Annual Report and Accounts 2011

Transcription

1 Annual Report and Accounts

2 Ladbrokes plc is a leader in the global betting and gaming market with annual Group revenues of over 970 million Business and financial highlights Revenue growth driven by UK Retail which was up 2.7% with 16.6% growth in machines Resilience in OTC business with amounts staked marginally up in Operating profit (1)(2) 0.4% down on an underlying basis (3) with profit before tax and net finance expense down 6.1% Development of Digital offer on track with investment in technology and increased marketing Continued strong cash generation underpins dividend growth Net Revenue (1) (illion) 980.3m +0.4% 980.3m 976.6m m Operating Profit (1)(2) (illion) 193.5m -4.3% 193.5m 202.3m m Dividend (pence per share) 7.80p +2.6% 7.80p 7.60p p For further information about the Group visit: (1) Continuing operations excluding High Rollers. (2) Profit before tax, net finance expense, amortisation of customer relationships and non-trading items. (3) Excludes one-off credit of VAT received in 8.1 million at total Group level.

3 01 Investing to reinvigorate Ladbrokes through enhanced technology, more products and better service to our customers Overview 02 Our business 04 Chairman s statement 05 KPIs Business review 06 Chief Executive s review 10 UK Retail 11 European Retail 12 Digital 12 Telephone 13 Regulation 14 Financial review 16 Risks and how we manage them 19 Fair Play Corporate responsibility at Ladbrokes Governance 22 Board of directors 24 Corporate governance 29 Directors report 31 Directors remuneration report Statutory reports and financial statements 44 Consolidated income statement 45 Consolidated statement of comprehensive income 46 Consolidated balance sheet 47 Consolidated statement of changes in equity 48 Consolidated statement of cash flows 49 Notes to the consolidated financial statements 88 Statement of directors responsibilities in relation to the consolidated financial statements 89 Independent auditor s report to the members of Ladbrokes plc 90 Company financial statements 91 Company balance sheet 92 Notes to the Company financial statements 100 Statement of directors responsibilities in relation to the Company financial statements 101 Independent auditor s report to the members of Ladbrokes plc 102 Five year financial record 103 Shareholder information 104 Corporate information 105 Glossary Overview Business review Governance Financial statements

4 02 Our business Our business objective is to build an e enabled international betting and gaming business Retail excellence Digital capability Pricing, trading and liability management Customer and brand Regulatory leadership UK land based betting and gaming has developed to become a genuine leisure activity. Our objective is to continually evolve the experience for our customers, whilst optimising both our margin and operational efficiency. Betting and gaming online or increasingly on mobile continues to grow. We are making good progress in acquiring and developing improved technology, expanding our range of Digital products and delivering a more compelling and competitive offer to customers. All are critical to optimising margin, broadening product range and establishing a market leading customer offer. Our increasing use of data and trading algorithms has enabled us to make great progress in expanding the number of Bet in Play markets available to our customers round the clock. Ladbrokes is the most recognised betting brand in the UK. We have begun the process of evolving the brand to make it more exciting, placing customer experience and insight right at the heart of our offer. The ongoing evolution of tax and regulation plays a key part in the performance of our business. We continue to play a lead role in ensuring the industry s contribution to the economy, jobs and taxes is understood. For more information go to pages 6-13 or

5 03 By focusing on our five critical success factors and restructuring our business to focus on the customer, we are developing a business for a multi channel future to deliver long-term growth and value for our shareholders. Overview UK Retail European Digital Telephone Retail Ladbrokes shops are a familiar fixture on British high streets. Revenue is driven by traditional Over the Counter sports betting and increasingly by gaming machines, which have shown an increase in gross win of 19% in. We operate retail businesses in Ireland, Belgium and also in Spain through a joint venture, Sportium, which leads the market in Madrid and is expanding into other regions, including Valencia. Ladbrokes is part way through an investment programme which is designed to enhance our Digital offer. Better technology, more products, a new online sportsbook and innovation in mobile are making the business more competitive. Telephone betting remains a service popular with a significant number of customers in spite of the growth of digital and mobile communications. Calls to the telephone service are taken in our shops and in our call centre in London. We also operate a telephone service for our High Roller customers. Number of shops 2,127 Operating profit (1)(2) 152.3m Number of shops 592 Net revenue mix sportsbook 38%, casino 35%, games 10%, poker 9%, bingo 8% Number of telephone calls 4.3m Gross win per machine per week 860 Operating profit (1)(2) 13.4m Amounts staked 923.0m Operating profit (1)(2) 55.0m Unique active players (3) 878,000 Net revenue (1) 9.5m Unique active players (3) 67,000 (1) Continuing operations excluding High Rollers. (2) Profit before tax, net finance expense, amortisation of customer relationships and non-trading items. (3) A player who has contributed to rake and/or placed a wager in the period.

6 Chairman s statement Peter Erskine Chairman Peter Erskine considers the Group s performance over the past year, and assesses how recent organisational and Board changes position the business for Dear Shareholder, has been a key development year which has seen significant investment in Ladbrokes as part of the strategy to reinvigorate the business which we laid out in. Richard and the executive team have remained absolutely focused on the key objectives identified last year and have made good progress in delivering them. In the Digital business we are seeing a more competitive betting and gaming offer with a combination of better technology, a wider product range and a more compelling customer proposition. In Retail I am pleased that we have maintained a tight control of costs and have grown operating profit (1), in spite of a difficult economic climate, with resilience in the Over the Counter business and really quite impressive growth momentum in machines. But there is much more to come. In 2012 we expect to grow Digital revenues, building upon our investments in technology and the growth in customers that has been driven by the increase in marketing spend during H2. Notwithstanding tough prospects for UK consumers in 2012, these are also exciting times in the retail business where initiatives to drive a clear growth agenda are already under way. Organisational Change In September the internal operating structure of the business was reorganised into three main business units: Product, Customer and Channels. This matrix type structure means all parts of the business are now orientated around a truly customer-led approach. All work closely to develop an increasingly cross-channel offer, for example offering more of the same games across Retail and Digital including mobile. In April we announced the appointment of Ian Bull to the plc board as Chief Financial Officer. Ian, who joined us from Greene King plc, has a wealth of knowledge within the regulated leisure sector as well as a background in growing businesses within both the digital and retail space. His experience in operations and of managing a tight focus on costs is now being applied effectively in the Ladbrokes business. Board and Corporate Governance Two non-executive directors have been appointed to the plc board. Christine Hodgson, Chairman of Capgemini UK and Richard Moross, founder and Chief Executive of Moo.com will join the Board on 1 May 2012, bringing with them complementary skills and experience that will be of significant benefit as we move forward. Pippa Wicks who has been a non-executive director since 2004 has decided to retire at the coming Annual General Meeting and we thank her for her significant contribution. The Board continues to set the tone for high standards of corporate governance, a report on which is set out on pages 24 to 28. During the Board has been applying the principles relating to its role and effectiveness. This included further evolving the strategy for the Company s long-term success, holding the executive team accountable in its new matrix style structure for the execution of that strategy, and developing the board structure in a manner consistent with the aim of fostering diversity. I believe that the Board has the right combination of skills and expertise, and that Board meetings have a healthy level of debate with the right mix of enquiry and support of the executive directors from the non-executive directors. Dividend The Group recommends paying a final dividend of 3.90 pence per share taking the full year dividend to 7.80 pence per share. This is line with our policy of a target dividend cover of approximately 2.0 times underlying earnings excluding High Rollers. The dividend will be payable on 26 April 2012 to shareholders on the register on 16 March Summary Against the background of a continuing economic downturn I am encouraged by the performance of the business this year. Initiatives to control cost and evolve our offer and competitiveness in Retail, strong growth indicators and mobile innovation in Digital and further planned improvements in our pricing and trading technology, position Ladbrokes well for The business continues to be strongly cash generative, and newly agreed banking facilities which run until 2016 enhance the strength of the balance sheet and provide us with flexibility going forward is a critical year for Ladbrokes to deliver on the investments we have made in the past 18 months and I am confident that the plans and people are in place to do just that. Peter Erskine Chairman (1) Before non-trading items.

