares which had already been gifted by the Principal Shareholders to a dedicated employee trust. While the exercise of these options had no cash impact on the Company, International Financial Reporting Standards require that the fair value of these options be amortised through the income statement over the life of the options.

Further details are contained in note 5 to the Financial Information below.

Finance income and costs

The Group generated net income from cash balances in the period of $4.5m (2007: $1.4m). The increase from the prior year primarily reflects increased cash balances, partially offset by lower interest rates.

Taxation

The tax charge for the period is $4.6m (2007: credit of $60.9m) reflecting an effective tax rate of 6.4%. The effective tax rate for the period is 4.9% before share-based payments (2007: 4.9%).

Net cash1

As at 31 December 2008 the Group had net cash of $201.4m (2007: $127.8m). After excluding amounts in respect of client liabilities and progressive prize pools, the Group's own net cash position was $70.3m (31 December 2007: $4.4m). 

Cashflow

Year ended 31 December	2008 $million	2007 $million
Operating cashflows before movements in working capital	132.5	107.6
Cash used by working capital and income tax paid	(18.2)	(11.8)
Net cash inflow from operating activities	114.3	95.8
Capital expenditure	(8.4)	(9.1)
Acquisitions of intangibles	(35.0)	(6.4)
Proceeds from sale of fixed assets	-	2.4
Short-term investments	0.2	0.6
Net interest received	2.7	1.7
Repayment of revolving credit facility	-	(12.0)
Net cashflow	73.8	73.0

Cashflow from operations before movements in working capital increased by 23% due to the increase in Clean EBITDA. The $18.2m increase in working capital primarily reflected a reduction in trade creditors during the year. The acquisitions of intangibles in the period relate primarily to the payment of deferred consideration due in respect of acquisitions made in prior periods.

Capital expenditure 

Capital expenditure during the period was $8.4 (2007: $9.1m) and is analysed in more detail in note 10 to the Financial Information below.

Principal risks 

The principal risks facing the Group are unchanged from those reported in the Company's annual report for the year ended 31 December 2007 and will be set out in the Company's annual report for the year ended 31 December 2008, due for release in the first half of April 2009.

By order of the Board of Directors

Robert Hoskin

Company Secretary

11 March 2009

 

1Net cash is defined as cash, cash equivalents and short term investments less bank debt

 Financial Information

Audited consolidated income statement

Year ended 31 December	Notes	2008 $million	2007 $million
Continuing operations
Net revenue - ongoing	4	472.9	457.8
Non-recurring adjustment to net revenue	4	-	18.2
Net revenue		472.9	476.0
Other operating (expense) income		(2.8)	2.3
Administrative expenses:
Other administrative expenses		(191.0)	(209.5)
Share-based payments	5	(21.7)	(79.3)
Total administrative expenses		(212.7)	(288.8)
Distribution expenses		(179.5)	(184.2)
Profit from operating activities		77.9	5.3
Finance income	6	4.7	3.0
Finance costs	6	(0.2)	(1.6)
Profit before tax		82.4	6.7
Tax	7	(4.6)	7.2
Profit after tax from Continuing operations		77.8	13.9
(Loss) profit after tax from Discontinued operations	3	(10.9)	27.7
Profit after tax attributable to the equity holders of the parent		66.9	41.6
Continuing earnings per share (cents)
Basic	8	19.2	3.5
Diluted	8	18.8	3.3
Earnings per share (cents)
Basic	8	16.5	10.4
Diluted	8	16.2	10.0

Audited consolidated statement of recognised income and expense

Year ended 31 December	2008 $million	2007 $million
Exchange differences on translation of foreign operations	(2.7)	2.2
Net (expense) income recognised directly to equity	(2.7)	2.2
Profit after tax for the year	66.9	41.6
Total recognised income and expense for the year	64.2	43.8

  Audited consolidated balance sheet

As at 31 December	Notes	2008 $million	2007 $million
Non-current assets
Intangible assets	9	184.5	203.2
Property, plant and equipment	10	16.7	37.7
		201.2	240.9
Current assets
Assets held for sale	12	5.9	-
Trade and other receivables		50.8	64.0
Short-term investments	13	8.3	8.5
Cash and cash equivalents		193.1	119.3
		258.1	191.8
Total assets		459.3	432.7
Current liabilities
Trade and other payables		(44.1)	(107.1)
Income taxes payable		(2.8)	(3.8)
Client liabilities and progressive prize pools		(131.1)	(123.4)
Provisions	14	(2.0)	(5.0)
Total liabilities		(180.0)	(239.3)
Total net assets		279.3	193.4
Equity
Share capital	16	0.1	0.1
Share premium account	17	66.4	66.4
Capital contribution reserve	17	34.7	34.7
Retained earnings	17	1,003.8	915.2
Other reserve	17	(825.4)	(825.4)
Currency reserve	17	(0.3)	2.4
Equity attributable to equity holders of the parent		279.3	193.4

