Interim Results

29th Aug 2007 07:01

PartyGaming Plc29 August 2007 29 August 2007 PartyGaming Plc Interim results for the six months to 30 June 2007 Financial Summary 2007 2006$ million Continuing Discontinued Continuing Discontinued Operations Operations# Total Operations Operations# TotalRevenue Poker 140.5 - 140.5 129.5 373.2 502.7 Casino 64.6 - 64.6 20.3 138.9 159.2 Sports Betting 6.5 - 6.5 - - - Emerging Games 0.9 - 0.9 - - -Total Revenue 212.5 - 212.5 149.8 512.1 661.9 Clean EBITDA* Poker 22.6 (11.1) 11.5 22.2 264.0 286.2 Casino 15.2 - 15.2 7.3 87.5 94.8 Sports Betting 0.7 - 0.7 - - - Emerging Games 0.2 - 0.2 - - - Unallocated Corporate (1.8) (7.9) (9.7) (1.0) - (1.0)Total Clean EBITDA* 36.9 (19.0) 17.9 28.5 351.5 380.0 Operating (Loss) profit (32.2) (15.1) (47.3) (13.6) 332.9 319.3(Loss) profit before Tax (32.0) (15.1) (47.1) (12.4) 332.9 320.5(Loss) profit after Tax (35.5) (15.1) (50.6) (25.2) 323.3 298.1 Basic EPS (cents) (0.9) (0.4) (1.3) (0.7) 8.5 7.8Clean EPS* (cents) 0.3 (0.5) (0.2) 0.2 8.6 8.8 # Operations located physically outside of the US but which relate to UScustomers that were no longer accepted following the passing of the UnlawfulInternet Gambling Enforcement Act on 13 October 2006 Highlights • Continuing revenue up 42% to $212.5m (2006: $149.8m) reflecting strong growth in Europe, Middle East and Africa ("EMEA"); total revenue of $212.5m (2006: $661.9m) • Continuing Clean EBITDA* up 29% to $36.9m (2006: $28.5m); total Clean EBITDA of $17.9m (2006: $380.0m) • Continuing Clean EPS* of 0.3 cents (2006: 0.2 cents); total Clean loss per share of 0.2 cents (2006: EPS 8.8 cents); Continuing Basic loss per share of 0.9 cents (2006: loss per share of 0.7 cents); total Basic loss per share of 1.3 cents (2006: EPS 7.8 cents) • Record number of non-US real money sign-ups that increased by 83% to 403,713 (2006: 220,761) • Acquisitions of EOL and IOG completed in January 2007 • Trading since 30 June 2007 has been in line with management's expectations. Gross revenue in the 4 weeks to 28 July 2007 averaged $1.4m per day and in the 4 weeks to 26 August 2007 also averaged $1.4m per day. $ refers to US Dollars throughout * EBITDA / EPS before reorganisation costs and charges relating to share-basedpayments (see reconciliation of Clean EBITDA to operating profit below). Commenting on today's results announcement, Mitch Garber, PartyGaming CEO, said: "The Group has delivered a solid performance in the first half of 2007 withexcellent top line growth and new player sign-ups. We continue to execute ourstrategy through growing our player base, localisation of the customer offer andbroadening our product suite. "In the four weeks ended 26 August 2007, average gross daily revenue was$1,418,000, a 1% decrease over July, but reflecting the peak holiday period inEurope. In poker, new player sign-ups averaged 1,138 per day and there were onaverage 59,000 active players per day, generating average gross daily revenue of$854,000. In casino, average gross daily revenue was $501,000 per day while insports betting, gross win per day was $56,000 per day. "Over the coming weeks and months we expect to announce a number of furtherimportant business alliances with leading companies around the world that willhelp us to promote and grow our business. While the important fourth quarterlies ahead, the Board remains confident about the Group's prospects for the fullyear." Contacts: PartyGaming Plc On 29 August 2007: +44 (0) 207 337 0100Peter Reynolds, Director of Investor RelationsJohn Shepherd, Director of Corporate Communications Financial Dynamics +44 (0) 20 7831 3113Edward Bridges / Juliet Clarke Analyst meeting, webcast, dial-in and conference call details: Wednesday 29August 2007 There will be an analyst meeting for invited UK-based analysts at DresdnerKleinwort, 30 Gresham Street, London, EC2P 2XY starting at 9.30am BST. Therewill be a simultaneous webcast and dial-in broadcast of the meeting. Toregister for the live webcast, please pre-register for access by visiting theGroup website (www.partygaming.com). Details for the dial-in facility are givenbelow. A copy of the webcast and slide presentation given at the meeting willbe available on the Group's website later today. In addition, there will be an interactive conference call for internationalinvestors and analysts starting at 2.30pm BST, details of which are set outbelow. An interview with Mitch Garber, Chief Executive Officer and Martin Weigold,Group Finance Director, in video/audio and text will also be available from7.00am BST on 29 August 2007 on: http://www.partygaming.com and on http://www.cantos.com. Dial-in details to listen to the analyst presentation: 29 August 20079.20 am Please call +44 (0) 20 7806 1961 (UK)Title PartyGaming Interim Results9.30 am Meeting starts A recording of the meeting will be available for a period of seven days from 29August 2007. To access the recording please dial the following replay telephonenumber: Replay telephone number +44 (0) 20 7806 1970Replay passcode: 4541454 Conference call: Wednesday 29 August 2007 For international analysts and investors there will also be an opportunity toput questions to Mitch Garber, Chief Executive Officer, and Martin Weigold,Group Finance Director, by way of a conference call. The details of the callare as follows: 2.20 pm Please call +44 (0)1452 562 815(UK)2.30 pm Conference call starts A recording of the conference call will be available for a period of seven daysfrom 29 August 2007. To access the recording please dial the following replaytelephone number: UK Replay telephone number +44 (0) 1452 550 000UK Replay passcode: 12151140 All times are British Summer Time. About PartyGaming Plc PartyGaming Plc is the world's leading listed online gaming company. Founded in1997, the Group is a constituent of the FTSE 250 share index with its shareslisted on The London Stock Exchange under the ticker: PRTY. In the six monthsto 30 June 2007, PartyGaming's continuing operations generated revenues of$212.5m and Clean EBITDA of $36.9m. The Group has over 1,100 employees locatedin Gibraltar, India, the United Kingdom, Bulgaria and Israel. PartyGaming's principal brands are PartyPoker.com, one of the world's largestonline poker rooms, EmpirePoker.com, PartyCasino.com, PartyBingo.com,PartyGammon.com, PartyBets.com and Gamebookers.com. None of the Group's sitesaccept real money customers located in the US. PartyGaming is regulated and licensed by the Government of Gibraltar and by theAlderney Gambling Control Commission and is certified by GamCare as aresponsible gaming operator. For more information, please visitwww.partygaming.com. Business Review Introduction PartyGaming Plc is the world's leading listed online gaming company.PartyGaming offers a broad range of different games and owns some of the biggestand best known brands in online gaming, including PartyPoker.com, one of theworld's largest online poker rooms, EmpirePoker.com, PartyCasino.com,PartyBingo.com, PartyGammon.com, PartyBets.com and Gamebookers.com. The Group's financial performance in 2006 was impacted by the enactment of theUnlawful Internet Gambling Enforcement Act (the "UIGEA") in the United Statesand the Group's decision to terminate immediately all real money games tocustomers in the US. Despite the substantial impact of the UIGEA on the Group'soperations, PartyGaming's non-US facing business continued to grow strongly inthe first half of 2007. Results - Group (including Discontinued operations) Total revenue was down 68% to $212.5m (2006: $661.9m) due to the termination ofall real money games to players based in the US from 13 October 2006. However,the underlying performance by the Continuing operations was strong and showed a42% increase to $212.5m (2006: $149.8m). Total administrative expenses decreased from $154.2m to $150.7m, primarily dueto a fall in transaction fees driven by lower numbers of deposits andwithdrawals associated with the Discontinued operations. This was partiallyoffset by higher share-based payments and amortisation charges. The increasedshare-based payments charge relates to an additional allocation of nil-costoptions to retain key employees at the end of 2006 and the introduction of a newfair market value ("FMV") option scheme that was introduced on 10 May 2007.This charge is non-cash and non-dilutive for shareholders. Amortisation costsincreased following the acquisition of the business and assets of Gamebookers inAugust 2006 and Empire Online Limited ("EOL") and Intercontinental Online GamingLtd ("IOG") in January 2007. Total distribution expenses fell by 41% to $111.2m (2006: $187.4m). Theeffective closure of the US market during the fourth quarter of 2006 resulted ina substantial year on year reduction in marketing expenditure, principallycustomer acquisition and retention costs as well as affiliate spend. Customerbad debts increased for the Continuing operations, reflecting an increase indeposit volumes as well as a decrease in the proportion of deposits made usingewallets that tend to have lower rates of default than other payment mechanisms.Webhosting and technical service costs increased due to the acquisitions ofGamebookers, EOL and IOG as well as the opening of a server hosting and disasterrecovery site in The Channel Islands. A number of costs that were previouslyabsorbed by the Discontinued operations are now having to be absorbed by theContinuing operations alone and this has impacted margins. As a percentage ofrevenue, total distribution expenses increased from 28.3% to 52.3%. Ashighlighted in the Q1 2007 Key Performance Indicators, this increase reflectedthe continued expansion into new geographic markets and a large rise in theproportion of affiliate-driven player sign-ups coming through CPA1 and hybrid2arrangements. 1 Cost per acquisition ("CPA") affiliate sign-ups are those where the Companypays a fixed fee to the affiliate for each real money sign-up whereas theassociated revenue benefit is received over the lifetime of the player. Thiscontrasts to revenue share affiliate signups where a % of the revenue generatedby the player (minus certain deductions) is paid to the affiliate over thelifetime of the player. 2 Hybrid affiliate sign-ups are those where the Company pays a fixed fee and arevenue share to the affiliate for each real money sign-up. Discontinued operations incurred a loss at the Clean EBITDA level of $19.0m.This primarily reflected commitments made in respect of a product placementagreement with Harrah's License Company LLC for The World Series of Poker, aswell as legal fees associated with the Group's ongoing discussions with the USDepartment of Justice ("DoJ"). Following the enactment of the UIGEA, the Groupsought to renegotiate the product placement agreement in order to amend thescope and cost of the agreement, specifically looking to focus on non-US marketsonly. However, mutually acceptable commercial terms could not be agreed betweenthe parties and so the contract remained in place resulting in a charge beingincurred in 2007. The Group is discussing with its insurers reimbursement ofcertain fees incurred by the Group for legal advice in connection with theongoing discussions with the DoJ. However, as the policy allowing the recoveryof these costs has not yet been formally triggered, these costs have beenexpensed in full during the period. Total Clean EBITDA was $17.9m (2006: $380.0m), substantially below that achievedin the previous year and almost entirely due to the absence of revenues from theUS in the first half of 2007. The Group incurred an operating loss of $47.3m inthe period (2006: operating profit $319.3m) reflecting lower Clean EBITDA and anincreased share-based payments charge. The loss before tax was $47.1m (2006:profit before tax $320.5m) and the loss after tax was $50.6m (2006: profit aftertax $298.1m). Total Clean loss per share was 0.2 cents (2006: EPS 8.8 cents) and basic lossper share was 1.3 cents (2006: EPS 7.8 cents). Consistent with the Group's dividend policy outlined at the time of the passingof the UIGEA, the Board has not declared an interim dividend. The table below provides a reconciliation of the movements between Clean EBITDAand operating (loss) profit. Reconciliation of Clean EBITDA to operating profit Six months to 30 June 2007 2006 $m $mClean EBITDA* - Continuing 36.9 28.5Depreciation (11.3) (8.2)Amortisation (10.8) (1.9)Share-based payments (47.0) (32.0)Operating loss from Continuing operations (32.2) (13.6)Operating (loss) profit from Discontinued operations# (15.1) 332.9Total operating (loss) profit (47.3) 319.3 Continuing Clean earnings per share* (cents) 0.3 0.2Continuing Basic loss per share (cents) (0.9) (0.7)Total Clean (loss) earnings per share* (cents) (0.2) 8.8Total Basic (loss) earnings per share (cents) (1.3) 7.8 * EBITDA / EPS before reorganisation costs charges relating to share-basedpayments # After crediting reorganisation costs of $3.9m (2006: $nil), chargingshare-based payments of $nil (2006: $7.4m) and depreciation and amortisation of$nil (2006: $11.2m) to Discontinued operations To provide a clearer picture of PartyGaming's Continuing operations and incompliance with relevant accounting standards, the financial results for the sixmonths to 30 June for both 2007 and 2006 have been segmented between Continuingoperations (comprising revenues and costs associated with customers locatedoutside the US) and Discontinued operations (operations located physicallyoutside of the US but which relate to customers in the US that were no longeraccepted following the enactment of the UIGEA on 13 October 2006). While fulldetails of the consolidated performance of Continuing and Discontinuedoperations are contained in the financial information and the accompanyingnotes, all references to financial performance or key performance indicatorsthroughout this document refer to the continuing non-US facing business only,unless expressly stated otherwise. Results - Continuing operations The Continuing operations again delivered a strong performance in the first halfof 2007 with revenue up 42% to $212.5m (2006: $149.8m). This was despite thedecision to cease offering real money games in a number of territories duringthe period such as Turkey, which passed legislation prohibiting certain forms ofonline gaming in the first quarter of this year. The acquisitions of EOL andIOG were completed in January 2007 and contributed a total of $17.4m to revenue. Despite the impact of the UIGEA and the consequent loss of a number of highvalue players to sites that continue to accept players based in the US, CleanEBITDA grew by 29% to $36.9m. Within this, the acquisitions of EOL and IOGgenerated $4.8m of Clean EBITDA. While the Group's casino business enjoyed the largest growth year-on-year, evenbefore the contributions from EOL and IOG, Poker remained the largest individualbusiness segment within Continuing operations. In the six months to 30 June2007, Poker represented 66% of revenues (2006: 86%) and 61% of Clean EBITDA(2006: 78%). PartyPoker.com remained the major force behind the Group's pokerbusiness and, despite the cannibalisation effect of the rapid growth in casinorevenues, continuing poker revenue still grew by 8% to $140.5m (2006: $129.5m),driven by strong growth in new player sign-ups, partially offset by themigration of a number of high value players to sites that continue to acceptplayers based in the US. Clean EBITDA from poker increased by 2% to $22.6m(2006: $22.2m), the rate of growth being held back by increased distributioncosts associated with CPA and hybrid affiliate-driven new player sign-ups in thefirst quarter of 2007. Under International Financial Reporting Standards, thecost of these players is expensed in the period rather than being spread overthe player's life. The overall poker performance benefited marginally fromacquisitions, which generated $1.9m of