7 05 Ladbrokes plc Overview Measuring our performance KPIs The Board and the executive team use a number of key performance indicators ( KPIs ) to monitor Group and divisional performance against budgets and forecasts as well as to measure progress against our strategic objectives. There are also a number of other Group and divisional metrics that are used by the business to monitor results, which are referred to within the business and financial reviews. Here we provide a summary of the KPIs for our two largest divisions. KPIs UK Retail KPIs Digital % Gross Win per machine per week Measure used by management to assess the performance of our machine offering in UK Retail shops Measure used to monitor the profitability of OTC performance expressed as a proportion of amounts staked m 458.7m 462.4m 70, % EBIT(4)(5) per shop Enables management to analyse divisional performance on a per shop basis across the retail estate. Used to gauge performance versus market. 15.6% 16.7% 15.9% 475.9m +3.7% Operating Costs(2)(4) Analysis of costs is key to monitoring performance and enables areas for further cost efficiencies to be identified. 183, , , % OTC Gross Win margin 2009 Measure used by management to assess the performance of our Digital offering , % Over the Counter (OTC)(1) Gross Win per shop Measure used by management to assess the performance of our OTC product offering (non-machine) in UK Retail shops ,900 66,300 62, m -3.5% Net Revenue(1) 163.4m m 160.7m 55.0m -12.3% EBIT(3) Measure of divisional profitability which is equal to Net Revenue less all relevant operating costs and gaming taxes , % Unique Active Players(1) Defined as any player who has contributed to rake and/or placed a wager in the period. It is a measure of our success at recruiting and retaining customers , , , % Adjusted Cost per Acquisition(1) Measuring how much on average it costs us (marketing spend and affiliate expenses) to recruit each new customer. 878, , , , % Real Money Sign-Ups(1) A new player who has registered and deposited funds into an online account. It is a measure of our success at attracting new customers. 55.0m 62.7m 46.1m 2009 Notes: (1) A full list of terms is set out in the Glossary on page 105. (2) Operating costs is a total of cost of sales after depreciation and amounts written off non-current assets and before gross profits tax, plus administrative expenses. (3) Profit before tax, net finance expense and amortisation of customer relationships before non-trading items from continuing operations. (4) Before non-trading items. (5) excludes the impact of the 6.7 million VAT credit

8 Chief Executive s review Richard Glynn Chief Executive Officer Richard Glynn considers how the business is positioned 18 months after starting in his role as Chief Executive and looks forward as he looks to build upon progress to date in 2012, a key year for operational delivery in the strategy to reinvigorate Ladbrokes. 06 Last year you described an ambition to make Ladbrokes favourite again. How have you progressed since then? There is no doubt that we are making good progress. A good example is the momentum we have achieved in our machines performance where, with the right technology, the right product and a determined operational mindset, we have regained our competitive edge and are fast closing the gap on our competitors. The speed at which we have caught up has been a real success and the team should be very proud of that. I am excited about our plans for machines in 2012 and I know that the team can t wait to get started. I always saw machines as the first major test in terms of reinvigorating Ladbrokes, but they are only part of the clear vision for the business that I laid out in February. In 2012 we are looking to achieve a similar acceleration in our Digital performance which is the next key part of the strategy. The business is well positioned to grow. We have taken great strides to increase our ability to deliver to customers, significantly expanding and improving the range of sports betting and gaming products which they can play through a better and easier to use website and a faster, more sophisticated range of mobile apps. It is now a real test of our ability to execute and deliver. Over the past twelve months, our investments in new trading and e-commerce platforms have enabled us to plug into different technology. We have our longstanding relationships with key suppliers like Microgaming, but have changed the terms under which we work together. This means we can use their market leading services but also work with other suppliers to ensure we offer the best products in the marketplace to Ladbrokes customers. What has been particularly pleasing has been the response of the Ladbrokes team. There is a great deal of talent at Ladbrokes and I m really pleased to see the real desire and passion our people have for taking on the challenges we face. The cultural progression has been a real success this year is a critical year for us all. We will continue to invest in the business in a way that drives real improvements for our customers and also further grows our marketing presence where we are already seeing good early results. We do not expect to receive any assistance from the economy in the near term we know the consumer environment will be tough. However we have a clear strategic plan, are organised in the right way and are investing in the right areas. We have a clear set of priorities which enable us to build on our early successes and grow the business into next year and beyond. Could you share a little more detail on the key developments within Digital and how you expect these to enhance the business? We have taken significant strides this year towards building and shaping a more competitive Digital business. This is being achieved through a combination of investment in technology, key personnel, improved commercial relationships, better online marketing and the expansion of content. Throughout the year we have been developing a new pricing and trading platform which has enabled us to increase significantly the number of Bet in Play (BIP) or in running events (matches/games) we offer, as well as the number of markets traded per event. In just the last six months of the year we increased our football offer from 200 events per week to an average of 700. BIP is the fastest growing area of the sports betting market and a real consumer battle ground. We will continue to expand the number of events and markets in To make the most of having better products we also have to ensure that customers enjoy using them. Another key part of our Digital investment in has been the development of a more sophisticated, attractive and up to date website. Far more than a lick of paint, this has seen us develop functionality, ease of use and the overall customer offer. Richer content, more personalisation and superior search and navigation enable customers to get to their bet quicker and provide a more dynamic and exciting live betting experience. While our heritage is very much founded in sports betting, we have also strengthened our gaming offer, which is key to enhancing our credentials as a truly multi-product, multi channel business. Following the negotiation of a new agreement with our key supplier Microgaming in the summer, we now have the flexibility to offer a broader range of games to customers, adding 61 new slots since July. We now have greater control over what we offer customers and how we present it to them, greatly improving our ability to evolve in line with fast-changing customer preferences in the digital market. This is key to developing a multi channel customer offer where the same products are offered to customers online and in Retail. Another important area of our Digital capability is online marketing. This is about making sure that we are attracting new potential customers, whilst also stimulating existing ones in order to drive profitability. Throughout the year we have restructured this part of the business and continue to refine the way in which we use affiliate marketing, pay per click (PPC) and search engine optimisation (SEO), the cornerstones of digital marketing. Better management and measurement has helped improve their effectiveness and efficiency, with higher rates of conversion from website visits through to registration and sign-up.