  Audited consolidated statement of cashflows

Year ended 31 December	2008 $million	2007 $million
Profit for the year	66.9	41.6
Adjustments for:
Amortisation of intangibles	23.0	21.7
Interest expense	0.2	1.6
Interest income	(4.7)	(3.0)
Depreciation of property, plant and equipment	18.6	23.6
Impairment of assets held for sale	1.3	-
Increase in reserves due to share-based payments	21.7	79.1
Increase in capital contribution reserve	-	2.2
Loss (profit) on sale of property, plant and equipment	0.2	(0.5)
Currency translation reserve	0.7	2.2
Income tax expense (credit)	4.6	(60.9)
Operating cashflows before movements in working capital and provisions	132.5	107.6
Decrease in trade and other receivables	12.1	3.3
Decrease in trade and other payables	(23.0)	(11.7)
Decrease in provisions	(3.0)	(0.5)
Cash generated from operations	118.6	98.7
Income taxes paid	(4.3)	(2.9)
Net cash inflow from operating activities	114.3	95.8
Investing activities
Purchases of property, plant and equipment	(8.4)	(9.1)
Sale of property, plant and equipment	-	2.4
Purchases of intangible assets	(35.0)	(6.4)
Interest received	4.7	3.0
Decrease in short-term investments	0.2	0.6
Net cash used in investing activities	(38.5)	(9.5)
Financing activities
Interest paid	(2.0)	(1.3)
Repayment of amounts drawn down under revolving credit facility	-	(12.0)
Net cash used in financing activities	(2.0)	(13.3)
Net increase in cash and cash equivalents	73.8	73.0
Cash and cash equivalents at beginning of year	119.3	46.3
Cash and cash equivalents at end of year	193.1	119.3

  Notes to the financial information

1. Accounting policies

Except as described below, the full year results are prepared on the basis of the accounting policies stated in the Group's Annual Report 2007 which is available on the Group's website at www.PartyGaming.com. The financial information has been prepared in accordance with those International Financial Reporting Standards including International Accounting Standards ('IASs') and interpretations, (collectively 'IFRS'), published by the International Accounting Standards Board ('IASB') which have been adopted by the European Commission and endorsed for use in the EU for the purposes of the Group's full year financial statements.

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

The financial information does not constitute the Group's statutory accounts for the year ended 31 December 2008 or the year ended 31 December 2007, but is derived from those accounts.

Statutory accounts for the year ended 31 December 2008 will be filed with Companies House Gibraltar following the Company's Annual General Meeting. The auditors have reported on those accounts and their report was unqualified and did not contain statements under section 10(2) of the Gibraltar Companies (Accounts) Act 1999 or section 182(1) (a) of the Gibraltar Companies Act. Statutory accounts for the year ended 31 December 2007 have been delivered to the Registrar of Companies in Gibraltar together with a report under section 10 of the Gibraltar Companies (Accounts) Act 1999.  The audit report for both 2007 and 2008, without qualifying the opinion therein, draws attention to the issue set out in note 15 on Contingent Liabilities in the financial information.

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

IFRIC 11 - Group and treasury share transactions (effective for annual periods beginning on or after 1 March 2007).

IFRIC 12 - Service concession arrangements (effective for annual periods beginning on or after 1 January 2008).

IFRIC 13 - Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008) which has been early adopted by the Group in accordance with best practice.

IAS 23 - Borrowing costs (effective for annual periods beginning on or after 1 January 2009) which has 

been early adopted by the Group in accordance with best practice.

IAS 39 and IFRS 7 (Amendment) - Reclassification of Financial Instruments (effective immediately).

IFRS 2 (Amendment) - Vesting conditions and cancellations (effective for annual periods beginning on or after 1 January 2009) which has been early adopted by the Group in accordance with best practice.

The following interpretations were issued by the IFRIC and IASB before the year end but were not effective for the 2008 year end:

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

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

IAS 1 - Presentation of financial statements (effective for annual periods beginning on or after 1 January 2009).

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

IAS 27 - Consolidated and separate financial statements (effective for annual periods beginning on or after 1 July 2009).

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

In the current financial year the Group has a new class of asset, Assets Held For Sale. In line with IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations which the Group has already adopted, the accounting policy regarding such assets is outlined below.

Non-current assets held for sale

Non-current assets and disposal groups are classified as held for sale if the carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as being met only when the sale is highly probable, management is committed to a sale plan, the asset is available for immediate sale in its present condition and the sale is expected to be completed within one year from the date of classification.  These assets are measured at the lower of carrying value and fair value less associated costs of sale.

2. Restatement of prior periods

Number of shares and earnings per share

At an Extraordinary General Meeting on 15 May 2008 an ordinary resolution was passed to consolidate the Company's 4,115,193,850 ordinary shares of 0.0015 pence each to 411,519,385 ordinary shares of 0.015 pence each with effect from 19 May 2008. The number of shares and earnings per share for the year ended 31 December 2007 have been restated as if the consolidation had taken place prior to 1 January 2007. There is no other effect on the financial information.