revenue in the period (2006: nil). Our strategy to broaden the product base continued and the casino businessenjoyed strong growth in the period with revenue up 218% to $64.6m (2006:$20.3m) and Clean EBITDA up by 108% to $15.2m (2006: $7.3m). The primarydrivers of this growth were strong growth in the number of active players and inspend per player, as well as the acquisitions of EOL and IOG in January 2007. Sports Betting, comprising Gamebookers.com which was acquired in August 2006,and PartyBets.com which was rolled out in November 2006, generated revenue of$6.5m (2006: $nil) and Clean EBITDA of $0.7m (2006: $nil). The Group's Continuing Clean EBITDA margin was held back by the major investmentin affiliate-driven sign-ups that resulted in only a minimal contribution in thefirst quarter followed by a very strong recovery in the seasonally weak secondquarter. As a result, Continuing EBITDA margin fell to 17.4% compared with19.0% for the same period in 2006. Regulation The Group is continuing to manage its operational risk and regulatory compliancethrough a strict and rigorous assessment process. Since the beginning of 2007there have been several important regulatory developments in the US, the EU andother jurisdictions around the world. While PartyGaming no longer acceptsdeposits or bets from players located in the US, developments in the largestonline gaming market in the world are important because of their possibleimplications for the Group's prospects and because of the potentialramifications for other international jurisdictions. While certain online gaming companies have chosen to continue to offer realmoney games to customers in the US, immediately upon the enactment of the UIGEAon 13 October 2006, PartyGaming stopped customers in the US from playing ormaking deposits on any of the Group's real money sites. Over the past fewmonths, a number of new bills have been introduced in the US that together seekto establish a regulatory framework for online gaming in the US under whichoperators would be licensed, regulated and taxed in the US. The prospects forthose measures are uncertain. Meanwhile, the World Trade Organisation ("WTO") has found that the USlegislative position on internet gambling is in violation of US tradecommitments. The US is seeking to withdraw those commitments and is now thesubject of a $3.4 billion claim from Antigua and Barbuda and other, yet to benotified claims under Article 21 of the General Agreement on Trade and Servicesfrom several other territories, including the EU. On 4 June 2007 the Group announced that, in light of recent actions taken by USlaw enforcement agencies following enactment of the UIGEA, it had initiateddiscussions with the United States Attorney's Office for the Southern Districtof New York. The Group remains in the process of voluntarily responding to arequest for information issued by that office. It remains too early to assessthe likelihood of any particular outcome of these discussions. In Europe, the EU is continuing to press ahead with proceedings against severalMember States that are deemed to be in breach of European Community law,specifically Article 49 of the Treaty of Rome: the freedom to provide andreceive services within the EU without discrimination on grounds of nationality.Countries that are under investigation by the EU in this area are Austria,Denmark, Finland, France, Germany, Greece, Holland, Hungary, Italy and Sweden.In addition, a number of these countries, namely Denmark, Finland, France,Hungary and Sweden have each been issued with reasoned opinions from the EUexplaining why they are deemed to be in breach of European Community law.Following receipt of such an opinion, if the Member State fails to address theissues raised, the European Commission may refer the matter to the EuropeanCourt of Justice, following which, if found in breach of EC treaty commitments,the countries concerned could be fined by the EU on a daily basis for continuednon-compliance. There have also been a number of important developments in several Member Stateswithin the EU. In France, la Cour de Cassation (the French Supreme Court)recently referred the case of Malta-based online betting company, ZeTurf back tothe Paris Appeal Court to examine whether those restrictions on betting inFrance comply with EU law, in particular the limited grounds on which theoffering of gambling services between Member States can be restricted as amatter of EU law. In March 2007, the EU informed the German government that itsdraft State Lottery Treaty was in breach of EU law. It is unclear, however,what action the German authorities propose to take in response. Also in March2007, the European Court of Justice issued its judgment in the Placanica case,which deals with the compatibility of the Italian gambling legislation with EUlaw and concluded that, inter alia, where the prohibition to offer gamblingservices was found contrary to EU law, a Member State could not apply criminalsanctions to an activity which contravened this prohibition. In parts of Asia, some governments are examining the possibility of licensingand regulating land-based casinos. While there is no mention of a framework foronline gaming at the present time, such developments are nonethelessencouraging. Against this regulatory background, it is clear that online gaming is already ahugely popular leisure pursuit and is enjoyed by millions of adults around theworld. According to Global Betting and Gaming Consultants ("GBGC")1 the onlinegaming market is expected to grow from $15 billion in 2006 to $24.1 billion in2012, a compound annual growth rate of 8%. PartyGaming continues to believethat regulation can strike the right balance between providing adults with asafe and secure gaming environment online whilst ensuring protection forchildren and the vulnerable. What is also clear from the recent experience inthe US, is that prohibition only drives customers to seek alternative, lesstransparent sources of online games from businesses that are less likely toprovide the protection afforded by publicly-listed and regulated companies. 1 GBGC - May 2007 2007 business developments Despite the continuing shifts in the regulatory landscape and the day-to-daychallenges associated with this highly dynamic market, the Group has continuedto make solid progress on executing each of the four elements of the businessstrategy: growing the player base, localising the customer offer, broadening theproduct base and acting responsibly. During the first half of 2007, the Groupsigned-up a record number of new players and continued to diversify thegeographic mix of active players. The Group's fully functioning multi-currencycapability has been available since the end of March 2007, allowing customers tohold their client balances in dollars, euros or pounds sterling. In terms oflanguages, PartyPoker.com is now available in 13 languages while the pokerclient is fully functional in 9 languages. Our multi-lingual customer servicecapability is now based completely in Europe and is performing well with a totalof 59 full-time staff. We have added a number of new games and features to the product suite includinga range of new poker tournaments such as "Heads-Up Rematch" and "Sit & Go Replay" as well as a variety of new slots including "Graveyard Bash" and "Bust a Safe". We have also made some significant enhancements to the PartyCasino roulette product that has helped to improve the appeal of roulette to our customers, especially in Europe. PartyBingo is now available in a flash format, allowing players to enjoy this increasingly popular game without having to download software onto their PC. On responsible gaming, the Group was delighted to have again been awarded aGamCare certificate in May 2007 in recognition of our approach to and highstandards of responsible gaming. The Group continues to raise the standards ofits business practices and is one of the founding members of the European Gamingand Betting Association ("EGBA") that has established a demanding code ofconduct that is being adopted by all of its members. For further information onthe EGBA visit www.egba.eu. Building alliances with appropriate blue chip organisations around the worldcontinues to be a key part of the Group's strategy. Since 30 June 2007, theGroup has entered into a number of alliances that are expected to enhance theGroup's prospects. In the UK, over 70 official football club websites haveentered into an exclusive three-year arrangement with PartyGaming under whichthey will each promote the Group's Poker and Casino brands. Taking all of theseclubs' online adult members, this represents a potential audience of over 2.5million customers. The strength and liquidity of the Group's proprietary gaming platform andassociated infrastructure has opened up a variety of new and additional revenueopportunities in the form of white label gaming solutions for third parties. Inthe year-to-date, the Group has been busy developing a series of online gamingbrands for a major household name in the UK and it is expected that these willbe announced and launched before the end of the year. Each element of the Group's business strategy is being implemented by the threepillars of the business operations: sales and player marketing, technology andcustomer service. An update on developments within each of these areas duringthe first half of 2007 is provided below. 1. Sales and player marketing As indicated at the time of the first quarter trading update on 2 May 2007, theGroup has continued to add new players at an impressive rate. During the firstsix months of 2007 over 400,000 new real money non-US players were added to theGroup's shared wallet - an increase of 83% over the previous year. After aparticularly strong first quarter when over 244,000 new players were added andin line with the normal seasonal pattern, the rate of growth in the subsequentthree-month period slowed but still saw an average of 1,749 new player sign-upsper day being added to the system. Europe, Middle East and Africa ("EMEA")remains the most important region, representing 85% of total sign-ups during theperiod and poker remains the most popular entry point for new players. The Group's affiliate network continues to represent an important source of newplayer traffic. A large increase in the number of new players being signed upon CPA and hybrid deals during the first quarter of 2007 resulted in a sharpincrease in affiliate expenses as a proportion of revenue. During the secondquarter, the mix of players signed-up on a CPA/hybrid basis versus a revenueshare basis returned to previous levels. An analysis of the growth ininternational sign-ups, unique active players and consolidated active playerdays in each of our key international segments is provided below: Continuing Operations New player sign-ups (000) 2007 2006 % increaseEMEA1 342.4 147.8 132%Americas (non-US) 42.3 53.0 (20%)Asia Pacific 19.0 20.0 (5%) ------ ------Total 403.7 220.8 83% ------ ------ Unique active players (000) 2007 2006 % increaseEMEA1 608.8 239.7 154%Americas (non-US) 120.9 109.1 11%Asia Pacific 38.5 31.6 22% ------ ------Total 768.2 380.4 102% ------ ------ Active player days (m) 2007 2006 % increaseEMEA1 11.4 4.0 185%Americas (non-US) 2.5 2.3 9%Asia Pacific 0.6 0.4 50% ------ ------Total 14.5 6.7 116% ------ ------ 1 Europe, Middle East and Africa The total number of unique active players for the six months to 30 June 2007increased by 102% to 768,200 (2006: 380,400) with the average number of dailyplayers increasing by 115% to over 80,100. The Group continues to face strongcompetition from those sites that are still offering real money games tocustomers in the US and the Group has seen a modest reduction in its globalmarket share in poker since late February 2007. That said, the Group's marketing teams have continued to innovate and develop avariety of new channels through which to attract players to the PartyGamingplatform. Television remains an important medium and the Group now has accessto media assets totaling over 500 hours worth of programming which has been usedby 60 broadcasters in over 90 countries. In May 2007, coverage of thePartyPoker.com Premier League Poker tournament began to air on Channel 4 in theUK and has been very well received. In addition, the Group has entered into abroadcast arrangement with Channel 5 in the UK under which PartyGaming brandedevents and tournaments will be broadcast in the UK every Wednesday night.Elsewhere in Europe, the Group has entered into similar arrangements with anumber of national broadcasting companies with a view to continuing to drive newplayer sign-ups. 2. Systems and product development The Group's proprietary technology infrastructure and operating platform lie atthe very heart of the customer's experience. During the first half of 2007,there were a number of significant enhancements and additions to the Group'ssystems with a total of 150 individual system changes having been completedsuccessfully. The two most significant projects completed during the first halfwere the launch of multi-currency and the integration of Gamebookers andPartyBets on to a single platform. The successful launch of multi-currency functionality at the end of March 2007represented the culmination of months of work and involved every aspect of theGroup's business (payments, customer service and marketing) and all of the coreproducts (poker, casino, sports betting and emerging games). As poker remainsthe Group's most popular game and is only played in US dollars, this is likelyto remain the most important currency for the time being. Following the acquisition of Gamebookers in August 2006 and the subsequentlaunch of PartyBets on the integrated Party-branded systems platform on 15November 2006, the Group has been developing a single infrastructure to manageboth Gamebookers and PartyBets simultaneously without the need to run two sportsbooks. This was completed in June 2007 and has enabled a 200% increase in thenumber of in-game betting options that can be offered at any one time and shouldgreatly improve the day to-day running of the sports betting operation. In addition to the advantage of having a dedicated team of software engineersbased in Gibraltar and Hyderabad in India to manage the ongoing development ofthe Group's systems, this pool of talent also acts as a constant source oftechnology innovation and process improvement. During the remaining few monthsof 2007, the team will continue to execute the delivery of new features, newgames and processes to enhance the overall customer experience, as well asprovide a number of white label services to new business alliances of the Group. 