9 07 There is no doubt we are making progress in Digital. Clear growth in sign-ups, actives and turnover, particularly in the sportsbook, are encouraging. As all the pieces of the jigsaw start to come together we expect to progress further, particularly through growth of net revenue, in You have spoken before about the importance of mobile to your overall Digital offer. Has this also progressed? We all rely increasingly on mobile devices with the mobile internet changing the way in which we purchase goods and services. The growth in mobile betting has been driven by convenience, ease of use and the facility to place a bet spontaneously. Our mobile net revenue grew by 174% in with 22% of Digital customers now using Ladbrokes mobile. The size of our mobile business is ahead of many of our key competitors. We are continually evolving existing apps, adding new ones and looking to innovate our offer to ensure that we grow this competitive advantage. We are all excited by the opportunity that mobile betting and gaming represents and 2012 will be a big year for us. An increased focus on gaming products, specific apps for tablet devices and the launch of a new sportsbook platform will see us driving to create genuine differentiated experiences for mobile users. We have heard you talk before about reinvigorating the Ladbrokes brand. Why is this so important? The Ladbrokes brand remains strong in the UK with the best unprompted awareness in the industry. Whilst our retail presence is a huge advantage, I have always believed that increasing the relevance of the brand to today s consumer is critical. Since the launch of our new Game On marketing campaign which is fronted by the eccentric Italian football commentator Tiziano Crudelli, we have seen strong growth in the sign-ups, actives and turnover of both our sportsbook and casino products. The new campaign is about creating vibrancy and capturing the real excitement that placing a bet can generate. However advertising is not about awards but about delivering results. Increasing our marketing investment didn t make sense earlier in the year, but now that we are starting to develop a more compelling offer, with more and better products for customers and can now evaluate the response and returns from campaigns, we will maintain an increased level of advertising spend going forward. The consumer environment on the UK High Street is tough at the moment. How is your Retail business addressing this? I think we can be pretty certain that 2012 will continue to be very challenging for UK consumers and businesses alike. In this environment it goes almost without saying that we continue to maintain a tight control on costs and look to build on the success we have had in this regard over the past couple of years. In January 2012 we introduced a new operating structure to our retail shops which simplifies the way in which shops are staffed, reducing average number of staff per hour and thereby generating cost savings. Our focus however extends far beyond cost discipline alone. I believe that in difficult economic times, companies that maintain a competitive edge and deliver value and excellent service to customers can capture market share. The new operating structure has been designed to be consistent with the way in which the retail betting and gaming experience has evolved in recent years, to become much more of a leisure/ entertainment activity with a growing trend towards a proactive approach to customer service. Redefined staff roles place much greater emphasis on this and allow us to reward staff better, providing greater incentives for good performance and results. Changing roles also support a drive to push our existing estate harder and smarter as we look to compete more effectively, making better use of market data and customer insight. New shops opening in 2012 and beyond will also account for changing retail trends, and their design reflects the growing need for more interaction between staff and customers and greater use of technology. We are confident of our ability to maintain momentum in the growth of machines, which generated an additional 58 million gross win in will see us use yield management tools to drive machine profitability further, whilst the expansion of the Odds On loyalty card will enable us to personalise the machines offer. We will not be resting on our laurels in Retail; rather pushing harder on all fronts to control, develop and grow in You placed great emphasis on putting the customer at the heart of your business how is this vision taking shape and is it related to the way in which you have now organised the business? The move to a new operating structure has enabled us to form a single view of the customer across all products and channels. Customer behaviour shows that channel and product divisions are starting to blur, with an increasing number of customers betting on more than one product and doing so in a shop as well as on their mobile or laptop. Data shows us that customers who exhibit these behaviours are more valuable than those who do not. In order to take advantage of this, we have changed the organisational set up of the business into the matrix type structure seen in other industries. We are now organised into three areas of expertise: Channels, Product and Customer. These groups enable us to learn more about customer behaviour across the entire business, develop the products customers want regardless of how they consume them and deliver a better, more service orientated experience across all points of consumption. We have already, for the first time, begun to offer the same games across all our channels maximising our supplier relationships and delivering a more consistent offer to Ladbrokes customers. You have always been very clear that international opportunities would be reviewed on their own merits. With the development of the Digital business starting to come together, is now the time to be expanding overseas? We have been very focused up to this point on getting the basics right. There remains a huge opportunity for us right here in the UK and making sure that we have the right capabilities and offer to take advantage of that is still the priority. That said, there are opportunities internationally and where tax and regulation are sensible we can and will engage. We are now a licensed operator in Denmark and have applied for an online licence in Spain. In early 2012 we invested $3 million in the Stadium Technology Group, a Nevada based provider of sportsbook software to Las Vegas casinos. The investment places us well to grow in the US if plans to liberalise sports betting in that market progress will be a big year for sport. How significant will this be for Ladbrokes? You don t need to be a huge sports aficionado to be looking forward to this summer. A combination of the London Olympics and Euro 2012 promises to have the whole country buzzing. Euro 2012 in particular is a big opportunity for us. Major football tournaments are landmark events for betting companies and while you can t guarantee results, it is a major customer recruitment opportunity, particularly for a recognised brand like ours. The Euros has the ingredients to be very successful for us with both England and Ireland having qualified and in good form. Whilst the Olympics themselves are unlikely to generate significant turnover, they are a huge sporting event and therefore provide a great opportunity to publicise our brand. In addition to the Olympics and Euros, we have our standard fare of Ascot, Wimbledon, the British Grand Prix and The Open, as well as the Ryder Cup in Chicago and the ICC Twenty20 World Cup in Sri Lanka, so have a great opportunity to perform well and capture our share of what is likely to be a massive year for sport. I can t wait! Business review

10 08 The change to our operational structure in September was the logical progression of our desire to evolve our commercial approach from being product or channel focused to being customer and service orientated. The new structure enables us to place more emphasis on the consistency of product quality and delivery across every channel, allowing teams to specialise in the areas of customer thinking, customer delivery and product design. Customer Group Stephen Vowles Customer Group The Customer Group is headed up by Stephen Vowles. Its objective is to ensure that the Ladbrokes brand and offer is rooted in a deep understanding of our customers and their behaviour. More and more people are now consuming betting and gaming products online. Increasingly reliable and secure technology, the rapid evolution of smart phone ownership and sophisticated marketing techniques have changed the ways in which customers interact with us. As this trend has developed, we have also seen the evolution of multi channel customers, with the division between retail and digital becoming less distinct. As a business we are fundamentally committed to ensuring that we fully understand this evolution and tailor our commercial approach to respond to it. Operationally we have therefore aligned ourselves in a way which enables the business to learn from the behaviour of our customers as it develops. We are now using this insight to shape the games and products we offer through the Product Group and to evolve the way in which they are delivered through the Channels Group. Stephen s team is responsible for all areas within Ladbrokes which directly touch the customer. This includes: development of the brand through traditional marketing via television, radio and printed media; online marketing activity which covers customer acquisition (through presence and promotions) and customer development (loyalty and customer journey); research; and consumer public relations. Tiziano Crudelli, the Italian football commentator, and Chris Kamara the football pundit, who both feature in our current advertising campaign.

11 09 Product Group The Product Group is headed up by Richard Ames and is responsible for sourcing, developing and delivering best-in-class products in all sectors and on all platforms. It is also responsible for the technology which underpins all of our betting and gaming products. This includes pricing, trading and liability management, an area in which we have made good progress this year. This is well demonstrated through the growth in the number of football matches per week in which we offer Bet in Play markets. Significant increases in the level of automation in our trading systems have enabled a 250% increase from 200 matches a week to weeks where we now offer over 700. We have already referred to the growing trend for customers to interact with us or use our products across more than one channel. By providing a consistent set of products and services across each of these channels we aim to capitalise on this trend, encouraging customers to use our products across retail, online and mobile. Over the past year we have renegotiated commercial agreements with many of our key suppliers and are well progressed in the development of our own trading platform, both of which have given us more flexibility in sourcing a broader range of products, which can be offered to customers on a broader range of platforms. This enhanced level of control is critical to ensuring that we can offer the same range of products across the whole of the Ladbrokes business, something that we have now started to do. Business review Richard Ames Product Group Thunderstruck & Mermaids Millions available on iphone and Android smartphones Our mobile offer is competitive, innovative and growing strongly. Convenience and spontaneity make mobile exciting and we are investing to grow further in 2012.

12 10 Channels Group Nick Rust Channels Group The Channels Group is led by Nick Rust whose team is focused upon delivery across all parts of the business where customers consume Ladbrokes product. His team looks to ensure that new and existing product and services work and are delivered to consistently enhance customer experience. With a remit which covers Digital as well as traditional Retail, Nick s team is also responsible for promoting our multi channel culture, whilst ultimately working to ensure that we optimise profits. The Channels team has been instrumental in the delivery of our impressive machine and mobile numbers in as well as playing a vital role in looking to replicate our machines offer outside Retail, working to make our best performing slots games available online too. They are already working hard on improving further our operational competitiveness, whilst pushing the next stage of machine developments as well as evolving Retail delivery through increased use of Self Service Betting Terminals (SSBTs), improved use of video content and trialling new shop formats. The extension of Odds On will help us to personalise the machines offer, enabling us to tailor menus, promotions and messages to customers. UK Retail OTC activity has been resilient throughout with stake per slip broadly flat and amounts staked marginally up by 0.6%. Whilst the growth in stakes benefited in the year from fewer race meeting abandonments (68 meetings lost in Q4 versus only two in Q4 ), this was largely offset by the lack of a major football tournament. Amounts staked adjusting for these factors was down by 0.3%. OTC gross win declined by 5.8% to million driven by a decline in gross win margin and the lack of a major football tournament in the year (the World Cup in generated gross win of 15.3 million). The gross win margin of 15.6% was 1.1 percentage points lower than and 0.9 percentage points lower than the five year margin average. This was as a result of comparatively poor football results in Q4 and a low horse margin due to smaller field sizes, a lower over-round per runner and a higher than average proportion of winning favourites. OTC net revenue decline was 5.9% with OTC free bets increasing by 1.3% or 0.1 million in. We have significantly improved our machine performance in, building upon the strong operational improvements made in H2. We completed the rollout of the new Global Draw terminals to all shops in the retail estate in May, minimising both the length and impact of any adoption lag. The gross win of million was 19.2% ahead of with momentum evident in the H2 uplift of 23.2%. Gross win per machine week grew to 860 in (: 730), an increase of 17.8%. In there were on average 8,050 machines in the estate versus 7,953 in. At 31 December there were 8,128 machines. We expect to continue our progress in 2012 through the increasing use of yield management techniques, further improvements to content from additional exclusive games launches and the growing ability to personalise our machines offer, with the planned rollout of Odds On to machines scheduled for H