Reanalysis of business segments

In the financial information for the year ended 31 December 2007, bingo was classified as part of casino. This business segment is now reported separately.

3. Discontinued operations

Income statement

Year ended 31 December	Notes	2008 $million	2007 $million
Administrative expenses
Other administrative expenses		(10.9)	(13.6)
Share-based payments	5	-	(2.0)
Total administrative expenses		(10.9)	(15.6)
Distribution expenses		-	(11.1)
Loss from operating activities before reorganisation costs		(10.9)	(26.7)
Reorganisation income		-	0.7
Loss before tax		(10.9)	(26.0)
Tax	7	-	53.7
(Loss) profit after tax		(10.9)	27.7
(Loss) earnings per share (cents)
Basic	8	(2.7)	6.9
Diluted	8	(2.7)	6.7

Statement of cashflows

Year ended 31 December	2008 $million	2007 $million
Net cash from operating activities	(10.9)	(17.0)
Net cash used in investing activities	-	-
Net cash used in financing activities	-	-
Net decrease in cash and cash equivalents	(10.9)	(17.0)

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

Other administrative expenses allocated to Discontinued operations in the year primarily represent legal costs incurred in respect of the Group's US legal matters and ongoing discussions with the United States Attorney's Office for the Southern District of New York regarding the Group's activities before the enactment of the UIGEA. The Group is discussing with its insurers reimbursement of certain of these costs.  However, as the policy allowing the recovery of these costs has not yet formally been triggered, these costs have been expensed in full during the period. The Group's insurers have now agreed in principle to reimburse the Company for some of the costs incurred by legal counsel retained by the Directors (as opposed to legal counsel retained by the Company, the costs of which are not covered by the policy). The Company is in the process of confirming this amount with the insurers, although it should be noted that the reimbursement sum is unlikely to exceed $0.5 million.

In 2007 a net $2.7 million was received from payment processors that had previously been provided for as part of the 2006 reorganisation charge. The credit reflected within reorganisation costs of $0.7 million includes this recovery net of $2.0 million associated with changes in estimates made in respect of the 2006 reorganisation charge.

4. Revenue and business segment information

For management purposes and transacting with customers, the Group's operations can be segmented into the following four operating divisions:

- poker (including emerging games),

- casino,

- sports betting and

- bingo.

These divisions are the basis on which the Group reports its segment information. Unallocated corporate expenses, assets and liabilities relate to the Group as a whole and are not allocated to individual segments.

Year ended  31 December 2008	Poker $million	Casino $million	Sports Betting $million	Bingo $million	Unallocated Corporate $million	Consolidated $million
Continuing operations
Net revenue	274.0	176.0	18.0	4.9	-	472.9
Clean EBITDA	76.1	66.1	5.1	(0.1)	(3.0)	144.2
Profit (loss) before tax	73.1	60.5	(7.2)	(0.1)	(43.9)	82.4
Discontinued operations
Clean EBITDA	-	(4.2)	-	-	(6.7)	(10.9)
Loss before tax	-	(4.2)	-	-	(6.7)	(10.9)
Total operations
Net revenue	274.0	176.0	18.0	4.9	-	472.9
Clean EBITDA	76.1	61.9	5.1	(0.1)	(9.7)	133.3
Profit (loss) before tax	73.1	56.3	(7.2)	(0.1)	(50.6)	71.5
Total assets	59.4	76.0	109.6	-	214.3	459.3

  

Year ended  31 December 2007	Poker $million	Casino $million	Sports Betting $million	Bingo $million	Unallocated Corporate $million	Consolidated $million
Continuing operations
Net revenue - ongoing	295.0	144.2	16.1	2.5	-	457.8
Non-recurring adjustment to net revenue	15.8	2.4	-	-	-	18.2
Net revenue	310.8	146.6	16.1	2.5	-	476.0
Clean EBITDA	62.4	43.5	3.4	0.1	2.3	111.7
Profit (loss) before tax	70.0	40.3	(9.4)	0.1	(94.3)	6.7
Discontinued operations
Clean EBITDA	(11.1)	-	-	-	(13.6)	(24.7)
Profit (loss) before tax	(16.6)	2.9	-	-	(12.3)	(26.0)
Total operations
Net revenue - ongoing	295.0	144.2	16.1	2.5	-	457.8
Non-recurring adjustment to net revenue	15.8	2.4	-	-	-	18.2
Net revenue	310.8	146.6	16.1	2.5	-	476.0
Clean EBITDA	51.3	43.5	3.4	0.1	(11.3)	87.0
Profit (loss) before tax	53.4	43.2	(9.4)	0.1	(106.6)	(19.3)
Total assets	60.2	81.6	121.9	-	169.0	432.7

In 2007, the Group implemented geographic operational changes and was also able to undertake a further review of developments in the approaches that may be taken by tax authorities in major jurisdictions. As a consequence there was a reversal of a creditor in the Group's balance sheet, the charge for which had historically been deducted from revenue, resulting in a corresponding one-off credit of $18.2 million to revenue in 2007. This adjustment was non-cash and non-recurring in nature.