3. Customer service The decision to establish a multi-lingual customer service operation in Europein 2006 is now a reality. Following the launch of multi-lingual versions of theGroup's games over the past 12 months and in addition to a total of 100full-time English-speaking customer service support staff, on 30 June the Grouphad a total of 59 full-time multi-lingual customer service operators providingdedicated local language support in six languages (English, German, French,Russian, Spanish and Portuguese). Approximately 14% of the 370,000 customercontacts received during the first half were conducted in languages other thanEnglish. As the volume of customers taking advantage of the multi-lingualoffering expands so will the requisite number of support staff. The Group willcontinue to manage seasonal and intra-day variations in the number of contactsthrough the use of shift work and natural employee turnover. A dedicatedmulti-lingual VIP team is now focused on looking after the Group's highest valueplayers and offers them a personal service to ensure that these importantcustomers remain loyal to PartyGaming. Management Lars Berg, a non-executive director of the Group since before the IPO in June2005 stepped down from the Board on 4 May 2007 to pursue his other businessinterests. Lars has been a valued member of the Board and we wish him everysuccess for the future. In his place we are delighted to have been able torecruit Tim Bristow as an independent non-executive director. Tim is currentlythe Chief Executive Officer of Gibtelecom Limited, Gibraltar's primarytelecommunications provider, and joined the Board on 4 May 2007. Formerly, Timwas the Financial and Development Secretary for the Government of Gibraltar andpreviously a Director at the UK National Audit Office. Acquisitions The Group completed two acquisitions during the first half of 2007 for anaggregate consideration of $66.6m in cash and shares, of which $12.5m remainscontingent on certain conditions being fulfilled on or before July 2008. Asummary of the acquisitions completed during the period is provided below: Date completed Business and assets acquired Description Consideration19 January 2007 Various websites from Empire Online Limited Casino and poker $48.0m 19 January 2007 Various websites from Intercontinental Online Gaming Limited Casino and bingo $18.6m Dividend The Board believes that in the current environment it would be imprudent to payan interim dividend. The Board will continue to review the appropriate dividendpolicy for the Group going forward. Future developments The Group has a number of new developments that are expected to be completedbefore the end of the year. The Group will commence significant new online andoffline marketing campaigns to accompany the formal launch of PartyBets andPartyBingo, both of which are expected to take place during the second half,together with the launch of a number of white label products for one of the UK'sleading household brands. While EMEA continues to be the Group's most significant single region and islikely to remain so for some time, the Group continues to invest in developingnew markets around the world. Recognising the importance of Asia as a potentialnew market, during the fourth quarter of 2007 the Group will be establishing arepresentative office based in the region. By having a presence on the ground,the Group will be better placed to establish appropriate business partnershipsin the region and ultimately exploit this large and as yet untapped businessopportunity. Current trading and outlook In the 4 weeks ended 29 July 2007, average gross daily revenue was $1,436,000.In poker, new player sign-ups averaged 1,192 per day and there were on average60,000 active players per day, generating average gross daily revenue of$900,000. In casino, average gross daily revenue was $486,000 per day while insports betting, gross win per day averaged $44,000 per day. In the following 4 weeks, ended 26 August 2007, average gross daily revenue haddecreased marginally to $1,418,000, reflecting the influence of the key holidayperiod in Europe. In poker, new player sign-ups averaged 1,138 per day andthere were on average 59,000 active players per day, generating average grossdaily revenue of $854,000. In casino, average gross daily revenue had increasedto $501,000 per day while in sports betting, gross win per day had increased to$56,000 per day. The Group has made a solid start to 2007 in an environment where the regulatoryand political landscape is continuing to shift. Whilst regulatory uncertaintiescontinue in a number of territories, the Group has the resources and skills toexecute its business strategy and the Board remains confident about the Group'sprospects for the full year. SUMMARY OF RESULTS Six months to 30 June Revenue Clean EBITDA* 2007 2006 2007 2006 $m $m $m $m Poker 140.5 129.5 22.6 22.2Casino 64.6 20.3 15.2 7.3Sports Betting 6.5 - 0.7 -Emerging Games 0.9 - 0.2 -Unallocated Corporate - - (1.8) (1.0)Total Continuing operations 212.5 149.8 36.9 28.5Discontinued operations - 512.1 (19.0) 351.5Total 212.5 661.9 17.9 380.0 * EBITDA before reorganisation costs and charges relating to share-basedpayments (see reconciliation of clean EBITDA to operating profit above) Continuing revenue was up 42% over the previous year, reflecting strong growthin new player sign-ups and the number of active players, partially offset bylower yields. The half year results for 2007 included first time contributionsfrom EOL and IOG. Whilst poker revenue grew strongly, particularly in Europe,the largest year-on-year increase was in the casino business that benefited froma full six-month contribution from PartyCasino.com, as well as the acquisitionof several casino websites from EOL and IOG in January 2007. Clean EBITDA fromContinuing operations increased by 29% to $36.9m, also driven by the stronggrowth in casino. The Clean EBITDA margin for the continuing business was 17.4% (2006: 19.0%).The loss of a number of high value players following the enactment of the UIGEAas well as a marked increase during the first quarter of 2007 in the number ofnew player sign-ups coming via CPA and hybrid affiliate deals meant that CleanEBITDA margins were lower than the comparable period in the previous year.However, a strong performance in casino helped to mitigate these factors. BothEOL and IOG made valuable contributions in the period adding $17.4m and $4.8m torevenue and Clean EBITDA respectively. Clean earnings per share from Continuing operations was 0.3 cents (2006: 0.2cents). Total Clean loss per share was 0.2 cents per share (2006: Total EPS of8.8 cents). Consolidated Key Performance Indicators Six months to 30 June 2007 2006 Annual Growth in growth Q2 07 vs Continuing Operations* Q1 07Active player days (m) 14.5 6.7 116% (2%)Daily average players (000s) 80.1 37.3 115% (3%)Yield per active player day ($) 14.7 22.6 (35%) 10%Yield per unique active player ($) 276.6 401.1 (31%) 17%New real money sign-ups (000s) 403.7 220.8 83% (35%)Unique active players during the period (000s) 768.2 380.4 102% (8%)Average daily revenue ($000) 1,184.7 842.8 41% 7% *excluding skins but including EOL and IOG Total active player days for the Continuing operations, excluding acquisitions,was 14.1m, a 109% increase over the same period in 2006. Once the acquisitionsare included this increases to 14.5m days. New player sign-ups increased by 83%to 403,700 in the period with a particularly strong first quarter performance.With customer attrition rates broadly in line with the previous year, this fedthrough into a strong increase in the number of unique active players that grewby 102% compared with the first half of 2006 and by 35% versus the second halfof 2006, to 768,200. EMEA performed particularly strongly with 154% increase inunique active players to 608,800, or 79% of the total compared with 63% in thefirst half of 2006. The loss of a number of high value players following the enactment of the UIGEAhas impacted the overall yield per active player day that fell to $14.7 versus$22.6 in the previous year. However, the yield per active player day increasedby 10% quarter on quarter reflecting quarterly increases in yields in both pokerand casino. The strong growth in sign-ups and active player days meant thataverage daily revenue for the six months to 30 June 2007, excludingacquisitions, increased substantially to $1,077,900 per day, up from $842,800 inthe same period the previous year. Including the acquisitions, average dailyrevenue was $1,184,700, an increase of 41% over the prior year. There follows a more detailed review of the Continuing operations including eachof the individual product segments. Full details of all quarterly keyperformance indicators can be downloaded from the Group's website at: http://www.partygaming.com/investor/documentation.html POKER Six months to 30 June 2007 2006 % changeContinuing Operations $m $m Gross revenue 159.4 143.4 11%Bonuses and other fair value adjustments to revenue (18.9) (14.2) 33%Net revenue from own sites 140.5 129.2 9%Income from skins - 0.3 (100%)Net poker revenue 140.5 129.5 8% Continuing Clean EBITDA 22.6 22.2 2%Clean EBITDA margin 16.1% 17.1% Whilst Poker remains the largest business segment at 66% of revenue and 61% ofClean EBITDA, this is now much lower than the previous year (86% and 78%respectively). Having recovered strongly after the enactment of the UIGEA,PartyPoker.com did lose some ground during the second quarter of 2007 to somecompetitor sites that were continuing to offer real money games to players inthe US. It is estimated that in the week ended 26 August 2007 PartyPoker.comhad approximately 12.0%1 of the global online poker market (versus 15.4% in lateFebruary 2007). While disappointing, this was not unexpected given theincreasingly casual nature of the Group's customer base relative to itsUS-facing counterparts. Continuing net poker revenue increased by 8% versus theprevious year to $140.5m (2006: $129.5m) with average daily revenue of $777,400(2006: $730,600). The growth quarter-on-quarter was more modest illustratingthe seasonality of the business with a 4% increase in average daily pokerrevenue in the second quarter to $792,400 versus $759,900 the previous quarter. While a number of new revenue and cost saving initiatives were introduced duringthe period, there were increased costs associated with the Group's drive todevelop the active player base in the first quarter. 1 based on the average number of daily real money cash game players - source:PokerSiteScout.com. Poker - Key Performance Indicators Six months to 30 June 2007 2006 Annual Growth in growth Q2 07 vs Continuing Operations* Q1 07Active player days (m) 12.0 6.6 82% (0%)Daily average players (000s) 66.4 36.4 82% (2%)Yield per active player day ($) 11.7 20.1 (42%) 7%Yield per unique active player ($) 225.9 366.6 (38%) 12%New real money sign-ups (000s) 341.9 209.6 63% (36%)Unique active players during the period (000s) 621.9 360.8 72% (6%)Average daily revenue ($000) 777.4 730.6 6% 4% *excluding skins but including EOL and IOG Real money sign-ups and the number of unique active players grew strongly duringthe first half with year-on-year increases of 63% and 72% respectively. Thiswas driven by a particularly strong performance in the first quarter which thenreturned to more normalised levels in the second quarter. Total active playerdays in poker grew by 82% year on year reaching 12.0m (2006: 6.6m), driven bythe increase in new real money sign-ups. Trends in player attrition during the first six months of 2007 have continued inline with previous years with a small increase in attrition over the previousyear reflecting the increasingly casual nature of the Group's customer base.Approximately 24.3% of all 2007 poker sign-ups remained active after six monthscompared with 25.2% of all 2006 sign-ups. As at 30 June 2007, across all realmoney non-US poker sign-ups, the proportion of players who were active after sixmonths was approximately 26.8%, after 12 months it was 21.1% and after 18 monthsit was 19.0%. Whilst the first half yield per active player day was down 42% year on year to$11.7 (2006: $20.1), there was an encouraging improvement during the first sixmonths with yield rising from $11.3 in the first quarter to $12.1 in the secondquarter. This was despite the usual seasonal impact experienced during thesecond quarter as well as the continued impact of cross-selling other games topoker customers and reflects an improvement in the quality of sign-ups as wellas a number of revenue enhancing initiatives introduced during the period. CASINO Six months to 30 June 2007 2006 % changeContinuing Operations $m $m Gross revenue 84.3 23.2 263%Bonuses and other fair value adjustments to revenue (19.7) (2.9) 579%Net casino revenue 64.6 20.3 218% Continuing Clean EBITDA 15.2 7.3 108%Clean EBITDA margin 23.5% 36.0% The Group's casino business delivered a particularly strong performance duringthe first half. Even allowing for the first-time contribution from theacquisitions of EOL and IOG, the growth has been spectacular. The proportion ofrevenue generated by casino increased to 30% of Continuing operations in thefirst half of 2007 (2006: 14%). As anticipated, bonuses and other fair value adjustments to revenues increasedfrom 12.5% to 23.4% of revenue, more in line with historic bonus rates forcasino, which were artificially depressed following the launch of blackjack onPartyPoker.com. The Clean EBITDA margin decreased to 23.5% from 36.0% on theback of increased customer acquisition and retention costs as well as affiliatecosts. A summary of the key performance indicators for the casino businessduring the half year and the percentage movement between the first and secondquarter of 2007 is shown in the table below: Casino - Key Performance Indicators Six months to 30 June 2007 2006 Annual Growth in growth Q2 07 vsContinuing Operations* Q1 07Active player days (000s) 2,064.1 711.0 190% 3%Daily average players (000s) 11.4 3.9 192% 2%Yield per active player day ($) 31.3 28.5 10% 19%Yield per unique active player ($) 185.9 158.9 17% 43%New real money sign-ups (000s) 25.6 11.1 131% (18%)Unique active players during the period (000s) 347.4 127.8 172% (14%)Average daily revenue ($000) 366.4 112.1 227% 21% *excluding skins but including EOL and IOG The recent trends in casino continued during the first half of 2007 with stronggrowth in player traffic, activity levels and revenue. The average number ofdaily players increased by 192% while the number of unique active players in theperiod was up by 172% year-on-year. The fact that new player sign-ups forcasino remained small relative to poker, confirms that the primary source ofcasino player traffic is the Group's existing player pool, most of which arepoker players. During the period approximately one third of the Group's pokerplayers had played at least one non-poker game on the Group's integratedParty-branded platform. Yield per active player day increased by 10% to $31.3 (2006: $28.5) andreflected the reduced reliance on blackjack that tends to command a lower yieldthan other casino games such as roulette and slots. Whilst the year-on-yearyield comparison was impacted by the loss of a number of high yielding playersfrom the platform in the fourth quarter of 2006, the increased popularity ofnon-blackjack games, together with the marked increase in the volume of play andnumber of players meant that average net daily casino revenue increasedsubstantially from $112,100 in the first half of 2006 to $366,400 in the firsthalf of 2007. Looking at the quarter-on-quarter trend, despite a very strongperformance in the first three months of 2007 as well as the slowdown in newplayer sign-ups seen in the second quarter, average daily revenue in the secondquarter increased by 21% versus the previous quarter to $391,200. SPORTS BETTING Six months to 30 June 2007 2006Continuing Operations $m $m Total Stakes 147.9 - Gross Revenue (or Gross Win) 10.0 -Bonuses and other fair value adjustments to revenue (3.5) -Net Sports Betting revenue 6.5 -Gross win margin 6.8% -Clean EBITDA 0.7 -Clean EBITDA margin 10.8% - Having only completed the acquisition of Gamebookers during the third quarter of2006, there is no prior year comparison for this business segment. PartyBets,launched in November 2006, is now fully integrated on the Party-branded systemsplatform and in June 2007 both Gamebookers and PartyBets were merged on to asingle gaming platform. As a result of this change, the number of live bettingevents offered has increased from seven games on Gamebookers and three onPartyBets to between 15 and 25 games on both sites. Having now integrated allbetting products onto the single Party-branded platform, the Group is now ableto offer white label betting services to third parties. During the first half of 2007, Sports Betting generated total gross win of$10.0m with an average gross win margin over the period of 6.8%. The overallresult was impacted by the performance in June 2007 which was a very difficultmonth