13 11 UK Retail Year ended 31 December Year ended 31 December Year on year change % OTC amounts staked 2, , Machines amounts staked 10, , Amounts staked 12, , OTC gross win (5.8) Machines gross win Gross win Adjustments to GW (1) (70.4) (54.6) (28.9) OTC net revenue (5.9) Machines net revenue Net revenue Gross profits tax (57.5) (61.2) 6.0 Associate income (36.8) Operating costs (475.9) (458.7) (3.7) Operating profit (2) European Retail Belgium Belgium Year ended 31 December Year ended 31 December Year on year change % Amounts staked Net revenue (6.7) Betting tax (7.4) (16.8) 56.0 Gross profit Operating costs (30.9) (26.5) (16.6) Operating profit (1) Business review (1) Fair value adjustments, free bets and VAT. (2) Before non-trading items. (3) Greyhound tracks account for 11.0 million of amounts staked and 7.1 million of gross win in (: 10.3 million of amounts staked and 6.5 million of gross win). Despite a higher VAT rate, net revenue from machines grew 16.6%. Operating costs grew 17.2 million in the year to million, a rise of 3.7%. Costs were up 2.4% allowing for the impact of new shop openings whilst benefited from a one-off additional VAT recovery of 6.7 million. Adjusting for this, underlying costs were up only 0.9% or 4.3 million, demonstrating consistent discipline, despite cost headwinds. This has been achieved despite a 7% increase in total shop opening hours which have been extended across as part of our overall plan to drive competitiveness and market share. Operating profit before non-trading items for the year was up 2.1% (7.0% adjusting for VAT credit) at million. At 31 December there were 2,127 shops (31 December : 2,098) in Great Britain. During the year, we opened 50 new shops and closed 21. In 2012 we are planning for 60 openings. Operating profit (1) within European Retail declined by 0.5 million or 3.6% to 13.4 million. European Retail comprises our operations in Ireland, Belgium and Spain. These are discussed in more detail below. Ireland Ireland Year ended 31 December Year ended 31 December Year on year change % OTC amounts staked Machines amounts staked Amounts staked OTC gross win Machines gross win Gross win Net revenue Betting tax (7.9) (7.4) (6.8) Operating costs (62.1) (59.4) (4.5) Operating profit (1) (15.6) (1) Before non-trading items. OTC amounts staked have to grow in Ireland, up 7.5% (H1: 5.3%) despite a tough economy and extremely competitive market in the Republic of Ireland in particular. Total gross win in Ireland increased by 1.9% to 81.4 million with machines and OTC up 16.3% and 0.9% respectively year on year. The OTC gross win margin of 12.7% was 0.8 percentage points behind with tough horse margins affected predominantly by the major festivals in H1. Faced with the current economic downturn we have focused on local competition and a drive to increase market share in the Republic of Ireland, as well as maintaining a tight control on costs across the whole Irish estate. Operating costs of 62.1 million were up 4.5% on driven primarily by the acquisition of 10 new shops at the start of the year. At 31 December there were 213 shops (31 December : 208) in the Republic of Ireland and 79 shops (31 December : 78) in Northern Ireland. During the year, we opened two new shops, acquired 10 and closed six. (1) Before non-trading items. The performance of the Belgium business has been predominantly driven by a change in tax regime from a turnover tax to a 15% gross profits tax. This was introduced from 1 January in Flanders and Wallonia and in Brussels from 1 April. This change was fully passed on to customers and we have seen amounts staked increase steadily throughout the year with an expected decrease in net revenue more than offset by the decline in betting tax. Gross profit in increased by 6.2 million. Operating costs were up in the year by 4.4 million. This was driven by an increase in content costs and higher commission based payments to our independent shop managers following the positive impact of the tax change. Operating profit for increased 37.5% to 6.6 million. At 31 December there were 282 shops versus 288 at 31 December. Spain Year ended Year ended Year 31 December 31 December on year change Spain % Operating loss (1) (2.4) (1.8) (33.3) (1) Before non-trading items. The performance in Spain for includes start up costs associated with our expansion beyond Madrid into Aragon in the year, where trading commenced at the end of April. We expect to begin trading in both Valencia and Navarra during H The Spanish economy continues to be difficult and performance has also been impacted by the introduction of a national smoking ban which was introduced on 2 January. Despite the challenging market, Sportium remains the market leader in Madrid. Amounts staked in Madrid grew 8.1% in the year and the business generated a gross win margin of 18.4%. At 31 December there were 169 corners (105 Madrid, 64 Aragon) (: 91 corners) and 18 standalone shops (Madrid only) (: 15 shops).

14 Digital Digital Year ended 31 December Year ended 31 December Year on year change % Net revenue Sportsbook (5.2) Casino Poker (24.5) Bingo Games Net revenue (3.5) Betting tax (0.4) n/a Operating costs (108.0) (106.7) (1.2) Operating profit (1) (12.3) (1) Before non-trading items and amortisation of 2.6 million (: nil) in respect of customer relationships. has been a year of transition for the Digital business. Throughout the year we have been working towards developing a more competitive offer through increased investment in technology, Digital marketing and the delivery of broader and better content through new and existing supplier arrangements. Digital net revenue fell by 6.0 million (3.5%) to million ( included 6.8 million from the World Cup) with operating profit down 12.3% at 55.0 million. This has been driven by the decline of poker and a weak sportsbook margin, particularly in Q4 which was affected by a high proportion of winning favourites in horseracing and generally unfavourable football results. Active players grew by 9.9% driven by growth in sportsbook and casino being partially offset by a decline in poker and bingo. Sign-ups have increased by 11.0% with strong H2 growth supported by increased investment in Digital marketing, including a new TV campaign which started in August. Costs were up 1.2% for the full year, with H2 costs up 6.2%, reflecting the increase in marketing investment year on year after the start of the new campaign. Digital operating profit overall was 7.7 million (12.3%) below at 55.0 million. Sportsbook net revenue of 61.7 million was 5.2% behind (5.8% ahead adjusting for 6.8 million World Cup revenue in ). This decline was largely 12 driven by a lower gross win margin which was down 0.5 percentage points to 6.0% due to weaker horse and football margins, particularly in Q4. Amounts staked grew 6.4% for the year as a whole, with strong progression in H2 after the commencement of increased investment in a new Digital marketing campaign, which included new TV advertising to support the brand. Amounts staked, 0.6% down in H1, grew 6.4% in Q3 and 22.2% in Q4 (41% up for UK only). Growth in sportsbook actives has shown a similar pattern, up 11.2% for the year, but 24.1% in Q4. Our investment during the year in a new pricing and trading platform enabled us to offer significantly more Bet in Play markets. The number of football events traded per week reached over 700 in October. We will grow our Bet in Play offering further in 2012 supported by the launch of the new online sportsbook in Q1. Bet in Play amounts staked grew 13.4% in the year, 19.8% in H2 and now represent 49% of non-racing activity (: 42%). Casino net revenue grew 2.9% with active players growing 14.4% driven primarily by H2 marketing campaigns including a free spins offer. Yield per customer declined 10.2% vs. due to an increase in lower yielding actives together with volatility in contributions from higher value customers. Poker net revenue fell by 24.5% to 14.2 million as the market place remains challenging. Active players declined 16.2% with yield falling by 10.5%. We will be reviewing our poker offer in 2012, with a view to improving our competitive position in what is a tough market. Bingo net revenue grew 2.2% to 14.0 million with active players declining 7.1% offset by a 9.3% increase in yield supported by a new customer loyalty scheme. Games net revenue increased by 0.6% with active players growing 5.0% driven in H2 by new games content including Rainbow Riches and Monopoly. Mobile Mobile continues to grow strongly with revenue growth up 174% to 15.6 million sportsbook: 10.5 million (up 144%) and casino: 5.1 million (up 264%). Overall 22% of Digital players transacted through mobile in, with a third of sportsbook customers using mobile in H2 (FY : 12%). Mobile is a key growth area in the overall digital market and we will continue to focus on improving our customer offer, with more apps, more casino games and a new mobile platform all scheduled for H Telephone In spite of the increased popularity of the internet and mobile, telephone betting remains an important part of a broad service offering, giving customers more ways to bet with Ladbrokes. Difficult trading in the year, driven particularly by football results in H1, meant the Core Telephone Betting business has struggled in. Net revenue was down 41.4% or 6.7 million. This shortfall was partially offset by a reduction in operating costs as we continue to rationalise the call centre. The overall loss for the year was 4.0 million. Telephone Year ended 31 December Year ended 31 December Year on year change % Amounts staked Net revenue (41.4) Gross profits tax (1.4) (2.5) 44.0 Operating costs (12.1) (14.1) 14.2 Operating loss (1) (4.0) (0.4) n/a Operating loss (1) from High Rollers for the year was 3.2 million (: 5.0 million profit). (1) Before non-trading items.