Geographical analysis of net revenue

The following table provides an analysis of the Group's net revenue before non-recurring adjustments by geographical segment:

Year ended 31 December	2008 $million	2007 $million
Germany	93.2	83.2
Canada	78.5	86.3
United Kingdom	48.4	55.7
Other	252.8	232.6
Net revenue - ongoing	472.9	457.8

  5. Share-based payments

Year ended 31 December	2008 $million	2007 $million
Charge relating to nil-cost options:
Issued pre-IPO	(1.3)	(0.9)
Issued post-IPO	(15.8)	(70.7)
Total charge relating to nil-cost options	(17.1)	(71.6)
FMV Plan	(4.3)	(7.1)
PSP Plan	(0.2)	(0.1)
Executive FMV Plan	(0.1)	(0.3)
Total charge relating to options	(21.7)	(79.1)
Bonita Trust charge* (see note 18)	-	(2.2)
Total charge	(21.7)	(81.3)

* In 2007 a corresponding credit of $2.2 million in respect of this charge was included in reserves. Of this $2.2 million, $2.0 million related to Discontinued operations and $0.2 million related to Continuing operations.

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

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

The charge associated with the nil-cost options decreased from $71.6 million in 2007 to $17.1 million in 2008, primarily reflecting the vesting of nil-cost options granted in earlier periods.

Details of the share option plans are shown in note 19.

6. Finance income and costs

Year ended 31 December	2008 $million	2007 $million
Interest income	4.7	3.0
Interest expense	(0.2)	(1.6)
Net finance income	4.5	1.4

7. Tax

Analysis of tax charge

Year ended 31 December	2008 $million	2007 $million
Tax - Continuing operations	(4.6)	7.2
Tax - Discontinued operations (see note 3)	-	53.7
Income tax (expense) credit for the year	(4.6)	60.9

In Gibraltar, the Group benefits from the exempt company regime. Taxation for other jurisdictions is calculated at the rate prevailing in the relevant jurisdiction.

There are no material deferred tax balances arising during the period.

The effective tax rate based on the total tax charge is a charge of 6.4% (2007: credit of 315.5%).  The effective tax rate for the period before share-based payments is 4.9% (2007: 4.9%).

 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 December	2008 $million	2007 $million
Profit before tax - Continuing operations	82.4	6.7
Loss before tax - Discontinued operations (see note 3)	(10.9)	(26.0)
Profit (loss) before tax	71.5	(19.3)
Tax at the weighted average tax rate of the Group being tax (expense) credit at the effective tax rate for the period	(3.5)	1.0
Effect of share-based payments	(1.1)	(4.0)
Effect of adjustment to the weighted average tax rate of the Group being tax credit at the effective tax rate for prior periods	-	63.9
Income tax (expense) credit	(4.6)	60.9

The Group's policy is to manage, control and operate Group companies only in the countries in which they are registered. At the period end there were Group companies registered in 12 countries including Gibraltar. However, the rules and practice governing the taxation of eCommerce activity are evolving in many countries. It is possible that the amount of tax that will eventually become payable may differ from the amount provided in the financial information.

The Group has received indemnities from the Principal Shareholders in connection with certain potential historic corporate taxation liabilities. The Directors consider 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.

 Factors that may affect future tax charges

The Gibraltar exempt company regime will be phased out by 31 December 2010; assessable income is taxed in Gibraltar at the mainstream corporation tax rate.

In India, the Group benefits from a tax holiday on income from qualifying activities until March 2010; under current rules assessable income is taxed in India at approximately 34%. A Minimum Alternative Tax of 11.33% applies. Fringe benefit tax is payable at approximately 34% on a proportion of specified benefits provided or deemed to have been provided to past and present employees.

8. Earnings per share ('EPS')

			2008			2007
Year ended 31 December	Continuing operations cents	Discontinued operations cents	Total cents	Continuing operations cents	Discontinued operations cents	Total cents
Basic EPS	19.2	(2.7)	16.5	3.5	6.9	10.4
Diluted EPS	18.8	(2.7)	16.2	3.3	6.7	10.0
Basic Clean EPS	24.9	(2.7)	22.2	16.1	(6.2)	9.9
Diluted Clean EPS	24.5	(2.7)	21.8	15.4	(6.2)	9.5

  Basic earnings per share

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

	2008	2007
Year ended 31 December	Total	Total
Basic EPS
Basic earnings ($ million)	66.9	41.6
Weighted average number of ordinary shares (million)	406.2	398.5
Basic earnings per ordinary share (cents)	16.5	10.4
Basic Clean EPS
Adjusted earnings ($ million)	90.3	39.5
Weighted average number of ordinary shares (million)	406.2	398.5
Adjusted earnings per ordinary share (cents)	22.2	9.9