for the bookmaking industry with a poor run of results, in particular theresults in the UEFA Euro 2008 qualifiers on 6 June 2007 when all but one of the16 favourites won their qualifiers. As a result, while the gross win margin inthe first quarter was 8.8%, this fell to 4.8% in the second quarter. Thisimpacted the overall gross win margin and held back Clean EBITDA that reached$0.7m in the period (2006: nil). Sports Betting - Key Performance Indicators Six months to 30 June 2007 2006 Annual Growth in growth Q2 07 vsContinuing Operations Q1 07Active player days (000) 1,721.0 - - (12%)Daily average players (000s) 9.5 - - (13%)Yield per active player day ($) 3.8 - - (45%)Yield per unique active player ($) 57.9 - - (50%)New real money sign-ups (000s) 34.1 - - (35%)Unique active players during the period (000s) 112.4 - - (3%)Average daily revenue ($000) 36.0 - - (52%) While Gamebookers' strong position in European football meant that it wasadversely impacted by the UEFA Euro 2008 qualifiers in June 2007, the businessdelivered another solid performance. This was despite the decision to ceaseaccepting customers from certain markets such as Turkey during the period. TheGroup also took a conscious decision not to cross promote PartyBets until theproduct was capable of being offered in multiple currencies and shared a commonplatform with Gamebookers. As a result, the complexities associated withrunning two sports books simultaneously meant that PartyBets was unable toachieve its full potential during the first half of 2007. However, followingthe combination of the back-end technology for both Gamebookers and PartyBetsonto a single platform in June 2007 and the introduction of a multi-currencyfacility, PartyBets can now look to capitalise on the substantial cross-sellingopportunity within the Group's poker customer base, only 4.5% of which placed abet with PartyBets in the six months to 30 June 2007. EMERGING GAMES Six months to 30 June 2007 2006Continuing Operations $m $mGross revenue 1.1 -Bonuses and other fair value adjustments to revenue (0.2) -Gross win 0.9 - Clean EBITDA 0.2 -Clean EBITDA margin 22.2% - As with Sports Betting, there is no meaningful comparison for the Emerging Gamessegment as PartyGammon only launched in June 2006. Following the effectiveclosure of a number of markets such as Turkey where backgammon is particularlypopular, the Emerging Games segment has continued to perform below management'sexpectations. Total revenue from continuing operations in the period was $0.9mand the business generated Clean EBITDA of $0.2m. Given the relatively smallsize of the Group's Backgammon business and as another peer to peer game,Emerging Games is now being managed and will be included as part of the Pokersegment following an internal reorganisation within the Group. Emerging Games - Key Performance Indicators Six months to 30 June 2007 2006 Annual Growth in growth Q2 07 vsContinuing Operations Q1 07Active player days (000) 248.5 - - (15%)Daily average players (000s) 1.4 - - (16%)Yield per active player day ($) 3.7 - - 28%Yield per unique active player ($) 35.3 - - 35%New real money sign-ups (000s) 2.1 - - (43%)Unique active players during the period (000s) 25.7 - - (20%)Average daily revenue ($000) 5.0 - - 7% DISTRIBUTION COSTS Six months to 30 June 2007 2006 % change $m $m Customer acquisition and retention 40.1 22.6 77%Affiliates 44.1 26.1 69%Other customer bonuses (not netted from revenue) 1.5 3.0 (50%)Customer bad debts 4.3 1.9 126%Webhosting and technical services 10.1 2.0 405%Total Continuing distribution costs 100.1 55.6 80%Total continuing distribution costs as %of continuing revenue 47.1% 37.1%Discontinued distribution costs 11.1 131.8 (92%)Total distribution costs 111.2 187.4 (41%) Total distribution costs as % of total revenue 52.3% 28.3% The shift in focus to be exclusively on markets outside the US and the growth inthe absolute number of new player sign-ups meant that customer acquisition andretention costs for the Continuing operations increased by 77% over the previousyear. As highlighted in the Group's first quarter trading update issued on 2May 2007, a large increase in the proportion of new player sign-ups that camethrough both CPA and hybrid deals with affiliates during the first quarter,meant that affiliate costs overall in the first half of 2007 were substantiallyhigher than originally expected, growing by 69% versus 2006. Following someamendments to previous affiliate arrangements, the mix of CPA, hybrid andrevenue share payment deals assumed a more normalised pattern in the secondquarter. As a result, first half affiliate costs as a proportion of revenueincreased to 20.8% (2006: 17.4%). Looking at quarter on quarter movements,affiliate costs fell from 25.7% of revenue in the first quarter to 16.1% ofrevenue in the second quarter. The increase in customer bad debts has grownfaster than revenue reflecting a shift in the mix of payment mechanisms beingused to make deposits while the increase in webhosting and technical servicescosts reflects the opening of a server hosting and disaster recovery centre inThe Channel Islands. As a proportion of Continuing revenue, total Continuingdistribution costs increased to 47.1% (2006: 37.1%). ADMINISTRATIVE EXPENSES Six months to 30 June 2007 2006 % change $m $m Transaction fees 10.4 8.7 20%Depreciation 11.3 8.2 38%Amortisation 10.8 1.9 468%Staff costs 39.2 34.2 15%Other overheads 24.1 21.8 11% 95.8 74.8 28%Continuing administrative costs before share-based payments as a % of revenue 45.1% 49.9%Share-based payments 47.0 32.0 47%Continuing administrative costs 142.8 106.8 34%Continuing administrative costs as a % of revenue 67.2% 71.3%Discontinued administrative costs 7.9 47.4 (83%)Total administrative costs 150.7 154.2 (2%) Administrative expenses before share-based payments increased by 28% to $95.8m.This was largely driven by a substantial uplift in depreciation and amortisationcosts following the acquisitions of Gamebookers, EOL and IOG as well as higherstaff costs and other overheads. As a percentage of revenue, Administrativeexpenses before share-based payments fell from 49.9% to 45.1% of Continuingrevenue reflecting the fixed nature of certain of these costs. Share-based payments Prior to flotation, the Principal Shareholders established a share option planfor the benefit of the current and future workforce. Under the terms of theplan, existing employees were granted a number of nil-cost options to besatisfied by existing shares which had effectively been gifted by the PrincipalShareholders to a dedicated employee trust. As such, the exercise of theseoptions had no dilutive effect on shareholders who subscribed at the IPO andwill have no cash impact on the Company. International Financial ReportingStandards requires that the fair value of the options be amortised through theincome statement over the life of the options. As a result, there is a non-cashcharge of $43.2m (2006: $39.4m) including a $0.2m charge relating to The BonitaTrust which has been included within the income statement in the first half of2007. In May 2007 the Company granted awards to Executives and Group employees under anumber of new share option schemes that had previously been approved byshareholders. This resulted in a charge of $3.8m in the period (2006: $nil)Further details are contained in note 4 to the Financial Information below. Bonita Trust The Bonita Trust was established in Gibraltar in 2004 by a subsidiary ofPartyGaming Plc to enable the Group's Principal Shareholders to benefit thecommunities where the Company and its people and service providers live andwork, or have lived and worked. It is primarily a philanthropic organisationsupporting well-established medical and educational non-profit organisationswith funds principally directed to benefit the communities of Gibraltar, Indiaand the UK. Employees of PartyGaming and their families are also eligible to becomebeneficiaries of the trust. During the period Bonita Trust made or committed tomake payments to certain individuals that were employed or had previously beenemployed by the Group. These payments were made independently of the Group andwere over and above the amounts that the Board had already determined should bepaid by the Group to those employees and former employees. However, as thesepayments were based primarily on the Company's share price, the Board considersthese to fall under IFRS2 - Share-Based Payments and in the six months to 30June 2007 has charged an amount to the income statement totalling $0.2m as ifsuch amounts had been paid by the Group itself. A corresponding amount has beenrecorded as a capital contribution in the Group's balance sheet. Associates and joint ventures The Group acquired a 35% interest in a company incorporated in England duringthe first half of 2005 which was sold in November 2006. The Group's share oflosses during the period totalled $nil (2006: $0.3m). Finance income and costs Six months to 30 June 2007 2006 $m $m Finance cost (0.7) (1.3)Finance income 0.9 2.8Net finance income 0.2 1.5 The Group generated a modest contribution from net cash balances in the periodof $0.2m (2006: $1.5m). The reduction from the prior year reflects reducedclient balances following enactment of the UIGEA. Taxation The tax charge for the period is $3.5m (2006: $22.4m). Net cash1 As at 30 June 2007 the Group had net cash of $70.0m (31 December 2006: $43.4m). Following the enactment of the UIGEA and subsequent discussions with itsbankers, the Group's multi-currency revolving credit facility was repaid in fulland cancelled on 12 April 2007. 1 Net cash is defined as cash, cash equivalents and short term investments lessbank debt CASHFLOW Six months to 30 June 2007 2006 $m $mCashflow from operations before movements in working capital 21.7 380.0Working capital movements 11.0 (131.9)Net cashflow from operating activities 32.7 248.1Capital expenditure (6.1) (30.8)Acquisitions of intangibles (3.0) (125.9)Proceeds from sale of fixed assets 2.5 0.1Short term investments (2.1) 4.8Net interest received 0.5 1.5Repayment of revolving credit facility (12.0) 40.0Equity dividends paid - (200.0)Cash inflow (outflow) 12.5 (62.2) Cashflow from operations was substantially lower than the previous year due tothe enactment of the UIGEA and the decision to cease taking bets from customerslocated in the US. The large working capital outflow in the prior period relates to the settlementof legal claims with Empire Online Limited ("EOL") which resulted in a paymentof $127.8m as part of the $250.0m acquisition consideration for Empirepoker.comand certain other assets owned by EOL. Capital expenditure Capital expenditure during the period was $6.1m (2006: $30.8m) and is analysedin more detail in the table below: Six months to 30 June 2007 2006 $m $m Poker - 0.4Casino - 0.3Sports Betting 1.4 -Emerging Games - 3.9Corporate assets 4.7 26.2Total 6.1 30.8 The level of capital expenditure incurred in the period was significantly lowerthan the previous year reflecting a series of cost saving initiatives and theabsence of some major expenditure in the previous year relating to third partyapplication licenses, hardware and property costs. Purchase of intangible assets During the period the Group acquired the business and assets of EOL and IOG viaan issue of new shares. Further details are contained in the note 20 of theaccompanying financial information. Glossary and definitions 'Active player Aggregate number of days in the given period in which active players have contributed to rake and/ordays' 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 signups which are active during the period. The measure indicates retention profile of the players. 'Average active The daily average number of players who contributed to positive rake and/or placed a wager in theplayers' given period. This can be calculated by dividing active player days in that period, by the number of days in that period. 'Clean EBITDA/EPS' EBITDA / EPS before reorganisation costs as well as non-cash charges relating to share-based payments. 'Company' or ' PartyGaming Plc.PartyGaming' 'Discontinued Operations located physically outside of the US but which relate to customers in the US that were nooperations' 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. 'Empire Poker' EmpirePoker.com. 'EOL' The business, assets, players and gaming related contracts associated with 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 The Company and its consolidated subsidiaries and subsidiary undertakings from time to time or,'PartyGaming Group'prior to 7 February 2005, PartyGaming Holdings Limited (formerly Headwall Ventures Limited) and its consolidated subsidiaries and subsidiary undertakings. 'IAS' International Accounting Standards 'IOG' The business, assets, players and gaming related contracts associated with Intercontinental Online Gaming Ltd 'IFRS' International Financial Reporting Standards 'KPIs' Key Performance Indicators, such as active player days and yield per active player day. 'PartyAccount' The Group's shared wallet that enables customers to play a variety of games, all using a single customer account. 'PartyBets' www.partybets.com, one of the Group's sports betting websites that is also fully integrated into the PartyAccount shared wallet. 'PartyBingo' www.partybingo.com, the Group's bingo website 'PartyCasino' www.partycasino.com, the Group's principal casino website 'PartyGammon' www.partygammon.com, the Group's backgammon website 'PartyPoker' www.partypoker.com, the Group's principal poker website 'Principal Anurag Dikshit (holding through Crystal Ventures Limited), James Russell DeLeon (holding throughShareholders' Stinson Ridge Limited), Ruth Monicka Parasol (holding through Emerald Bay Limited) and Vikrant Bhargava (holding through Coral Ventures Limited), each of whom was a promoter of the Company. 