15 13 Regulation Business review A Sustainable Fiscal and Regulatory Framework There are a number of tax and regulatory matters currently being examined by Government which have significant implications for the betting industry. These include Machine Games Duty, the taxation and regulation of remote gambling operators and the future funding of horseracing. Ladbrokes continues to play a lead role in engaging with Government and stakeholders to ensure the industry s contribution to the economy in terms of jobs, taxes and economic growth is fully appreciated and that the impact of any tax or regulatory changes are fully understood. The British betting industry is a highly taxed industry generating 1 billion in taxes in the UK, and retaining only 600 million in profits. It employs around 40,000 people in 8,500 betting shops throughout Britain. Machine Games Duty The Government is expected to confirm in the March 2012 budget the rate of Machine Games Duty. This is a new tax on machine revenues which will replace Amusement Machine Licence Duty, currently payable on each machine, and VAT which is payable on all machine revenues. A gambling industry modelling exercise pointed to a rate of 15% as ensuring no single sector was penalised by the move. Taxation and Regulation of Remote Gambling Operators The Government is reviewing the current tax and regulatory arrangements for remote gambling operators. Further detail on its plans may be forthcoming in the 2012 Budget. Ladbrokes will engage fully with Government to ensure it recognises the importance that tax and regulation work together, rather than merely making regulated businesses uncompetitive by proving commercial advantage to those sitting outside the regulatory net. The Future Funding of Horseracing Closer cooperation between racing and betting is vital to ensuring horseracing remains a core feature of the betting shops for the future. The lack of a data led approach to fixture and race planning means both industries are failing to optimise their returns from racing. Ladbrokes is meeting regularly with racecourse representatives, Government and interested parties to progress a renewed partnership that removes Government from the annual discussions around the funding of racing. We will continue to work to secure a long-term partnership between racing and betting that delivers the best possible racing product to betting shop customers, and delivers sustainable long-term funding for the racing industry.

16 Financial review 14 Ian A Bull FCMA Chief Financial Officer Year ended 31 December Year ended 31 December Continuing operations Revenue Profit before net finance expense, tax and non-trading items Net finance expense (32.8) (14.0) Profit before tax and non-trading items Non-trading items before tax (20.3) (46.2) Profit before tax Income tax expense (16.8) (33.6) Income tax settlement credit Profit after tax continuing Profit/(loss) after tax dis 0.4 (27.1) Profit for the year Trading summary Continuing operations Revenue Revenue from continuing operations decreased by 4.0 million (0.4%) to million (: million). Excluding High Rollers activity, revenue increased by 3.7 million (0.4%) to million (: million) mainly as a result of improved machines performance in the UK Retail estate. Revenue recognition reconciliation to gross win The Group reports the gains and losses on all betting and gaming activities as revenue in accordance with IAS 39, which is measured at the fair value of the consideration received or receivable from customers less fair value adjustment for free bets, promotions and bonuses. Gross win includes free bets, promotions and bonuses, as well as VAT payable on machine income. A reconciliation of gross win to revenue for continuing operations is shown below. Year ended 31 December Year ended 31 December Gross win 1, ,059.3 Adjustments (1) (41.3) (33.5) VAT (61.1) (45.7) Revenue (1) Includes free bets, promotions, bonuses and other fair value adjustments. The table below sets out the gross win and net revenue for each division. Year ended 31 December Gross win Net revenue Year ended 31 December Gross win Net revenue UK Retail European Retail Digital Core Telephone Betting High Rollers (4.1) (4.2) Total 1, ,

17 15 Profit before net finance expense, tax and non-trading items Profit before net finance expense, tax and non-trading items decreased by 19.6 million (9.5%) to million (: million). Excluding High Rollers activity, profit before net finance expense, tax, nontrading items and amortisation of customer relationships decreased by 8.8 million (4.3%) to million (: million) reflecting the improved machines performance offset by weaker OTC and sportsbook margins and a one-off VAT credit in. Corporate costs Before non-trading items, corporate costs rose 0.2 million (0.9%) to 23.2 million (: 23.0 million). The increase largely reflects non-cash costs relating to long-term share incentive schemes partially offset by lower costs elsewhere. Amortisation of customer relationships In there was a 2.6 million amortisation charge within Digital in respect of customer relationships (: nil). Finance expense The net finance expense before non-trading items of 32.8 million was 1.2 million lower than last year (: 34.0 million) mainly reflecting lower average net debt. In, there was also interest income of 20.0 million in respect of an interest rebate following the HMRC tax settlement. Profit before tax The decrease in trading profits as well as a higher overall finance expense, due to the one-off interest rebate in, has resulted in a 19.9% decrease in profit for continuing operations before tax and non-trading items to million (: million). Non-trading items before tax 20.3 million of continuing non-trading items before tax include an impairment charge in European Retail of 10.9 million, 1.9 million loss on the closure of shops and disposal of assets within UK and European Retail and 2.6 million relating to corporate transaction costs. Additionally, 4.4 million of restructuring costs were incurred across the Group. These relate to the re-organisation of the Group to a new cross-channel and customer centric structure. Following the termination of the Group s interest rate swaps in April, the remaining 0.5 million of losses deferred in equity have been recycled to the income statement as a non-trading finance expense. Taxation The Group has made progress in the resolution of historic tax matters and has released tax provisions no longer required. This has led to a taxation charge for continuing operations before non-trading items of 18.4 million, representing an effective tax rate of 11.9% (: 18.4%, excluding the corporation tax settlement described below). There was a tax credit of 1.6 million in relation to non-trading items in (: 2.0 million). Assuming the corporation tax rate reductions previously announced are enacted, our P&L guidance is 13% for 2012 and will remain at this level thereafter. The cash tax rate is anticipated to be circa 13%. In the Group reached a settlement with HMRC which resulted in the recognition in the income statement of a million tax credit in relation to prior years. Dividend The Board today announces a final dividend of 3.90 pence per share taking the full year dividend to 7.80 pence per share, an increase of 2.6% over last year. This dividend is approximately 2.0 times covered by underlying earnings excluding the impact of High Rollers. The dividend will be payable on 26 April 2012 to shareholders on the register on 16 March Earnings per share (EPS) Continuing operations Underlying EPS (before non-trading items, High Rollers and excluding the benefit of the corporation tax settlement in the comparative period) increased by 0.7% to 15.3 pence (: 15.2 pence), reflecting a lower net finance expense and an improved rate of corporation tax. Total EPS (before non-trading items) decreased 67.7% to 15.0 pence (: 46.4 pence), reflecting the benefit of the corporation tax settlement in. EPS (including the impact of non-trading items) was 13.0 pence (: 41.5 pence). Fully diluted EPS (including the impact of non-trading items) was 12.9 pence (: 41.4 pence) after adjustment for outstanding share options. Earnings per share (EPS) Group Underlying EPS (before non-trading items, High Rollers and excluding the benefit of the corporation tax settlement in the comparative period) increased 7.7% to 15.3 pence (: 14.2 pence), reflecting the losses from dis operations in. Total EPS (before non-trading items) decreased 67.0% to 15.0 pence (: 45.4 pence), reflecting the benefit of the corporation tax settlement in. EPS (including the impact of non-trading items) was 13.0 pence (: 38.5 pence). Fully diluted EPS (including the impact of non-trading items) was 12.9 pence (: 38.4 pence) after adjustment for outstanding share options. Cash flow, capital expenditure, borrowings and banking facilities Cash generated by operations was million. After net finance expense paid of 36.0 million, income taxes paid of 18.1 million and 77.3 million on capital expenditure and intangible additions, cash inflow was million. Post dividend payment of 69.0 million and other outflows of 1.9 million, free cash flow of 38.1 million was generated in the year. At 31 December, gross borrowings of million less cash and short-term deposits of 26.4 million has resulted in a net debt of million (: million). During the year the Group signed new five year facilities with its relationship banks totalling 540 million which will mature in These replace the existing arrangements which total 560 million and had been due to mature in The Group has a further 225 million bond which matures in Business review