Clean earnings per share

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

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

			2008			2007
Year ended 31 December	Continuing operations $million	Discontinued operations $million	Total $million	Continuing operations $million	Discontinued operations $million	Total $million
Earnings (loss) for the purposes of basic and diluted earnings per share being profit attributable to equity holders of the parent	77.8	(10.9)	66.9	13.9	27.7	41.6
Reorganisation costs (income)	1.7	-	1.7	-	(0.7)	(0.7)
Earnings (loss) before reorganisation items	79.5	(10.9)	68.6	13.9	27.0	40.9
Share-based payments	21.7	-	21.7	79.3	2.0	81.3
Non-recurring adjustment to revenue	-	-	-	(18.2)	-	(18.2)
Release of tax provision	-	-	-	(10.8)	(53.7)	(64.5)
Clean net earnings (loss)	101.2	(10.9)	90.3	64.2	(24.7)	39.5

Year ended 31 December	2008 $million	2007 $million
Weighted average number of shares
Number of shares in issue as at 1 January	411.5	400.0
Number of shares in issue as at 1 January held by the Employee Trust	(11.3)	(16.1)
Weighted average number of shares issued during the year	-	10.9
Effect of vested share options	6.0	3.7
Weighted average number of ordinary shares for the purposes of basic earnings per share	406.2	398.5
Effect of potential dilutive unvested shares	7.3	19.3
Weighted average number of ordinary shares for the purposes of diluted earnings per share	413.5	417.8

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

9. Intangible assets

	Other intangibles $million	Goodwill $million	Development expenditure $million	Total $million
Cost or valuation
As at 1 January 2007	128.6	171.1	-	299.7
Additions	29.0	37.6	6.4	73.0
As at 31 December 2007	157.6	208.7	6.4	372.7
Additions	1.5	-	2.8	4.3
As at 31 December 2008	159.1	208.7	9.2	377.0
Amortisation
As at 1 January 2007	71.7	76.1	-	147.8
Charge for the year	21.2	-	0.5	21.7
As at 31 December 2007	92.9	76.1	0.5	169.5
Charge for the year	20.7	-	2.3	23.0
As at 31 December 2008	113.6	76.1	2.8	192.5
Carrying amounts
As at 31 December 2007	64.7	132.6	5.9	203.2
As at 31 December 2008	45.5	132.6	6.4	184.5

The other intangible assets primarily include the customer lists, brands and other intangibles acquired in respect of Gamebookers and the acquisitions from EOL and IOG which are being amortised over their estimated useful economic lives of between 18 months and ten years.

  10. Property, plant and equipment

	Land and buildings $million	Plant, machinery and vehicles $million	Fixtures, fittings,  tools and equipment $million	Total $million
Cost or valuation
As at 1 January 2007	16.2	4.9	83.6	104.7
Exchange movements	0.1	0.2	0.8	1.1
Additions	0.1	0.2	8.8	9.1
Disposals	(1.8)	(0.2)	(3.4)	(5.4)
As at 31 December 2007	14.6	5.1	89.8	109.5
Exchange movements	(1.9)	(1.1)	(10.3)	(13.3)
Additions	0.3	1.6	6.5	8.4
Reclassified as assets held for sale (see note 12)	(7.4)	-	-	(7.4)
Disposals	-	(0.3)	(4.5)	(4.8)
As at 31 December 2008	5.6	5.3	81.5	92.4
Depreciation
As at 1 January 2007	2.4	2.5	45.2	50.1
Charge for the year	0.9	1.2	21.5	23.6
Disposals	-	-	(1.9)	(1.9)
	3
As at 31 December 2007	3.3	3.7	64.8	71.8
Exchange movements	(0.4)	(1.1)	(8.6)	(10.1)
Charge for the year	0.7	1.8	16.1	18.6
Disposals	-	(0.2)	(4.4)	(4.6)
As at 31 December 2008	3.6	4.2	67.9	75.7
Carrying amount
As at 31 December 2007	11.3	1.4	25.0	37.7
As at 31 December 2008	2.0	1.1	13.6	16.7

11. Commitments for capital expenditure

As at 31 December	2008 $million	2007 $million
Contracted but not provided for	1.6	0.4

12. Assets held for sale

As at 31 December	2008 $million	2007 $million
Cost	7.4	-
Exchange movement	(0.2)	-
Less: impairment	(1.3)	-
	5.9	-

Assets held for sale comprise residential properties that are no longer required by the Group and are currently being offered for sale. There are no associated liabilities. The Directors consider that the carrying amounts of assets held for sale approximate to their fair values, which are based on estimates of the present value of expected future cashflows.

  13. Short-term investments

As at 31 December	2008 $million	2007 $million
Cash on deposit for more than three months	1.6	5.4
Restricted cash	6.7	3.1
	8.3	8.5

As at 31 December 2008, restricted cash related to amounts held as interest-bearing security deposits.  As at 31 December 2007 restricted cash related to the remaining cash held in the Employee Trust payable to a former Director.