'Real money A new player who has registered and deposited funds into an account with the company. Customers aresign-up' 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 A player who has contributed to rake or placed a wager in the period.player' 'Yield per unique Net gaming revenue (net of customer bonuses and other fair value adjustments to revenues) divided byactive player' the number of unique active players in the period. Financial Information Consolidated income statement Six months to June 2007 2006$ million Continuing Discontinued Continuing Discontinued Notes Operations Operations Total Operations Operations Total Revenue - net revenue 2 212.5 - 212.5 149.8 512.1 661.9 Other operating expense (1.8) - (1.8) (1.0) - (1.0)Administrative expenses• Other administrative expenses (95.8) (7.9) (103.7) (74.8) (40.0) (114.8)• Share-based payments 4 (47.0) - (47.0) (32.0) (7.4) (39.4) Total administrative expenses (142.8) (7.9) (150.7) (106.8) (47.4) (154.2) Distribution expenses (100.1) (11.1) (111.2) (55.6) (131.8) (187.4) (Loss) profit from operatingactivities beforereorganisation costs (32.2) (19.0) (51.2) (13.6) 332.9 319.3 Reorganisation costs 3 - 3.9 3.9 - - - (Loss) Profit fromoperating activities (32.2) (15.1) (47.3) (13.6) 332.9 319.3 Finance income 5 0.9 - 0.9 2.8 - 2.8Finance costs 5 (0.7) - (0.7) (1.3) - (1.3)Share of loss of associate 11 - - - (0.3) - (0.3) (Loss) Profit before tax (32.0) (15.1) (47.1) (12.4) 332.9 320.5 Tax 6 (3.5) - (3.5) (12.8) (9.6) (22.4) (Loss) Profit after tax (35.5) (15.1) (50.6) (25.2) 323.3 298.1 (Loss) Earnings per shareBasic (cents) 7 (0.9) (0.4) (1.3) (0.7) 8.5 7.8Diluted (cents) 7 (0.9) (0.4) (1.3) (0.6) 8.2 7.6 Consolidated statement of changes in equity Six months to June 2007 2006$ million NotesExchange differences on translationof foreign operations - (0.1) Net income recognised directly to equity - - (Loss) profit after tax for the period (50.6) 298.1 Total recognised income and expense for the period (50.6) 298.0 Issue of share capital 66.0 -Equity share-based payments 4 47.0 39.4Equity dividend at 5.25 cents per share 21 - (200.0) Total changes in equity 62.4 137.4 Attributable to: Equity holders of the parent 62.4 137.4 Consolidated balance sheet As at 30 June 31 December 30 June 2007 2006 2006$ million Notes Non-current assetsIntangible assets 8 210.2 151.9 144.4Property, plant and equipment 9 46.9 54.6 58.3Investment in associates 11 - - 0.7 257.1 206.5 203.4 Current assetsTrade and other receivables 47.8 67.3 155.8Cash and cash equivalents 58.8 46.3 132.9Short term investments 12 11.2 9.1 1.9 117.8 122.7 290.6 Total assets 374.9 329.2 494.0 Current liabilitiesBank overdrafts - - (2.0)Bank and other loans 13 (2.7) (14.1) -Trade and other payables (106.8) (78.7) (67.2)Income taxes payable (70.1) (67.6) (80.4)Other taxes payable (19.3) (18.2) (9.6)Client liabilities and progressiveprize pools (103.5) (109.1) (192.6)Provisions 14 (6.5) (5.5) (7.5) (308.9) (293.2) (359.3) Non-current liabilitiesTrade and other payables (1.3) (30.0) (3.2)Bank and other loans 13 - (3.7) (40.0) Total liabilities (310.2) (326.9) (402.5) Total net assets 64.7 2.3 91.5 EquityShare capital 16 0.1 0.1 0.1Share premium account 17 66.4 0.4 0.4Share-based payments reserve 17 202.7 155.9 108.2Capital contribution reserve 17 32.7 32.5 -Retained earnings 17 588.0 638.6 808.3Other reserve 17 (825.4) (825.4) (825.4)Currency reserve 17 0.2 0.2 (0.1) Equity attributable to equityholders of the parent 64.7 2.3 91.5 Consolidated statement of cashflows Six months to June 2007 2006$ million (Loss) profit before tax (47.1) 320.5Adjustments for: Amortisation of intangibles 10.8 11.8 Interest expense 0.7 1.3 Interest income (0.9) (2.8) Depreciation of property, plant and equipment 11.3 9.5 Increase in share based payment reserve 46.8 39.4 Loss on investment in associate - 0.3 (Profit) loss on sale of assets (0.1) 0.1 Currency translation reserve - (0.1) Increase in capital contribution reserve 0.2 - Operating cashflows before movements in working capital and provisions 21.7 380.0 Decrease (increase) in trade and other receivables 19.4 (27.7)(Increase) in trade and other payables (8.7) (105.5)Increase in provisions 1.1 1.3Income taxes paid (0.8) - Cash generated (used) by working capital 11.0 (131.9) Net cash inflow from operating activities 32.7 248.1 Investing activitiesPurchases of property, plant and equipment (6.1) (30.8)Sale of property, plant and equipment 2.5 0.1Purchases of intangible assets (3.0) (125.9)Interest received 0.7 2.8(Increase) decrease in short term investments (2.1) 4.8 Net cash used in investing activities (8.0) (149.0) Financing activitiesInterest paid (0.2) (1.3)Equity dividend paid - (200.0)Revolving credit facility (12.0) 40.0 Net cash (used) by financing activities (12.2) (161.3) Net increase (decrease) in cash and cash equivalents 12.5 (62.2) Net cash and cash equivalents at beginning of year 46.3 193.1 Net cash and cash equivalents at end of year 58.8 130.9 Cash and cash equivalents 58.8 132.9Bank overdraft - (2.0) 58.8 130.9 Notes to consolidated financial information 1. Accounting policies Basis of preparation The interim results are prepared in accordance with those InternationalFinancial Reporting Standards including International Accounting Standards(IASs) and interpretations, (collectively IFRS), published by the InternationalAccounting Standards Board (IASB) which have been adopted by the EuropeanCommission and endorsed for use in the EU for the purposes of the Group's fullyear financial information. The financial information included in thisannouncement is unaudited and does not comprise statutory accounts. Thefinancial statements for the year ended 31 December 2006 received an unqualifiedaudit report. However, those financial statements included an emphasis of matterparagraph relating to certain contingent liabilities (see note 15). The Group has not wholly applied IAS 34 in the preparation of the interimfinancial information. As published in February 2007, the following interpretations, issued by theInternational Reporting Interpretations Committee (IFRIC), are effective for thefirst time in the 2007 financial year and have been adopted by the Group with nosignificant impact on its consolidated results or financial position for theperiod: IFRIC 7 - Applying the restatement approach under lAS 29 - Financial reportingin hyperinflationary economies (effective for annual periods beginning on orafter 1 March 2006). IFRIC 8 - Scope of IFRS 2 - Accounting for share-based payments (effective forannual periods beginning on or after 1 May 2006). IFRIC 9 - Reassessment of embedded derivatives (effective for annual periodsbeginning on or after 1 June 2006). IFRIC 10 - Interim financial reporting and impairment (effective for annualperiods beginning on or after I November 2006). As published in February 2007, the following standards and interpretations,issued by the IASB or IFRIC, have not been adopted by the Group and the Group iscurrently assessing the impact these standards and interpretations will have onthe presentation of its consolidated results in future periods: IFRS 8 - Operating segments (effective for annual periods beginning on or after1 January 2009). IFRIC 11 - Group and treasury share transactions (effective for annual periodsbeginning on or after 1 March 2007). IFRIC 12 - Service concession arrangements (effective for annual periodsbeginning on or after 1 January 2008). IFRS 8 contains requirements for the disclosure of information about an entity'soperating segments and also about the entity's products and services, thegeographical areas in which it operates, and its major customers. The standardis concerned only with disclosure and replaces lAS 14 - Segment reporting. TheGroup has assessed the impact of this standard and no change is required in thepresentation of its consolidated results. Critical accounting policies, estimates and judgements The preparation of consolidated financial information under IFRS requires theGroup to make estimates and judgements that affect the application of policiesand reported amounts. Estimates and judgements are continually evaluated andare based on historical experience and other factors including expectations offuture events that are believed to be reasonable under the circumstances. Actualresults may differ from these estimates. Included in this note are accounting policies which cover areas that theDirectors consider require estimates and assumptions which have a significantrisk of causing a material adjustment to the carrying amount of assets andliabilities within the next financial year. These policies together withreferences to the related notes to the financial information can be found below: Taxation note 6 Intangible assets and impairment of goodwill note 8 Payment processor receivables note 3 Provisions note 14 Regulatory compliance and contingent liabilities note 15 Share-based payments note 4 Basis of accounting The Consolidated Financial information has been prepared under the historicalcost convention other than for the valuation of certain financial instruments. The functional currency used in the preparation of this Consolidated FinancialInformation is United States Dollars (USD) as is the presentation currency. Thefunctional currency is the currency in which the parent company operates and itreflects the economic substance of the underlying events and circumstances ofthe Group. A small minority of Group companies operate in Pounds Sterling,Indian Rupees, Euros, Israeli Shekel and Bulgarian Lev but the amounts involvedare not material. Assets, liabilities and expenses of the Group are translated from PoundsSterling, Euros, Indian Rupees, Israeli Shekels and Bulgarian Lev into USD asfollows: • assets and liabilities are translated at the closing rateexisting at the balance sheet date; • income and expenses are translated at the exchange ratesexisting at the dates of the transactions or at a rate that approximates theactual exchange rates; • equity items other than the net profit or loss for the periodthat are included within retained earnings are translated at the closing rateexisting at the balance sheet date; and • any exchange differences arising from the above translationsare recognised in the income statement. Basis of consolidation Subsidiaries are those companies controlled, directly or indirectly byPartyGaming Plc. Control exists where the Company has the power to govern thefinancial and operating policies of an enterprise so as to obtain benefits fromits activities. Except as noted below, subsidiaries are consolidated from thedate of acquisition (i.e. the date on which control of the subsidiaryeffectively commences) to the date of disposal (i.e. the date on which controlover the subsidiary effectively ceases). Except as noted below, the financial information of subsidiaries is included inthe Consolidated Financial Information using the acquisition method ofaccounting. On the date of acquisition the assets and liabilities of therelevant subsidiaries are measured at their fair values. The interest ofminority shareholders is stated at the minority's proportion of the fair valuesof the assets and liabilities recognised. Under Section 10(2) of the Gibraltar (Consolidated Accounts) Act 1999, theCompany is exempt from the requirement to present its own income statement. All intra-Group transactions, balances, income and expenses are eliminated onconsolidation. Accounting for the Company's acquisition of the controlling interest inPartyGaming Holdings Limited The Company's controlling interest in its directly held, wholly-owned,subsidiary PartyGaming Holdings Limited (formerly Headwall Ventures Limited) wasacquired through a transaction under common control, as defined in IFRS 3Business Combinations. The Directors note that transactions under commoncontrol are outside the scope of IFRS 3 and that there is no guidance elsewherein IFRS covering such transactions. IFRS contain specific guidance to be followed where a transaction falls outsidethe scope of IFRS. This guidance is included at paragraphs 10 to 12 of IAS 8Accounting Policies, Changes in Accounting Estimates and Errors. This requires,inter alia, that where IFRS does not include guidance for a particular issue,the directors may also consider the most recent pronouncements of other standardsetting bodies that use a similar conceptual framework to develop accountingstandards. In this regard, it is noted that the United States FinancialAccounting Standards Board (FASB) has issued an accounting standard coveringbusiness combinations (FAS 141) that is similar in a number of respects to IFRS3. Further there is currently a major project being run jointly by the IASB andFASB to converge IFRS and US GAAP. In contrast to IFRS 3, FAS 141 does include, as an Appendix, limited accountingguidance for transactions under common control which, as with IFRS 3, areoutside the scope of that accounting standard. The guidance contained in FAS141 indicates that a form of accounting that is similar to pooling of interestsaccounting, which was previously set out in Accounting Principles Board (APB)Opinion 16, may be used when accounting for transactions under common control. Having considered the requirements of IAS 8, and the guidance included withinFAS 141, it is considered appropriate to use a form of accounting which issimilar to pooling of interests when dealing with the transaction in which theCompany acquired its controlling interest in PartyGaming Holdings Limited. Associates Where the Group has the power to exercise significant influence over (but notcontrol) the financial and operating policy decisions of another entity, it isclassified as an associate. Associates are initially recognised in theconsolidated balance sheet at cost. The Group's share of post-acquisitionprofits and losses is recognised in the consolidated income statement, exceptthat losses in excess of the Group's investment in the associate are notrecognised unless there is an obligation to make good those losses. Profits and losses arising on transactions between the Group and its associatesare recognised only to the extent of unrelated investors' interests in theassociate. The investor's share in the associate's profits and losses resultingfrom these transactions is eliminated against the carrying value of theassociate. Any premium paid for an associate above the fair value of the Group's share ofthe identifiable assets, liabilities and contingent liabilities acquired iscapitalised and included in the carrying amount of the associate. The carryingamount of the associate is tested under IAS 36 for impairment wherever theapplication of the requirements of IAS 39 indicate that the carrying value ofthe associate might be impaired. Investments in subsidiaries Investments in subsidiaries held by the Company are carried at cost less anyimpairment in value. Foreign currency Transactions entered into by Group entities in a currency other than thecurrency of the primary economic environment in which it operates (the "Functional Currency") are recorded at the rate ruling when the transactionoccurs. The assets and liabilities of foreign operations, including goodwill and fairvalue adjustments arising on acquisition, are translated into the Group'sfunctional and presentational currency (US Dollars) at exchange rates ruling atthe reporting date. The income and expenses of foreign operations aretranslated to US Dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised directly in equity, and arerecognised in the foreign currency translation reserve. When a foreignoperation is disposed of, in part or in full, the relevant amount in the foreigncurrency translation reserve is transferred to the income statement. Revenue Revenue from online gaming, comprising poker, casino and 'white label/skins'(third party entities that use the Group's platform and certain services), isrecognised in the accounting periods in which the gaming transactions occur.Net revenue consists of net gaming revenue and revenue generated from foreignexchange gains on customer deposits and withdrawals. Poker and Emerging Games revenue represents the commission charged or tournamententry fees where the player has concluded his participation in the tournament.Casino and Sports Betting revenue represents net house win adjusted for the fairmarket value of gains and losses on open betting positions. Revenue in respectof 'white label/skin' arrangements is the net commission invoiced. Revenue ismeasured at the fair value of the consideration received or receivable and isnet of certain promotional bonuses. Revenue generated from foreign exchangegains on customer deposits and redeems is allocated to each reporting segment. Interest income is recognised on an accruals basis. Segment information A segment is a distinguishable component of the Group that is engaged either inproviding products or services (business segment), or products or serviceswithin a particular economic environment (geographical segment). Taxation Income tax expense represents the sum of the Directors' best estimate oftaxation exposures and deferred tax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using rates that have beenenacted or substantively enacted by the balance sheet date. Deferred Tax Deferred tax is recognised on differences between the carrying amounts of assetsand liabilities in the financial information and the corresponding tax basesused in the computation of taxable profit. It is accounted for using thebalance sheet liability method. Deferred tax liabilities are generallyrecognised for all taxable temporary differences other than where IAS 12 'IncomeTaxes' contains specific examples. Deferred tax assets are recognised to theextent that it is probable that taxable profits will be available against whichdeductible temporary differences can be utilised. Such assets and liabilitiesare not recognised if the temporary difference arises from goodwill or from theinitial recognition (other than in a business combination) of other assets andliabilities in a transaction that affects neither the taxable profit nor theaccounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset realised. Deferred tax ischarged or credited to profit or loss, except when it relates to items chargedor credited directly to equity, in which case the deferred tax is also dealtwith in equity. Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current assets against current tax liabilities andwhen they relate to income taxes levied by the same taxation authority and theGroup intends to settle its current tax assets and liabilities on a net basis. Property, plant and equipment All property, plant and equipment are stated at cost less accumulateddepreciation. Assets in the course of construction are carried at cost, less any recognisedimpairment loss. Cost includes directly attributable costs incurred in bringingthe asset to working condition for its intended use, including professionalfees. Depreciation commences when the assets are ready for their intended use. Depreciation is provided to write off the cost, less estimated residual values,of all property, plant and equipment, evenly over their expected useful lives.It is calculated at the following rates: Leasehold improvements - over length of leasePlant, machinery, computer equipment - 33% per annumFixtures, fittings, tools and equipment, vehicles - 20% per annum Where an item of property, plant or equipment comprises major components havingdifferent useful lives, they are accounted for as separate items of property,plant and equipment. Subsequent expenditure is capitalised where it is incurred to replace acomponent of an item of plant, property or equipment where that item isaccounted for separately including major inspection and overhaul. All othersubsequent expenditure is expensed as incurred, unless it increases the futureeconomic benefits to be derived from that item of plant, property and equipment. Goodwill Goodwill represents the excess of the cost of an acquisition over the Group'sshare of the fair value of the identifiable assets and liabilities of anacquired subsidiary, associate or jointly controlled entity. For acquisitions where the agreement date is on or after 31 March 2004, goodwillis not amortised and is reviewed for impairment at least annually. Anyimpairment is recognised immediately in the income statement and is notsubsequently reversed. Goodwill arising on earlier acquisitions was beingamortised over its estimated useful life of 20 years. In accordance with thetransitional provisions of IFRS 3 Business Combinations, the unamortised balanceof goodwill at 31 December 2004 was frozen and reviewed for impairment, and willbe reviewed for impairment at least annually. Intangible assets Identifiable assets, liabilities and contingent liabilities that meet theconditions for recognition under IFRS3 are recognised at their fair value at theacquisition date. The identified intangibles are amortised over the usefuleconomic life of the assets. For acquisitions during the year, the usefuleconomic life of the intangible assets acquired is estimated to be betweeneighteen months and five years. Internally generated assets - research and development expenditure Expenditure incurred on development activities, including the Group's softwaredevelopment, is capitalised only where the expenditure will lead to new orsubstantially improved products or processes, the products or processes aretechnically and commercially feasible and the Group has sufficient resources tocomplete development. The expenditure capitalised includes the cost ofmaterials, labour and an appropriate proportion of overheads. All otherdevelopment expenditure is expensed as incurred. Subsequent expenditure on capitalised intangible assets is capitalised onlywhere it clearly increases the economic benefits to be derived from the asset towhich it relates. All other expenditure, including that incurred in order tomaintain the related intangible asset's current level of performance, isexpensed as incurred. Impairment of tangible and intangible assets At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Where the asset does not generate cashflows that are independent from other assets, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs. Anintangible asset with an indefinite useful life is tested for impairmentannually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cashflows are discountedto their present value using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to theasset for which the estimates of future cashflows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. An impairment lossis recognised as an expense immediately, unless the relevant asset is carried ata revalued amount, in which case the impairment loss is treated as a revaluationdecrease. Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of animpairment loss is recognised as income immediately, unless the relevant assetis carried at a revalued amount, in which case the reversal of the impairmentloss is treated as a revaluation increase. Trade and other receivables Trade and other receivables are stated at amortised cost less provision forimpairment. Cash and cash equivalents Cash comprises cash in hand and balances with financial institutions. Cashequivalents are short-term, highly liquid investments that are readilyconvertible to known amounts of cash. They include unrestricted short-term bankdeposits originally purchased with maturities of three months or less. Trade and other payables Trade and other payables are stated at amortised cost. Share-based payments The Group has applied the requirements of IFRS 2 Share-based Payments. The Groupissues equity settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date of the equity-settledshare-based payments is expensed on a straight line basis over the vestingperiod based, for those share options which contain only non-market vestingconditions, on the Group's estimate of the shares that will eventually vest.Fair value is measured by use of a suitable option pricing model. The expectedlife used in the model has been adjusted, based on management's best estimate,for the effects of non-transferability, exercise restrictions, and behaviouralconsiderations. For cash-settled share-based payment transactions, the goods or servicesreceived and the liability incurred are measured at the fair value of theliability. Up to the point at which the liability is settled, the fair value ofthe liability is re-measured at each reporting date and at the date ofsettlement, with changes being recorded in the income statement. The Grouprecords the expense based on the fair value of the share-based payments on astraight-line basis over the vesting period. For cash payments made by TheBonita Trust, the charge is recorded when the Trustees commit to make thepayment. Where equity instruments of the parent company or a subsidiary are transferred,or cash payments based on the company's (or a subsidiary's) share price aremade, by shareholder(s) or entities that are effectively controlled by one ormore shareholder(s), the transaction is accounted for as a share-based payment,unless the transfer or payment is clearly for a purpose other than payment forgoods or services supplied to the Group. Where equity instruments are transferred by one or more shareholder(s), theamount recorded in reserves is included in the share-based payment reserve.Where a cash payment is made, this is recorded as a capital contribution. Treasury shares The consideration paid or received for the purchase or sale of treasury sharesis recognised directly in equity. The cost of treasury shares held is presentedas a separate reserve. Any excess of the consideration received on the sale oftreasury shares over the weighted average cost of the shares sold is credited tothe share premium account. Provisions and contingent liabilities The Group recognises a provision in the balance sheet when it has a legal orconstructive obligation as a result of a past event and it is probable that anoutflow of economic benefits will be required to settle the obligation. Where the Group has a possible obligation as a result of a past event that may,but probably will not, result in an outflow of economic benefits, no provisionis made. Disclosures are made of the contingent liability including, wherepracticable, an estimate of the financial effect, uncertainties relating to theamount or timing of outflow of resources, and the possibility of anyreimbursement. Where time value is material, the amount of the related provision is calculatedby discounting the cashflows at a pre-tax rate that reflects market assessmentsof the time value of money and any risks specific to the liability. Leased assets Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at theirfair value or, if lower, at the present value of the minimum lease payments,each determined at the inception of the lease. The corresponding liability tothe lessor is included in the balance sheet as a finance lease obligation.Lease payments are apportioned between finance charges and reduction of thelease obligation so as to achieve a constant rate of interest on the remainingbalance of the liability. Finance charges are charged directly against income. Rentals payable under operating leases are charged to income on a straight-linebasis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operatinglease are also spread on a straight-line basis over the lease term. Financial instruments A substantial portion of the Group's revenue is received in its functionalcurrency. As such, currency exposure on revenues is minimal. Further, the Groupminimises foreign currency exposure by netting non-US$ deposits and payments ofwinnings in the respective currency. Additionally, other exposures includeinterest rate risk from borrowing and the investment of cash balances. The Groupseeks to limit these risks by investing cash in short-term instruments andinterest income is recognised on an accruals basis. Dividends Dividends are recognised when they become legally payable. In the case ofinterim dividends to equity shareholders, this is when declared by thedirectors. In the case of final dividends, this is when approved by theshareholders at the Annual General Meeting. Bank borrowings Interest bearing bank loans and overdrafts are recorded at the fair value of theproceeds received. Finance charges, including premiums payable on settlement orredemption and direct issue costs, are charged to the income statement using theeffective interest method and are added to the carrying amount of the instrumentto the extent that they are not settled in the period in which they arise. 2. Business and geographical segment information For management purposes and transacting with customers, the Group's operationscan be segmented into the following four operating divisions: • Poker; • Casino, including bingo; • Sports betting; and • Emerging Games, currently comprising backgammon. These divisions are the basis on which the Group reports its primary segmentinformation. Unallocated corporate expenses, assets and liabilities relate tothe entity as a whole and cannot be allocated to individual segments. Sports Emerging UnallocatedSix months to 30 June 2007 Poker Casino Betting Games Corporate Consolidated$m Continuing operationsRevenue 140.5 64.6 6.5 0.9 - 212.5Clean EBITDA 22.6 15.2 0.7 0.2 (1.8) 36.9Profit / (loss) before tax 18.7 12.6 (5.8) (0.4) (57.1) (32.0) Discontinued operationsRevenue - - - - - -Clean EBITDA (11.1) - - - (7.9) (19.0)Loss before tax (16.5) 4.2 - - (2.8) (15.1) Total operationsRevenue 140.5 64.6 6.5 0.9 - 212.5Clean EBITDA 11.5 15.2 0.7 0.2 (9.7) 17.9Profit / (loss) before tax 2.2 16.8 (5.8) (0.4) (59.9) (47.1) Sports Emerging UnallocatedSix months to 30 June 2006 Poker Casino Betting Games Corporate Consolidated$m Continuing operationsRevenue 129.5 20.3 - - - 149.8Clean EBITDA 22.2 7.3 - - (1.0) 28.5Profit / (loss) before tax 18.3 7.0 - - (37.7) (12.4) Discontinued operationsRevenue 373.2 138.9 - - - 512.1Clean EBITDA 264.0 87.5 - - - 351.5Profit / (loss) before tax 252.8 87.5 - - (7.4) 332.9 Total operationsRevenue 502.7 159.2 - - - 661.9Clean EBITDA 286.2 94.8 - - (1.0) 380.0Profit / (loss) before tax 271.1 94.5 - - (45.1) 320.5 Following a reorganisation of the management and internal reporting of thebusiness to place more emphasis on vertical product groups at the end of 2006,the majority of marketing costs are now allocated to each business segment basedon the revenue within each vertical generated by new sign-ups in that period.The 2006 data has been restated on a consistent basis. Revenue by geographical segment The following table provides an analysis of the Group's revenue by geographicalsegment: Six months to 30 June 2007 2006 $m $m EMEA 157.7 93.2Americas (non-US) 43.3 46.1Asia Pacific 11.5 10.5 Continuing operations 212.5 149.8Discontinued operations - 512.1 Total revenue 212.5 661.9 3. Reorganisation costs During the first half of 2006 no reorganisation costs were incurred. In 2007 anet $4.5m was received from payment processors that had previously been providedfor as part of the $250.4m reorganisation charge made during the second half of2006. The credit reflected in reorganisation costs of $3.9m includes thisrecovery net of $0.6m associated with changes in estimates made in respect ofthe 2006 reorganisation charge. 4. Share-based payments Six months to 30 June 2007 2006 $m $mCharge relating to nil-cost options: - issued pre-IPO (1.2) 19.1 - issued post-IPO 44.2 20.3 Total charge relating to nil-cost options 43.0 39.4 Charge relating to new option plans:- FMV Plan 3.7 -- PSP Plan 0.0 -- Executive FMV Plan 0.1 - Total charge relating to new options 3.8 - Bonita Trust charge 0.2 - Total share option charge 47.0 39.4 Prior to flotation, the founding shareholders established the PartyGaming PlcShare Option Plan (the "Nil-Cost Plan") for the benefit of the current andfuture workforce. Under the terms of the Nil-Cost Plan each option takes theform of a right, exercisable at nil-cost, to acquire Shares in the Company, thevesting of which are satisfied by existing Shares which had been issued to theEmployee Trust. As such, the exercise of these options had no dilutive effecton shareholders who subscribed at the IPO and will have no cash impact on theCompany. IFRS requires that the fair value of the options be amortised throughthe income statement over the life of the options. The charge associated withthe nil cost options increased from $39.4m to $43.0m primarily reflecting a newissue of nil cost options and accelerated vesting arrangements made in respectof the Company's senior employees in the final quarter of 2006 as a retentiontool following the enactment of the UIGEA in October 2006. These new awardswere satisfied in large part by an additional 40 million Shares gifted to theEmployee Trust by certain founders of the Company. Following the introduction during the first half of 2007 of two fair marketvalue option plans, the PartyGaming Plc All-Employee Option Plan ("FMV Plan")and PartyGaming Plc Executive Share Option Plan ("Executive FMV Plan"), and anequity plan, the PartyGaming Plc Performance Share Plan ("PSP Plan"), the totalcharge during the period relating to these options was $3.8m (2006: $nil). Thisprimarily reflected an issue of share options to the Group's employees under ThePartyGaming All-Employee Option Plan ("FMV Plan"). Under this plan, optionsvest over a three year period and the majority were granted at an exercise priceof 45.75 pence per share. 