18 Risks and how we manage them 16 Risk governance and responsibilities The Board has overall responsibility for risk management as an integral part of strategic planning The Executive Committee (made up of executive directors and senior executives) makes recommendations on the overall approach to risk management and identifies the key risks. The Executive Committee is assisted by a Risk Committee made up of Group and divisional senior executives The Audit Committee is responsible for assessing the scope and effectiveness of the systems established to identify, assess, manage and monitor risks Each key risk is assigned Executive Committee member ownership Risk management process The key risks are assessed by the Risk Committee using a bespoke risk methodology and reviewed by the Executive Committee At each Board meeting any changes to key risks are identified and all key risks are reviewed formally by the Board twice yearly The risk management processes are reviewed by the Audit Committee annually Risk management forms an integral part of the Group s internal control, planning and approval process Risk methodology The Risk Committee considers the following impact areas in assessing risks: Legal and regulatory Betting and gaming compliance Financial management and bookmaking Reputation Technology Data integrity and fraud protection Customers Employees For each risk identified within these impact areas the likelihood, consequence, mitigating controls and actions, risk owner and forecast residual risk are identified by the Risk Committee The overall risk level is quantified and assessed to ensure that the appropriate mitigation measures and future actions have been identified Strategy Achieving the strategy outlined in the Chief Executive s review will deliver long-term growth for the benefit of all stakeholders whilst minimising some of the key risks that Ladbrokes faces. Failure to achieve the strategy has the potential to affect the business and its performance. How strategy is established and the associated risks are managed are described in Corporate governance. Principal risks and uncertainties There are general business risks faced by Ladbrokes that are comparable to those faced by most other businesses. In addition, there are more specific risks which are either unique to Ladbrokes or apply to the industry it operates in. The risks outlined here are those principal risks and uncertainties that are material to the Group. They do not include all those associated with Group activities and are not set out in any order of priority. General business risks include: Marketplace changes in the economic environment, changes in consumer leisure spend. Financial availability of debt financing and costs of borrowing, taxation, pension fund liability. Operational recruitment and retention of key talent, execution of international expansion.

19 17 Specific risks that are material to Ladbrokes are: Risks Marketplace Competition Ladbrokes faces competition primarily from other land based bookmakers, online betting exchanges and other online gambling operators. In particular, the online gambling market is characterised by intense and substantial competition and by relatively low barriers to entry for new participants. In addition, Ladbrokes faces competition from market participants who benefit from greater liquidity as a result of accepting bets and wagers from jurisdictions in which Ladbrokes chooses not to operate (because of legal reasons or otherwise). Mitigation Ladbrokes performance and competitive position are continuously monitored and, where appropriate, changes are instituted, including in relation to marketing, product development, yield management, cost control and investment. Acquisition opportunities, with a view to taking advantage of market consolidation, are continuously evaluated. Business review Betting and gaming industry Taxes, laws, regulations and licensing Regulatory, legislative and fiscal regimes for betting and gaming in key markets around the world can change, sometimes at short notice. Such changes could benefit or have an adverse effect on Ladbrokes and additional costs might be incurred in order to comply with any new laws or regulations. Increased cost of product Ladbrokes is subject to certain financing arrangements intended to support industries from which it profits. Examples are the horseracing and the voluntary greyhound racing levies which respectively support the British horseracing and greyhound industries. In addition, Ladbrokes enters into contracts for the distribution of television pictures, audio and other data that are broadcast into Ladbrokes betting shops. A number of these are under negotiation at any one time. Operational and bookmaking Bookmaking Ladbrokes may experience significant losses as a result of a failure to determine accurately the odds in relation to any particular event and/or any failure of its risk management processes. Sporting schedules and cancellations There are certain high profile sporting events which attract significant betting activity e.g. the Grand National and the FIFA Football World Cup. Cancellation or curtailment of such events, for example due to adverse weather conditions, or the failure of certain sporting teams to qualify for sporting events, can adversely impact Ladbrokes results. High fixed cost base Ladbrokes has a relatively high fixed cost base as a proportion of its total costs, consisting primarily of employee and rental costs associated with its betting shop estate. This means that falls in revenue could have a significantly adverse effect on Ladbrokes profitability unless the Group reduces its costs substantially in the short to medium term. Regulatory, legislative and fiscal developments in key markets are monitored closely (see page 13 for further details), allowing Ladbrokes to assess and adapt quickly to changes in the environment and minimise risks to the business. Ladbrokes engages with its regulators and the relevant trade organisations with regard to the betting and gaming regulatory framework and other issues of shared concern, such as problem gambling. Ladbrokes engages with the relevant trade associations and the principal bodies of sport and event industries with regard to sports rights payments, including the statutory horseracing levy, animal welfare and other issues. Ladbrokes core expertise is risk management and it has developed the skills and systems to be able to offer a wide range of betting opportunities and accept large bets. There is in place a highly experienced trading team and risks are spread across a wide range of events. A bookmaker s odds are determined so as to provide an average return to the bookmaker over a large number of events and therefore, over the long term, Ladbrokes gross win percentage has remained fairly constant. In addition to gaming machines, Ladbrokes has a number of alternative products to fill gaps in the schedules including virtual horseracing. Business re-engineering initiatives have been implemented to reduce the cost base. Structural contingency plans have been put in place and where possible central facilities have been co-located. The future strategy to increase online revenues will reduce the proportion of the Company s fixed costs.

20 18 Risks and how we manage them Risks Mitigation Operational and bookmaking Loss of key locations Ladbrokes has a number of key sites, in particular Imperial House at Rayners Lane in London, its head office and main operations centre, and its premises in Europort in Gibraltar from where online betting and gaming operations are based. Existing business continuity plans and arrangements for offsite data storage, alternate system availability and remote working for key operational and senior management continue to be developed as part of an ongoing process. Information technology and communications Technology changes The market for online gambling products and services is characterised by technological developments, new product and service introductions and evolving industry standards. Failure by Ladbrokes to use leading technologies effectively, develop its technological expertise, enhance its products and services and improve the performance, features and reliability of its technology and advanced information systems, could have a material adverse effect on its competitive position. Technology failure Ladbrokes operations are highly dependent on technology and advanced information systems and there is a risk that such technology or systems could fail. In particular, any damage to, or failure of online systems and servers, electronic point of sale systems and electronic display systems could result in interruptions to financial controls and customer service systems. Data disclosure Ladbrokes processes sensitive personal customer data (including name, address, age, bank details and betting and gaming history) as part of its business and therefore must comply with strict data protection and privacy laws in all jurisdictions in which the Group operates. Ladbrokes is exposed to the risk that this data could be wrongfully appropriated, lost or disclosed, or processed in breach of data protection regulation. This could also result in prosecutions and the loss of the goodwill of its customers and deter new customers. Failure in the supply chain Ladbrokes is dependent on a number of third parties for the operation of its business. The withdrawal or removal from the market of one or more of these major third party suppliers, or failure of third party suppliers to comply with contractual obligations could adversely affect Ladbrokes operations. Ladbrokes has invested and committed considerable resources into upgrading its existing technology, IT infrastructure, communication systems and application systems, as well as developing and acquiring new platforms. Rigorous testing regimes are utilised to ensure a high quality of product offerings and services are maintained. Ladbrokes has a level of resilience in place which seeks to eliminate single points of failure within key technology locations. Security systems are deployed to protect transactional data. Sophisticated hardware and security mechanisms are used to ensure all sensitive and confidential data is fully encrypted. To provide fail-safe integrity of all data, a series of storage systems are used to replicate all data processed by online services. In respect of fraud protection, an extensive programme of data monitoring is in place with both prevention and detection audit controls. Infrastructure suppliers, network and telecommunication suppliers and application service providers are long-term partners in providing an infrastructure which seeks to ensure the delivery of sophisticated and high performance transaction processing systems. There is continual communication with these suppliers and providers at an operating level and service level agreements have been established to maintain high service levels. The ongoing review of business continuity plans will include key supplier alternatives.