14. Provisions

As at 31 December	2008 $million	2007 $million
Provision at beginning of period	5.0	5.5
Charged to income statement	2.6	1.7
Credited to income statement	(5.6)	(2.2)
Provision at end of period	2.0	5.0

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

15. Contingent liabilities

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

Regulatory issues

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

Following the enactment of the UIGEA, the Group stopped taking any deposits from customers in the US and barred such customers from wagering real money on all of the Group's sites. Notwithstanding this, the actions taken by certain US regulatory authorities suggest that there remains a residual risk of an adverse impact arising from the Group having had customers in the US prior to the enactment of the UIGEA.

Furthermore, the Group is aware that certain US regulatory authorities have made enquiries of banks and other financial advisers that have had involvement with the internet gaming industry. Certain customary indemnities have been given by the Company to its advisers in connection with the Company's initial public offering in June 2005 and other assignments, and claims under such indemnities cannot be ruled out. The Group has not, however, received notice of any such claim to date.

On 4 June 2007, the Company announced that it had initiated discussions with the United States Attorney's Office for the Southern District of New York ('USAO').  These discussions have made good progress and the Company continues to negotiate the terms of a possible settlement with the USAO. However, the terms of any settlement have not yet been finalised and there can be no certainty that any agreement will be reached between the Company and the USAO.

The Board believes that further disclosure in relation to this matter including any disclosure of any range of potential settlement would be prejudicial to the Group's interests.

  Litigation

The Group is the defendant in a US action which is based on alleged collusion taking place on the Group's online poker tables. This action has been brought by two individual plaintiffs who are seeking class certification. The class seeking to be represented comprises poker customers in the US who from 1 January 2002 played real money games on the Group's sites.

The Group believes the action to be speculative, without merit and open to challenge on a number of grounds. The Group had not hitherto submitted to US jurisdiction and therefore the action had not been contested. In light of a number of factors, not all of which pertained at the time of the decision not to contest, the Group decided to seek to challenge the proceedings and accordingly sought and was granted permission to enter a defence and contest the action on the merits. The Group also applied to have the action dismissed, and the judge granted that order and dismissed the proceedings with prejudice on 30th September 2008. Subsequently, the plaintiffs have appealed the judge's decision.

The Board believes that the disclosure of a range of potential liability, if any, would be prejudicial to the 

Group's interests.

16. Share capital

	Issued and fully paid $	Number  million
Ordinary shares as at 31 December 2007 and 31 December 2008	103,866	411.5

Shares issued are converted into US dollars at the exchange rate prevailing on the date of issue. The issued and fully paid share capital of the Group amounts to $103,866 and is split into 411,519,385 ordinary shares. The share capital in UK sterling is £61,727.91 and translates at an average exchange rate of $1.6822 US dollars to £1 sterling.  As at 31 December 2008, 6,684,959 (2007: 11,222,665) 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 500 million ordinary shares with a par value of 0.015 pence each. All issued shares are fully paid. The holders of ordinary shares are entitled to receive dividends when declared and are entitled to one vote per share at meetings of the Company. The Trustee of the Employee Trust has waived all voting and dividend rights in respect of shares held by the Employee Trust. The share capital is shown on the basis that it has been in issue throughout the period. There were no changes to the authorised share capital during the period.

On 9 May 2008 the Company issued 8 additional ordinary shares in order to increase the total number of shares in issue to a number divisible by a factor of 10. At an Extraordinary General Meeting on 15 May 2008 an ordinary resolution was passed to consolidate the Company's 4,115,193,850 ordinary shares of 0.0015 pence each to 411,519,385 ordinary shares of 0.015 pence each with effect from 19 May 2008. The number of shares and earnings per share for prior periods have been restated as if the consolidation had taken place prior to 1 January 2007.

  17. Reserves

	Share premium $million	Capital contribution reserve $million	Retained earnings $million	Other  reserve $million	Currency reserve $million
As at 1 January 2007	0.4	32.5	794.5	(825.4)	0.2
Profit after tax attributable to equity holders of the parent	-	-	41.6	-	-
Issue of shares	66.0
Share-based payments	-	2.2	79.1	-	-
Exchange differences on translation of foreign operations	-	-	-	-	2.2
As at 31 December 2007	66.4	34.7	915.2	(825.4)	2.4
Profit after tax attributable to equity holders of the parent	-	-	66.9	-	-
Share-based payments	-	-	21.7	-	-
Exchange differences on translation of foreign operations	-	-	-	-	(2.7)
As at 31 December 2008	66.4	34.7	1,003.8	(825.4)	(0.3)

Share premium is the amount subscribed for share capital in excess of nominal value. Capital contribution reserve is the amount arising from share-based payments made by The Bonita Trust and cash held by the Employee Trust. Retained earnings are the cumulative net gains and losses recognised in the consolidated income statement after the effect of share-based payments. In prior years the amounts arising from share-based payments made by the Group were shown in a separate reserve. Currency reserve represents the gains/losses arising on retranslating the net assets of overseas operations into US dollars.