5. Finance income and costs Six months to 30 June 2007 2006 $m $m Finance cost (0.7) (1.3)Finance income 0.9 2.8 Net finance income 0.2 1.5 6. Tax a) Analysis of tax charge for the period Six months to 30 June 2007 2006 $m $m Income tax expense for the period 3.5 22.4 Domestic income tax is calculated at 35% (2006: 35%) of the estimated assessableprofit for the period. Taxation for other jurisdictions is calculated at therate prevailing in the relevant jurisdiction. There are no material deferred tax balances arising in the period. b) Factors affecting the tax charge for the year The total charge for the period can be reconciled to accounting profit asfollows: Six months to 30 June 2007 2006 $m $m (Loss) / Profit before tax (47.1) 320.5 Tax at the weighted average tax rate of the Groupbeing tax expense at the effective tax rate for the current period 4.7 (21.2)Effect of share-based payments, depreciation and amortisation (6.9) (1.2) Effect of adjustment to the weighted average tax rate of theGroup being tax expense at the effective tax rate for prior periods (1.3) - Income tax expense (3.5) (22.4) The Group's policy is generally to manage, control and operate Group companiesonly in the countries in which they are registered. At the period end therewere Group companies registered in Gibraltar, India, the UK, Alderney, Bulgaria,Israel, British Virgin Islands, Bermuda and Antigua. However, the rules andpractice governing the taxation of e-commerce activity are evolving in manycountries. It is possible that the amount of tax that will eventually becomepayable may differ from the amount provided in this financial information. Incalculating the tax provision, in addition to any amounts due in respect ofjurisdictions in which Group companies are currently incorporated or domiciled,a provision has been made to cover the Directors' best estimate of additionaltaxation exposures which may arise. Where the actual outcome differs from theamounts originally recorded, the tax and deferred tax provisions will beaffected in the period(s) in which the determination is made. The Group has received indemnities from the Principal Shareholders in connectionwith certain potential historic corporate taxation liabilities. The Directorsconsider the likelihood of any such liability arising to be remote.Accordingly, neither has a provision for any such potential taxation been made,nor has an asset been recognised in respect of the indemnity. c) Factors that may affect future tax charges In Gibraltar, the Group benefits from the exempt company regime. The Gibraltarexempt company regime will be phased out between 1 July 2006 and 31 December2010; assessable income is taxed in Gibraltar at 33.0% for the year ending 30June 2008, and reductions have been announced by the Chief Minister of Gibraltarto 30% for the year ending 30 June 2009, 27% for the year ending 30 June 2010and a rate of 10% to 12% thereafter. In India, the Group benefits from a tax holiday on income from qualifyingactivities until March 2009; under current rules assessable income is taxed inIndia at approximately 33.7% and fringe benefit tax is payable at approximately33.7% on a proportion of specified benefits provided or deemed to have beenprovided to past and present employees. 7. Earnings per share ("EPS") Continuing DiscontinuedSix months to 30 June 2007 operations operations TotalCents Basic EPS (0.9) (0.4) (1.3) Diluted EPS (0.9) (0.4) (1.3) Basic Clean* EPS 0.3 (0.5) (0.2) Diluted Clean* EPS 0.3 (0.5) (0.2) Continuing DiscontinuedSix months to 30 June 2006 operations operations TotalCents Basic EPS (0.7) 8.5 7.8 Diluted EPS (0.6) 8.2 7.6 Basic Clean* EPS 0.2 8.6 8.8 Diluted Clean* EPS 0.2 8.4 8.6 *EPS before reorganisation costs and charges relating to share-based payments. Basic earnings per share Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of Ordinary sharesoutstanding during the year, excluding those held by the Company. Six months to 30 June 2007 2006 Before Before Reorganisation Reorganisation reorganisation Reorganisation costs costs Total costs costs Total Adjusted (loss) earnings ($m) (7.5) 3.9 (3.6) 337.5 - 337.5 Weighted average numberof Ordinary shares (m) 3,958.7 3,958.7 3,958.7 3,819.9 3,819.9 3,819.9 Adjusted (loss) earnings perOrdinary share (cents) (0.2) 0.1 (0.1) 8.8 - 8.8 Basic (loss) earnings ($m) (54.5) 3.9 (50.6) 298.1 - 298.1 Weighted average number ofOrdinary shares (m) 3,958.7 3,958.7 3,958.7 3,819.9 3,819.9 3,819.9 Basic earnings (loss) perOrdinary share (cents) (1.4) 0.1 (1.3) 7.8 - 7.8 Clean earnings per share Management believes that Clean earnings per share reflects the underlyingperformance of the business and assists in providing a clearer view of thefundamental performance of the Group. Clean EBITDA and Clean earnings per shareare performance measures used internally by management to manage the operationsof the business and remove the impact of one-off and non-cash items. They aretherefore calculated before reorganisation costs, non-cash charges relating toshare-based payments and share-based payments made by the Bonita Trust (see note18). Clean net earnings attributable to equity shareholders is derived as follows: Six months to 30 June 2007 2006($m) Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total (Loss) earnings for the purposes of basicand diluted earnings per share being(loss) profit after tax attributable toequity holders of the parent (35.5) (15.1) (50.6) (25.2) 323.3 298.1 Reorganisation costs - 3.9 3.9 - - - Earnings before reorganisationcosts (35.5) (19.0) (54.5) (25.2) 323.3 298.1 Share-based payments 47.0 - 47.0 32.0 7.4 39.4 Clean net earnings 11.5 (19.0) (7.5) 6.8 330.7 337.5 Six months to 30 June 2007 2006Number of shares for basic earnings per share Number Number m mNumber of shares in issue 4,000.0 4,000.0Number of shares issued to the Employee Trust (264.0) (224.0)New shares issued 103.1 -Number of shares sold by the Employee Trust 10.1 -Number of shares vested in the previous periods 92.5 36.2Effect of shares which vested during the period 17.0 7.7 Weighted average number of ordinary shares for thepurposes of basic earnings per share 3,958.7 3,819.9 The shares held by the Employee Trust are accounted for as treasury shares. In accordance with IAS 33, the weighted average number of shares for dilutedearnings per share takes into account all potentially dilutive shares granted,which are not included in the number of shares for basic earnings per shareabove. Although the unvested potentially dilutive shares are contingentlyissuable, in accordance with IAS 33, the period end is treated as the end of theperformance period. Those option holders who were employees at that date aredeemed to have satisfied the performance requirements and their relatedpotentially dilutive shares have been included for the purpose of diluted EPS(see note 19). Six months to 30 June 2007 2006Number of shares for diluted earnings per share Number Number m mNumber of shares in issue 4,000.0 4,000.0Number of shares issued to the Employee Trust (264.0) (224.0)New shares issued 103.1 -Number of shares sold by the Employee Trust 10.1 -Number of shares vested in the previous periods 92.5 36.2Effect of shares which vested during the period 17.0 7.7Effect of potential dilutive vested and unvested shares 167.7 126.9 Weighted average number of ordinary shares for thepurposes of diluted earnings per share 4,126.4 3,946.8 8. Intangible assets Other Development intangibles Goodwill expenditure Total $m $m $m $mCost or valuationAs at 30 June 2006 78.9 84.0 - 162.9Additions 49.7 87.1 - 136.8 As at 31 December 2006 128.6 171.1 - 299.7Additions 29.0 37.6 2.5 69.1 As at 30 June 2007 157.6 208.7 2.5 368.8 Amortisation and impairment lossesAs at 30 June 2006 16.1 2.4 - 18.5Charge for the period 13.8 - - 13.8Impairment 41.8 73.7 - 115.5 As at 31 December 2006 71.7 76.1 - 147.8Charge for the period 10.8 - - 10.8 As at 30 June 2007 82.5 76.1 - 158.6 Carrying amounts:As at 30 June 2006 62.8 81.6 - 144.4 As at 31 December 2006 56.9 95.0 - 151.9 As at 30 June 2007 75.1 132.6 2.5 210.2 The other intangible assets primarily include the customer lists, brands andother intangibles acquired in respect of Gamebookers, EOL and IOG which arebeing amortised over their estimated useful economic lives of between 18 monthsand 15 years. The values are based on cash flow projections from existingcustomers taking into account the expected impact of attrition. Development expenditure represents software infrastructure assets that have beendeveloped and generated internally. They are being amortised over theirestimated useful economic lives of between three and five years. In accordance with IAS 36, the Group regularly monitors the carrying value ofits intangible assets. A review was undertaken at 30 June 2007 to assess whetherthe carrying value of assets was supported by the net present value of futurecash flows derived from those assets using cash flow projections for a 5 yearperiod. The discount rates for the review were based on company specific pre-taxweighted average cost of capital percentages and ranged from 9% to 15%. Thefuture cash flows have been modelled to decline in line with historic playerattrition patterns which are consistent with those experienced by the Group as awhole in recent years. The results of the review undertaken at 31 December 2006 indicated thatimpairment totalling $115.5m, predominantly in respect of Empire Poker, wasnecessary in respect of the intangible assets, arising due to the enactment ofthe UIGEA. 9. Property, plant and equipment Fixtures, Plant, fittings, Land and machinery tools and buildings and vehicles equipment Total $m $m $m $mCost or valuationAs at 30 June 2006 16.6 4.3 66.4 87.3Additions - 0.7 17.2 17.9Disposals - (0.1) - (0.1)Write-off (0.4) - - (0.4) As at 31 December 2006 16.2 4.9 83.6 104.7Additions - - 6.1 6.1Disposals (1.7) (0.1) (0.7) (2.5) As at 30 June 2007 14.5 4.8 89.0 108.3 Depreciation and impairment lossesAs at 30 June 2006 1.4 1.8 25.8 29.0Charge for the period 1.0 0.7 11.6 13.3Impairments - - 7.8 7.8 As at 31 December 2006 2.4 2.5 45.2 50.1Charge for the period 0.1 0.7 10.5 11.3 As at 30 June 2007 2.5 3.2 55.7 61.4 Carrying amount As at 30 June 2006 15.2 2.5 40.6 58.3 As at 31 December 2006 13.8 2.4 38.4 54.6 As at 30 June 2007 12.0 1.6 33.3 46.9 10. Commitments for capital expenditure: 30 June 31 December 30 June 2007 2006 2006 $m $m $m Contracted but not provided for 2.8 2.8 5.3 11. Investment in associates There were no new investments in associated companies during the period. In2006, the Group impaired a previously acquired 35% interest in the ordinaryshare capital of The Poker Channel Ltd, a company incorporated in England. 12. Short term investments Six months to 30 June 30 June 31 December 30 June 2007 2006 2006 $m $m $m Cash on deposit for more than 3 months 6.8 3.4 1.9Restricted cash 4.4 5.7 - Total 11.2 9.1 1.9 Restricted cash relates to the cash held in the Employee Trust payable to MitchGarber relating to incentive awards over a 30-month period from December 2006. 13. Bank debt and other loans Six months to 30 June 30 June 31 December 30 June 2007 2006 2006 $m $m $m Bank debt and other loans - current 2.7 14.1 -Bank debt and other loans - non-current - 3.7 40.0 Total 2.7 17.8 40.0 14. Provisions Six months to 30 June 30 June 31 December 30 June 2007 2006 2006 $m $m $m Provision at beginning of period 5.5 6.2 6.2Increase (decrease) in provisionduring period 1.0 (0.7) 1.3 Provision at end of period 6.5 5.5 7.5 Provisions are expected to be settled within the next year and relate tochargebacks which are recognised at the Directors' best estimate of theprovision based on past experience of such expenses applied to the level ofactivity. 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 andactions. a. Regulatory issues As part of the Board's ongoing regulatory compliance and operational riskassessment process, the Board continues to monitor legal and regulatorydevelopments, and their potential impact on the business, and continues to takeappropriate advice in respect of these developments. Following the enactment of the UIGEA on 13 October 2006, the Group stoppedtaking any deposits from customers in the US and barred such customers fromwagering real money on all of the Group's sites. Notwithstanding this, theactions taken by certain US regulatory authorities suggest that there remains aresidual risk of an adverse impact arising from the Group having had customersin the US prior to the enactment of the UIGEA. Furthermore, the Group is aware of press speculation that certain US regulatoryauthorities have made enquiries of banks and other financial advisers that havehad involvement with the internet gaming industry. Certain customary indemnitieshave been given by the Company to its advisers in connection with the Company'sinitial public offering in June 2005 and other assignments, and claims undersuch indemnities cannot be ruled out. The Group has not, however, receivednotice of any such claim to date. On 4 June 2007, the Company announced that it had initiated discussions with theUnited States Attorney's Office for the Southern District of New York and was inthe process of voluntarily responding to a request for information issued bythat office. These discussions are continuing and it is too early to assess thelikelihood of any particular outcome of these discussions. b. Litigation The Group is the defendant in a US action which is based on alleged collusiontaking place on the Group's online poker tables. This action has been broughtby two individual plaintiffs who are seeking class certification. The classseeking to be represented comprises poker customers in the US who from 1 January2002 played real money games on the Group's sites. The Group believes the actionto be without merit, but has not submitted to US jurisdiction and therefore theaction has not been contested. The Group has received legal advice that, having not submitted to USjurisdiction, any eventual US default judgement could not be enforced interritories where the Group has its principal assets (including Gibraltar andthe UK) and new substantive proceedings would need to be brought on the meritsin such territories. The Group believes it has strong defences and any suchproceedings, if they were to be brought, would be vigorously defended. The Board believes that a sufficiently reliable estimate of the potentialliability in connection with each of the above matters cannot be made andconsequently no provision has been made. 16. Share capital Issued and fully paid Number $ mOrdinary sharesAs at 30 June and 31 December 2006 100,452 4,000.0Issued during the period ended 30 June 2007 3,414 115.2 As at 30 June 2007 103,866 4,115.2 Shares issued are converted into US dollars at the exchange rate prevailing onthe date of issue. The issued and fully paid share capital of the Group amountsto $103,866 and is split into 4,115,193,842 ordinary shares. The share capitalin UK sterling is £61,727.91 and translates at an average exchange rate of$1.6822 USD to GBP. As at 30 June 2007, 141,849,327 (2006: 168,367,029)ordinary shares were held as treasury shares by the Employee Trust. Authorised share capital and significant terms and conditions The total authorised number of shares comprises 5,000 million ordinary shareswith a par value of 0.0015p. All issued shares are fully paid. The holders ofordinary shares are entitled to receive dividends when declared and are entitledto one vote per share at meetings of the Company. The Trustee has waived allvoting and dividend rights in respect of shares held by the Employee Trust. Theshare capital is shown on the basis that it has been in issue throughout theperiod. There were no changes to the authorised share capital during theperiod. 