21 19 Fair Play Corporate responsibility at Ladbrokes We are committed to being a leader of our sector in responsible business practice. Maintaining a reputation for fairness and integrity, strengthening our customer focus and achieving high levels of employee engagement are all vital to growing our business. Our Corporate Responsibility (CR) programmes are in line with our broader business strategy. We embed CR principles into our day-to-day operations, maintaining high ethical and socially responsible standards and remaining compliant with all relevant CR legislation. Our Fair Play CR strategy is in place to uphold our position as a responsible betting and gaming company. To us, this means protecting children and the vulnerable, tackling problem gambling and maintaining integrity in everything we do. Our strategy is supported by the following priorities: keeping our customers satisfied and well informed across the channels through which we offer our products and services; engaging proactively with relevant regulators and staying compliant wherever we operate; attracting the best people and sustaining high levels of knowledge and motivation throughout our diverse workforce; keeping crime out of gambling and tackling fraud and preventing bribery in rigorous, systematic ways; minimising health and safety risks to our employees, customers and the general public from our business; reducing our environmental footprint and minimising the impact of future costs; maintaining good links with the communities in which we operate through our day-to-day operations and community investment programme; and minimising the social, ethical and environmental risks associated with our business partnerships, joint ventures and product sourcing. We monitor our performance through appropriate key performance indicators (KPIs) reflecting each priority of our CR strategy. Our progress has been good and remains aligned to our strategic aims. Putting customers at the heart of our business We are keen to drive brand loyalty and all that the brand stands for, including trust and integrity. It is important to provide our customers with an enjoyable, efficient, secure, fair and socially responsible service and all our employees are trained to support this commitment. To check our performance, we continually seek the views of our customers and encourage feedback on our employees and services. In, we introduced a number of new KPIs to measure our performance, including a Net Promoter Score (NPS) to measure how likely our customers are to recommend us to others. Our performance is also checked through third party audits (e.g. mystery shopper surveys) and by monitoring customer complaints. During our mystery shopper scores averaged 85.4% customer satisfaction. Furthermore, our customer loyalty card Odds On continues to grow with the total number of cards used in at 581,390 representing 39% of OTC turnover. Through Odds On we have given back to our customers over 4.3 million free bets, with just under a million of those in. Ensuring responsible gambling We continue to meet the regulatory requirements in all countries where we are licensed to operate, including those of The Gambling Commission of Great Britain, the governments of Gibraltar, the Republic of Ireland and Northern Ireland, South Africa and Denmark, the Belgium Gaming Commission and the regional governments in Spain. Furthermore, we continue to support The Gambling Commission of Great Britain s three key licensing objectives to: keep crime out of gambling; ensure gambling is conducted fairly and openly; and protect children and vulnerable people from being harmed or exploited by gambling. All relevant personnel are trained to meet our high standards and our performance is monitored on a continual basis by our Compliance Director and the supporting Compliance Committee. Ladbrokes continues to work with its peers and national governments to improve responsible gambling behaviour across the industry. For many years we have supported the Association of British Bookmakers (ABB) and the Remote Gambling Association (RGA) in defining industry-wide standards and promoting responsible behaviour. We ensure that our customers are well informed about our products, about problem gambling issues and, for our online customers, about their own gambling history. We provide inherent protection to try to limit the possible financial impacts on our customers from excessive gambling e.g. daily and weekly deposit limits and appropriate customer due diligence. We protect the young and the vulnerable through clear marketing standards, strict age limits, online age verification checks and self-exclusion arrangements. For most people, gambling is an enjoyable and harmless leisure pursuit. However, for a small number of people gambling can become a behavioural problem. Ladbrokes has a responsibility to help tackle problem gambling, understand its causes and promote its treatment. We make our employees aware of the symptoms of problem gambling and train them in how to respond. Ladbrokes was a founding member of the GREaT Foundation, supporting problem gambling research, education and treatment. Through our membership of GREaT, we support a number of charitable organisations including GamCare, the Gordon Moody Association and the Central and North West London National Problem Gambling Clinic. Richard Glynn remains a trustee of GREaT, a position he took up in. A key role for GREaT is to develop a national public education and awareness strategy, as part of the overall prevention of problem gambling agenda. The gambleaware website continues to be supported and the logo or website address is carried on all our websites and advertising. Business review

22 20 Supporting our business with a strong workforce Our people are our greatest asset. We aim to be an employer of choice for talented, passionate people. Over the past year we have invested in the systems, processes and interventions needed to make Ladbrokes a better place to work. Our strategic approach to increasing employee engagement is informed by the results of our recent and most comprehensive colleague opinion survey, which gives a clear steer on the areas requiring priority action. These are: direction and management; wellbeing; and career development, performance and recognition. A robust action plan is in place to address these priorities and quarterly updates are shared across our business. We have also introduced an employee engagement performance indicator into our business reporting. To underpin this, we have focused on aligning our performance management approach across the Company. We started the year with multiple performance management systems, with different rating scales and different ways of being assessed. These have now been aligned into one format to be used consistently across the business. In we also introduced our first cross-company talent management process. This will ensure that we find the talent across the Company and support succession planning within the top levels of the business. Actions and recommendations have been put in place and the process will be completed on a twice yearly basis. We to offer learning and training opportunities through a variety of resources, including BS2000 (our integrated shop computer system), the intranet and free workshops and workbooks. All these new systems support our values and together with the restructure of the business, allow us to assess the capabilities required to be successful at Ladbrokes and to help more of our managers be successful sooner. Providing a safe environment for our employees and customers Maintaining the wellbeing of our employees and visitors to our premises is important to us. To ensure this, we aim for best practice health, safety and security standards throughout all our operations and we support a proactive culture of risk management. We also monitor and seek to minimise the financial impacts of health and safety related claims from across our business. One of the important risks to the health of our employees and our customers comes from breaches of security on our premises, such as robbery and theft. We have invested heavily in CCTV which is installed across all of our UK retail estate, both to help reduce the number of incidents and to help protect employees and customers. During we working with the Safe Bet Alliance to develop and issue a Voluntary Code of Safety & Security for Bookmakers. Our joint efforts were rewarded with a Tilley Award for bringing down the number of robberies in London. The Safe Bet Alliance is a collaborative initiative which includes ABB, Metropolitan Police, Local Authorities Coordinators of Regulatory Services (LACORS) and Community Union. The Code sets out a single national standard for betting shop safety and security. Ladbrokes was the first bookmaker to have developed a Primary Authority relationship in the UK under the scheme for better regulation. Liverpool City Council continues to act as a single point of contact a Primary Authority for all health and safety issues affecting Ladbrokes shops all over the UK. Our health and safety record in was good. We had no reportable fatalities or major injuries across our business and, following 128 health, safety and environment inspector visits in the UK alone, there were no enforcement notices or prosecutions for health, safety or environmental offences. Providing a greener future We seek to minimise the impact of increasing environmental costs of our operations. This year we have made an effort to communicate more regularly with our employees on how they can contribute to minimising our environmental footprint. Through our employee magazine, The Score, and other channels we have carried multiple stories to help explain the bigger picture and what individuals can do. We have identified and implemented a number of energy efficiency initiatives during in support of our aim to reduce our UK carbon footprint by 21% by the end of 2013 compared with 2008 usage. This is equivalent to a saving of more than 11,000 tonnes of CO 2. The majority of this saving will be made in the retail estate. All of our shop linear fluorescent lighting has been upgraded to incorporate high frequency technology, which has helped to reduce our total energy spend in. We have also implemented our new shop-fitting specification incorporating many of the new carbon reduction technologies. As a result our new shops are 30% more efficient. So we are making steady progress. In the past we worked hard to green our UK car fleet by offering qualifying drivers lower emission cars. Continuing this effort in, we provided Smarter Driving training to 59 of our employees, who achieved an average of 13.5% fuel reduction immediately after the training. Contributing to society and being a good corporate citizen We contribute positively to the societies in which we operate, through employment, payment of taxes, contributions to growth in the economy and supporting industries and by supporting our local communities. We recognise the links our employees have to their own communities and through Ladbrokes in the Community Charitable Trust (LICCT) we support their activities by giving something back. LICCT has raised over 6.2 million for good causes since it was established in The funds have been raised by employees all around the UK and Ireland. During LICCT donated over 600,000 to charitable and community causes across the UK. In addition, Ladbrokes has donated over 931,000 to community safety, citizenship and problem gambling charities. A leader in our sector During we conducted an assessment of how we communicate with our key investors and what they look for in our CR performance. Our findings confirmed that within our sector we are seen as a CR leader. For the ninth year in succession we were pronounced one of the leaders in our sector in the Dow Jones Sustainability Indexes (DJSI). We were also included in the FTSE4Good Indices with a score of 91% relative to the Super Sector leader. Managing our issues The Chief Executive is ultimately responsible for CR matters and is supported by the CR Team who provides an overview and advisory function for the business. Overall governance of CR is the responsibility of the Board. CR and governance issues are given full consideration by the Board when defining Group strategy. CR risks are regularly reviewed by the business and are considered by the Board, as appropriate, as a part of the corporate risk review process (see page 16). CR matters are reported to the Board on a regular basis (as a minimum quarterly) thus forming part of the Board calendar, along with tailored director briefings and, where appropriate, training. The Board reviews the key CR issues and agrees the annual CR strategy. Board members are provided with adequate background information to support their decision making. The Remuneration Committee also takes account of CR issues when determining executive remuneration and benefits. CR governance and management processes are subject to internal audit and the reporting process is externally reviewed by our CR advisors, Acona Partners LLP. Our full CR report For further details of our CR policies and performance, please refer to our CR Report which is available at The website also contains CR reports from previous years together with our CR policies. Further information on our approach to responsible business is included in the Directors report.