The other reserve of $825.4 million is the amount arising from the application of accounting which is similar to the pooling of interests method, as set out in the Group's accounting policies. Under this method of accounting, the difference between the consideration for the controlling interest and the nominal value of the shares acquired is taken to other reserves on consolidation. As a result, the share capital and reserves reflect PartyGaming Plc's share capital and the retained earnings for each of the periods ended 31 December 2007 and 2008 and reflects the cumulative profits as if the current Group structure had always been in place.

18. Related parties

Principal Shareholders

Anurag Dikshit, Ruth Parasol DeLeon and Russ DeLeon are the ultimate controlling shareholders of the Group. During the period the Principal Shareholders, and corporate entities controlled by the Principal Shareholders, did not receive any remuneration in the form of salary, bonuses or consulting fees (2007: $nil).

The wife of a Principal Shareholder owns a property and it is leased to the Group's Indian subsidiary on an arm's length basis. Rentals paid during the year were $79,000 (2007: $61,000). In 2007 an increased security deposit of $33,375 was paid.

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

The Principal Shareholders have also given certain indemnities to the Group.

Bonita Trust

The Bonita Trust was established in Gibraltar in 2004 in effect by the Group's Principal Shareholders to benefit the communities where the Group and its employees and service providers operate. The Bonita Trust is operated by an independent professional trustee. The Bonita Trust has philanthropic objectives and supports medical, cultural and educational programmes, principally directed to benefit the communities of Gibraltar, India and the UK. In addition, employees of PartyGaming and their families are a beneficiary class of The Bonita Trust.

In December 2006 and subsequently, The Bonita Trust made or committed to make payments to certain individuals that were employed or had previously been employed by the Group. These payments were made independently of the Group and were over and above the amounts that the Board had already determined should be paid by the Group to those employees and former employees. However, as these payments were based primarily on the Company's share price, the Board considers these to fall under the criteria for Share-based Payments under IFRS 2. As a result, the income statement for the year ended 31 December 2007 included a charge totalling $2.2 million (of which $2.0 million related to Discontinued operations) as if such amounts had been paid by the Group itself. A corresponding amount was recorded as a capital contribution in the Group's balance sheet. No further commitments were made during the year ended 31 December 2008.

The Bonita Trust regularly makes donations and other payments in respect of its other objectives. Disclosure of the existence of such payments has been made as it is possible that the Group's name may be linked with them.  It is emphasised that neither The Bonita Trust nor any person or entity connected with The Bonita Trust sought any advice from the Group, its Directors or key management in deciding whether these payments should be made. In addition, none of the payments were made in respect of any obligations incurred, or services received by the Group, nor did they fall within the scope of IFRS 2 Share-based Payments. Consequently, no entries have been made in the Group's financial information in respect of these payments.

Directors and key management

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

Year ended 31 December	2008 $million	2007 $million
Short-term benefits	16.4	18.0
Share-based payments	14.7	63.0
	31.1	81.0

At the year end an aggregate balance of $1.4 million (2007: $0.3 million) was due to Directors and key management.

The Group's subsidiaries continued to provide the following property arrangements during the period:

 

- the former Chief Executive Officer had two furnished properties available for 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 former Chief Executive Officer had an additional property available for his use at fair rental value, but he did not avail himself of the property and the property has been leased to other employees and third parties at fair rental value.

In 2007 unfurnished property was leased to the Group Finance Director at an annual lease rental of £44,400 ($84,000), which the Directors believe was the fair rental value of the property.  With the approval of the Company's shareholders this property was sold at fair market value of £1.2 million ($2.4 million) to the Group Finance Director on 25 May 2007.

The Group purchased telecommunication and utility services of $5.9 million (2007: $5.0 million) from companies for whom a Board member is a Director on an arm's length basis, with amounts owed at 31 December 2008 of $0.3 million (2007: $0.2 million).

The Group made affiliate payments of less than $1,000 (2007: $nil) to a company for whom a Board member is a Director on an arm's length basis, with amounts owed at 31 December 2008 of less than $1,000 (2007: $nil).

On 1 February 2008, the Group paid the final element of the consideration due to Trident Gaming Plc in respect of the acquisition of the business and assets connected with the Gamebookers.com website. This amounted to Euro 21.0 million and total interest of Euro 1.3 million. John O'Malia, former Managing Director, was the former CEO of Gamebookers and received Euro 2.1 million of the total consideration. 

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

Certain Directors and certain key management were granted nil-cost options under service contracts which were granted under a Group share option plan (see note 19).

19. Share options

As disclosed in note 5, the Group has adopted and granted awards under the Nil-Cost Plan, FMV Plan, PSP Plan and Executive FMV Plan as a reward and retention incentive for employees of the Group, including the Executive Directors (the 'Participants'). The Group has used the binomial options pricing model. An appropriate discount has been applied to reflect the fact that dividends are not paid on options that have not vested or have vested and have not been exercised.