17. Reserves Share-based Capital Share Retained Other Payments contributions Currency premium earnings reserves reserve reserve reserve $m $m $m $m $m $m As at 31 December 2006 0.4 638.6 (825.4) 155.9 32.5 0.2(Loss) profit after taxattributable to equityholders of the parent - (50.6) - - - -Share-based payments - - - 46.8 0.2 -Issue of Shares 66.0 - - - - - As at 30 June 2007 66.4 588.0 (825.4) 202.7 32.7 0.2 Share premium is the amount subscribed for share capital in excess of nominalvalue. Retained earnings is the cumulative net gains and losses recognised inthe consolidated income statement. Share-based payments reserve is the amountarising from share-based payments made by the Group. Capital contributionsreserve is the amount arising from the cash settled share-based payments made byThe Bonita Trust and cash held by the Employee Trust. Currency reserve is thegains/losses arising on retranslating the net assets of overseas operations intosterling. The other reserve of $825.4m is the amount arising from the application ofaccounting which is similar to the pooling of interests method, as set out inthe Group's accounting policies. Under this method of accounting, thedifference between the consideration for the controlling interest and thenominal value of the shares acquired is taken to other reserves onconsolidation. As a result, the share capital reflects PartyGaming Plc's sharecapital and the retained earnings for each of the periods ended 30 June 2007,reflects the cumulative profits as if the current Group structure had alwaysbeen in place. The Company issued 115,193,842 new shares on 19 January 2007 in connection withthe acquisition of the business and assets of Empire Online Limited andIntercontinental Online Gaming Limited. Further details are contained in note20 below. 18. Related parties Relationships Transactions between the Group companies that have been eliminated onconsolidation are not disclosed in this note. Anurag Dikshit, Ruth Parasol and Russ DeLeon are the ultimate controllingshareholders of the Group. During the period the controlling shareholders, andcorporate entities controlled by controlling shareholders, did not receive anyremuneration in the form of salary, bonuses or consulting fees (2006: $0.7m). Remuneration of key management personnel Key management personnel are those individuals who the Directors believe havesignificant authority and responsibility for planning, directing and controllingthe activities of the Group. The aggregate short-term and long-term benefits,as well as share-based payments of the Directors and key management personnel ofthe Group are set out below: Short-term Long-term Share-based Total $m $m $m $mSix months ended 30 June 2006 7.7 - - 7.7Year-ended 31 December 2006 14.7 - 56.1 70.8Six months ended 30 June 2007 7.4 - 40.0 47.4 Transactions The following aggregate balances were due to/(from) key management at eachperiod end: As at 30 June 2007 2006 Due to - 0.6 Due from - - The wife of a Principal Shareholder owns a property leased to the Group's Indiansubsidiary. Rentals paid were: $ Six months ended 30 June 2006 14,858Six months ended 30 June 2007 15,320 Additionally a security deposit in the sum of $13,800 has been paid (2006:$13,800). The Group's subsidiaries continued to provide the following propertyarrangements during the period: - the lease of an unfurnished property to the Group Finance Director atan annual lease rental of £44,400 ($84,000), which the Directors believe is thefair rental value of the property. This property was sold at fair market valueof £1.2m to the Group Finance Director on 25 May 2007; - the Chief Executive Officer continues to reside at two furnishedproperties in Gibraltar which the Directors believe have a fair rental value of£84,000 ($158,800); and - the Chief Executive Officer has an additional property available forhis use at fair rental value. The Chief Executive Officer has not availedhimself of the property and the property has been leased to other employees atfair rental value. Former directors and founders have leased their personal properties to employeesof the Group. The Directors believe that these lease arrangements are fairvalue personal arrangements between the parties involved and are independent ofthe Group. Principal Shareholders have also given certain indemnities to the Group. On 20 June 2007 Mr Garber gifted 300,000 Shares to the Employee Trust. Therewere no conditions applying to this gift but Mr Garber recommended to theEmployee Trust that the Shares be awarded to those PartyGaming employeesdemonstrating an outstanding commitment to helping the Company achieve itsobjectives in 2007 or who come up with exemplary entrepreneurial ideas for theCompany's business. Share option arrangements Certain key management and certain directors were granted nil-cost options underservice contracts, which were formally granted under the Group's share optionplan (see note 19). Bonita Trust During the first half of 2007, The Bonita Trust made or committed to makepayments to certain individuals that were employed or had previously beenemployed by the Group. These payments were made independently of the Group andwere over and above the amounts that the Board had already determined should bepaid by the Group to those employees and former employees. However, as thesepayments were based primarily on the Company's share price, the Board considersthese to fall under the criteria for share-based payments under IFRS2 and in thesix months to 30 June 2007 has charged an amount to the income statementtotaling $0.2m as if such amounts had been paid by the Group itself. Acorresponding amount has been recorded as a capital contribution in the Group'sbalance sheet. Of the $0.2m, $nil relates to Discontinued operations. Further details on the Bonita Trust can be found at www.bonitatrust.org. 19. Share-based payments As disclosed in note 4 the Group has adopted and granted awards under theNil-Cost Plan, FMV Plan, PSP Plan and Executive FMV Plan as a reward andretention incentive for employees of the Group, including the ExecutiveDirectors (the "Participants"). The Group has used the binomial options pricingmodel. An appropriate discount has been applied to reflect the fact thatdividends are not paid on options that have not vested or have vested and havenot been exercised. (a) Nil-Cost Plan During the six months to 30 June 2007, options over 4,957,375 Shares weregranted to Participants, representing 0.12% of the total issued share capital.Options granted under this plan during the period generally vest in instalmentsover a four to five year period. There are no performance conditions attachedto options issued by the Group. Details of modifications to share options areset out in note 4. Six months to 30 June 2007 2006 Number (m) Number (m) Outstanding at beginning of period 170.3 126.7Shares over which options granted during the period 5.0 48.1Shares in respect of options lapsed during the period (21.2) (18.0)Exercised during the period (31.5) (37.3) Outstanding at end of period 122.6 119.5 Exercisable at the end of period 12.6 1.6 (b) FMV Plan During the six months to 30 June 2007, options over 62,499,591 Shares weregranted to Participants, representing 1.5% of the total issued share capital.Options granted under this plan during the period generally vest in instalmentsover a three year period. There are no performance conditions attached tooptions issued by the Group. Executive Directors are not eligible to receiveany awards under this plan. Six months to 30 June 2007 2006 Number (m) Number (m) Outstanding at beginning of period - -Shares over which options granted during the period 62.5 -Shares in respect of options lapsed during the period (0.7) -Exercised during the period - - Outstanding at end of period 61.8 - Exercisable at the end of period 3.1 - (c) PSP Plan During the six months to 30 June 2007, awards over 3,207,316 Shares were grantedto Participants, representing 0.08% of the total issued share capital. Theseawards vest subject to the achievement of a total shareholder return ("TSR")performance target over the 3 year period 1 January 2007 to 31 December 2009compared to the median TSR of a sector comparator group. These PSP awards vestautomatically if and when the Company's Remuneration Committee determines theaforementioned performance condition has been satisfied. Six months to 30 June 2007 2006 Number (m) Number (m) Outstanding at beginning of period - -Shares over which options granted during the period 3.2 -Shares in respect of option lapsed during the period - -Exercised during the period - - Outstanding at end of period 3.2 - Exercisable at the end of period - - (d) Executive FMV Plan During the six months to 30 June 2007, awards over 2,043,600 Shares were grantedto Participants, representing 0.05% of the total issued share capital. Theseoptions vest subject to the growth in the Company's Clean Earnings per Shareequalling or exceeding 15% per annum in the three year period from 1 January2007 to 31 December 2009. Six months to 30 June 2007 2006 Number (m) Number (m) Outstanding at beginning of period - -Shares over which options granted during the period 2.0 -Shares in respect of options lapsed during the period - -Exercised during the period - - Outstanding at end of period 2.0 - Exercisable at the end of period - - 20. Acquisitions made during the period Empire Online Limited ("EOL") On 19 January 2007 the Group acquired assets, players and gaming relatedcontracts associated with EOL, an exclusively non-US facing gaming business. Inconsideration for the acquisition, PartyGaming issued 83,325,934 new shares inPartyGaming with an average price of 29.32p over the 15 days prior to the dateof acquisition. In calculating the goodwill arising on acquisition, the fair value of the netassets of EOL has been assessed and adjustments from book value have been madewhere necessary. In the investigation period since the date of acquisitionfurther adjustments to the fair value of the net assets have made. Adjustmenthas also been made to convert share capital issued using the foreign exchangerate prevailing on the date of acquisition. These adjustments are summarised asfollows: Fair value Fair value adjustment as as reported Fair value reported at at year Adjustments Book value year ended 31 ended 31 in Final fair on December December investigation value to the acquisition 2006 2006 period Group $m $m $m $m $m Intangible fixed assets 221.8 (202.8) 19.0 - 19.0 Net assets 222.1 (202.8) 19.3 (0.3) 19.0 The fair value adjustment relates to the write-off of goodwill and theattributing of fair values of customer lists and brands acquired as part of theacquisition. These customer lists and brands are being amortised over theirestimated useful economic lives of up to 5 years. As reported at Fair value year adjustments in ended 31 investigation Final fair value December 2006 period to the Group $m $m $m Fair value of net assets acquired 19.3 (0.3) 19.0Goodwill 28.3 0.7 29.0 Fair value of consideration including expenses 47.6 0.4 48.0 This is represented by: As reported at year ended 31 Adjustments in Final adjusted December 2006 period value $m $m $m Share-based consideration to EOL 37.9 0.3 38.2Deferred share-based consideration to EOL 9.5 0.1 9.6Expenses 0.2 - 0.2 47.6 0.4 48.0 Intercontinental Online Gaming Limited ("IOG") On 19 January 2007 the Group acquired assets, players and gaming relatedcontracts associated with IOG, an exclusively non-US facing gaming business. Inconsideration for the acquisition PartyGaming issued 31,867,908 new shares inPartyGaming with an average price of 29.32p over the 15 days prior to the dateof acquisition. In calculating the goodwill arising on acquisition, the fair value of the netassets of IOG has been assessed and adjustments from book value have been madewhere necessary. In the investigation period since the date of acquisitionfurther adjustments to the fair value of the net assets have made. Adjustmenthas also been made to convert share capital issued using the foreign exchangerate prevailing on the date of acquisition. These adjustments are summarised asfollows: Fair value Fair value adjustment as as reported Fair value reported at at year adjustments Book value year ended 31 ended 31 in Final fair on December December investigation value to the acquisition 2006 2006 period Group $m $m $m $m $m Intangible fixed assets - 10.0 10.0 - 10.0 Net assets 3.4 10.0 13.4 (3.4) 10.0 The fair value adjustments relate to the recognition of the customer lists andbrands acquired as part of the acquisition. These intangibles are beingamortised over their estimated useful economic lives of up to 5 years. As reported at year Fair value ended 31 adjustments in December investigation Final fair value 2006 period to the Group $m $m $m Fair value of net assets acquired 13.4 (3.4) 10.0Goodwill 5.0 3.6 8.6 Fair value of consideration including expenses 18.4 0.2 18.6 This is represented by: As reported at year ended 31 December Adjustments Final adjusted 2006 in period value $m $m $m Share-based consideration to IOG 15.3 0.2 15.5Deferred share-based consideration to IOG 2.9 - 2.9Expenses 0.2 - 0.2 18.4 0.2 18.6 As a result of these two transactions a total of 115,193,842 new shares havebeen issued in the period. 21. Dividend The Board believes that in the current environment, it would be imprudent to payan interim dividend for the 2007 financial year. 22. Cashflows from Discontinued operations Six months to 30 June 30 June 30 June 2007 2006 $m $m Net cash from operating activities (10.8) 268.9Net cash used in investing activities - (115.3)Net cash used in financing activities - -Net increase in cash and cash equivalents (10.8) 153.6 Independent Review Report to PartyGaming Plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 June 2007 which comprises a consolidated interim balancesheet as at 30 June 2007 and the related consolidated statements of income,cashflows and changes in equity for the period then ended and related notes. Wehave read the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. Our report has been prepared in accordance with theterms of our engagement to assist the Company in meeting the requirements of theListing Rules of the Financial Services Authority and for no other purpose. Noperson is entitled to rely on this report unless such a person is a personentitled to rely upon this report by virtue of and for the purpose of our termsof engagement or has been expressly authorised to do so by our prior writtenconsent. Save as above, we do not accept responsibility for this report to anyother person or for any other purpose and we hereby expressly disclaim any andall such liability. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with Listing Rules ofthe Financial Services Authority which require that the accounting policies andpresentation applied to the interim figures should be consistent with thoseapplied in preparing the preceding annual accounts except where any changes, andthe reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standard on Auditing (UK and Ireland)and therefore provides a lower level of assurance than an audit. Accordingly wedo not express an audit opinion on the financial information. Emphasis of matter - Regulatory issues In forming our review conclusion, which is not qualified, we have considered theadequacy of, and draw attention to, the disclosures made in note 15 to thefinancial information concerning the residual risk of adverse action arisingfrom the Group having had customers in the US prior to the enactment of theUnlawful Internet Gambling Enforcement Act. Note 15 includes a statement thatthe Group has not been able to quantify any potential impact of the regulatoryuncertainty on the financial information for the period ended 30 June 2007. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2007. BDO Stoy Hayward LLP Chartered AccountantsLondon29 August 2007 This information is provided by RNS The company news service from the London Stock Exchange

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