Year ended 31 December 2008	Nil-Cost Plan Number million	FMV Plan Number million	PSP Plan Number million	Executive FMV Plan Number million
Outstanding at beginning of period	9.0	7.3	0.4	0.2
Shares over which options granted during the period	2.3	17.5	1.5	0.2
Shares in respect of options lapsed during the period	(0.6)	(3.8)	(0.2)	(0.1)
Exercised during the period	(4.7)	-	-	-
Outstanding at end of period	6.0	21.0	1.7	0.3

Year ended 31 December 2007	Nil-Cost Plan Number million	FMV Plan Number million	PSP Plan Number million	Executive FMV Plan Number million
Outstanding at beginning of period	17.0	-	-	-
Shares over which options granted during the period	0.6	7.9	0.4	0.2
Shares in respect of options lapsed during the period	(2.6)	(0.6)	-	-
Exercised during the period	(6.0)	-	-	-
Outstanding at end of period	9.0	7.3	0.4	0.2

Terms and conditions

Nil-Cost Plan

Options granted under this plan during the period generally vest in instalments over a four to five-year period. There are no performance conditions attached to options issued by the Group. 

FMV Plan

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

 

PSP Plan

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

Executive FMV Plan

These options vest subject to the growth in the Company's Clean Earnings per share equalling or exceeding 15% per annum in the three-year period from commencing on either 1 January 2007 or 1 January 2008.

Outstanding share options issued under the FMV Plan and Executive FMV Plan have been granted at exercise prices between 155.0 pence and 457.5 pence (2007: between 282.5 pence and 457.5 pence). 

  

Glossary and definitions

'Active player days'	aggregate number of days in the given period in which active players have contributed to rake and/or placed a wager. This can be calculated by multiplying average active players by the number of days in the period
'Affiliates'	third-party online or offline marketers who drive traffic to PartyGaming's gaming sites for a flat fee or on a revenue share basis
'Attrition'	the ratio of real money sign-ups which are active during the period. The measure indicates the retention profile of the players
'Average active players' or 'Daily average players'	the daily average number of players who contributed to positive rake and/or placed a wager in the given period. This can be calculated by dividing active player days in that period, by the number of days in that period
'CFD'	Contract for difference
'Clean EBITDA/EPS'	EBITDA/EPS before reorganisation income and costs, non-cash charges relating to share-based payments, non-recurring adjustment to revenue and release of tax provision
'Company' or 'PartyGaming'	PartyGaming Plc
'Discontinued operations'	operations located physically outside of the US but which relate to customers in the US that were no longer accepted following the enactment of the UIGEA on 13 October 2006
'EBITDA'	earnings before interest, tax, depreciation and amortisation
'EMEA'	Europe, the Middle East and Africa
'EOL'	Empire Online Limited
'Employee Trust'	the PartyGaming Plc Shares Trust, a discretionary share ownership trust established by the Company
'Gamebookers'	www.gamebookers.com, one of the Group's sports betting websites
'Group' or 'PartyGaming Group'	the Company and its consolidated subsidiaries and subsidiary undertakings from time to time or, prior to 7 February 2005, PartyGaming Holdings Limited (formerly Headwall Ventures Limited) and its consolidated subsidiaries and subsidiary undertakings
'IAS'	International Accounting Standards
'IOG'	Intercontinental Online Gaming Ltd
'IFRS'	International Financial Reporting Standards
'KPIs'	Key Performance Indicators, such as active player days and yield per active player day
'PartyBets'	www.partybets.com, one of the Group's sports betting websites that is also fully integrated into the Group's shared wallet
'PartyBingo'	www.partybingo.com, the Group's principal bingo website
'PartyCasino'	www.partycasino.com, the Group's principal casino website
'PartyGammon'	www.partygammon.com, the Group's backgammon website
'PartyMarkets'	www.partymarkets.com, the Group's financial spread betting and CFD trading website
'PartyPoker'	www.partypoker.com, the Group's principal poker website
'Principal Shareholders'	Anurag Dikshit (holding through Crystal Ventures Limited), James Russell DeLeon (holding through Stinson Ridge Limited), Ruth Parasol DeLeon (holding through Emerald Bay Limited) and Vikrant Bhargava (holding through Coral Ventures Limited)
'Real money sign-up' or 'sign-up'	a new player who has registered and deposited funds into an account with the company. Customers are categorised between lines of business according to where they first register on the gaming site to address the issues posed by shared wallets
'UIGEA'	The Unlawful Internet Gambling Enforcement Act that was enacted in the US on 13 October 2006
'Unique active player'	a player who has contributed to rake or placed a wager in the period
'Yield per unique active player'	net gaming revenue (net of customer bonuses and other fair value adjustments to revenues) divided by the number of unique active players in the period
'Yield per active player day'	net gaming revenue (net of customer bonuses and other fair value adjustments to revenues) divided by the number of active player days in the period

ENDFR GUUBAWUPBPUU

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