23 21 Corporate responsibility Highlights of the year Awards/activities Highlights Business review Brand Recognition Maintained our position as the leading betting brand in the UK with 35% of adults spontaneously citing Ladbrokes before any other brand. The nearest competitor was at 20%. ClubLadbrokes 38% of our workforce actively takes advantage of the Ladbrokes employee benefits scheme Colleague Opinion Survey Introduced a robust framework for measuring employee engagement, including a rolling programme of Colleague Opinion surveys. In May, more than 9,000 people (61%) shared their views. The Employee Engagement Index, which was based on eight results within the survey, came in at 65% as against a UK national norm of 75%. CRC Energy Efficiency Scheme Achieved a position of 241 out of 2,103 participating organisations in the CRC (Carbon Reduction Commitment), the UK s mandatory climate change and energy scheme. Carbon Trust Standard Achieved the Carbon Trust Standard in September in recognition of our five year carbon plan to reduce our Carbon Footprint by 21% by Dow Jones Sustainability Indices Included again in the Dow Jones Sustainability Indices with an overall score of 77%. We are one of only three global betting and gaming companies to be included. Employee Benefits Awards Finalist for Most Effective Motivation or Incentive Strategy. FTSE4Good Indices Remained in FTSE4Good. We have been members since its foundation in GREaT Foundation HR Excellence Awards Ladbrokes Fanclub Mystery Shopper Scores Primary Authority for Better Health & Safety (H&S) Regulation Tilley Award for the Safe Bet Alliance Founder member of the GREaT Foundation funding research, education and treatment of problem gambling. Gold Level Sponsor, donating 834,000. Finalist for the most Outstanding Employee Engagement Strategy. Launched Ladbrokes Fanclub, an online, one-stop resource for our employees to show recognition across the business. Average Mystery Shopper score for was 85.4%. The result is high despite having made the questionnaire more challenging. Introduced Mystery Shopping on machines for the first time. The first bookmaker to develop a Primary Authority relationship in the UK. Liverpool City Council continues to act as a single point of contact a Primary Authority for all health and safety issues affecting Ladbrokes shops all over the UK. Received the Tilley Award for the work of the Safe Bet Alliance and our efforts to reduce the number of robberies across London.

24 Board Committees As at 16 February 2012 Audit Committee Darren M Shapland (Chaired by) John M Kelly C Pippa Wicks Nomination Committee Peter Erskine (Chaired by) John F Jarvis John M Kelly Christopher J Rodrigues Remuneration Committee Christopher J Rodrigues (Chaired by) Sly Bailey Peter Erskine John F Jarvis

25 23 Governance Board of directors 01 Peter Erskine Chairman Peter was appointed Chairman and a non-executive director in He was Chairman and Chief Executive of O 2 until 2008 and is a non-executive director of Telefónica. Prior to this he held senior positions with BT (from 1993 to 2001), UNITEL and Mars. He is a member of the Telecoms and IT Advisory Board of Apax Private Equity and is Chairman of the Advisory Board on Strategy at Henley Business School, Reading University. Age Richard I Glynn Chief Executive Richard was appointed Chief Executive and a director in April. He was previously Chairman of Sporting Index from 2008 to, having been Chief Executive from Prior to this he was Group Managing Director of WCT and CEO of Megalomedia PLC. In 2009 he founded Alinsky Partners where he worked with management, financial institutions and investors to effect transformation. From 2000 to, he served as a special trustee of Great Ormond Street Hospital Children s Charity and from 2008 to was a trustee of the Child Health Research Appeal Trust of the UCL Institute of Child Health. From June to September, he was a member of the Bookmakers Committee of the Horserace Betting Levy Board. He is currently a trustee of the GREaT Foundation. Age John M Kelly OBE Independent Non-Executive Director & Senior Independent Director John was appointed a non-executive director and Senior Independent Director in September. He was founder and Chief Executive of the Gala Coral Group having led a management buy-in from Bass Plc in 1997 and subsequently became Chairman until Prior to founding Gala Coral he was a Board member at Mecca Leisure Limited and was a Board member of The Prince of Wales Business in the Community Charity from 2003 to. He is Chairman of Trainline.com, Novus Leisure Limited and Kings Park Capital LLP Advisory Board as well as being a co-founder of Dunelmia Partners LLP. Age Sly Bailey Independent Non-Executive Director Sly was appointed a non-executive director in Since 2003 she has been Chief Executive of Trinity Mirror plc. From 1989 to 2003, she held senior positions with IPC Media Limited including Chief Executive from Previously she was senior independent director and remuneration committee Chairman of EMI plc and a non-executive director of Littlewoods Plc. She is a non-executive director and Chairman of the remuneration committee of the Press Association, President of NewstrAid and a governor of the English National Ballet School. Age John F Jarvis CVO, CBE Independent Non-Executive Director John was appointed a non-executive director in He is a non-executive director of Apollo Genting London Limited, non-executive Chairman of Sandown Park and a member of The Jockey Club. Until October, he was Chairman of Jarvis Hotels Limited. He was previously a non-executive director of United Racecourses and non-executive Chairman of Sporting Index. From 1979 to 1990, he was an executive director of the Company, then named Ladbroke Group plc, and Chairman of Hilton International from 1987 to Age 69. Governance 03 Richard J Ames Director, Product Richard was appointed a director in A business school graduate, he joined Ladbrokes in 2005 as Retail Commercial Director. He was appointed Managing Director, UK Retail in 2006 and assumed responsibility for Ireland in From August until July, he was Managing Director, Consumer Operations. In July, he was appointed Director, Product under Ladbrokes new organisation structure. He previously held senior management positions with Dixons and Asda. He is currently a director of the Association of British Bookmakers. Age Ian A Bull FCMA Chief Financial Officer Ian was appointed Chief Financial Officer and a director on 4 July. From January 2006 to June, he was Group Finance Director of Greene King plc. Between 1997 and 2005, he held a number of senior positions with BT Group, including CEO, BT Retail Enterprises and CFO, BT Retail. Prior to this he was with Buena Vista Home Entertainment (Walt Disney Group) from 1993 to 1997 and Whitbread plc from 1990 to Age Christopher J Rodrigues CBE Independent Non-Executive Director Christopher was appointed a non-executive director in He is currently Chairman of International Personal Finance plc and Chairman of the national tourism body, VisitBritain. Until 2006 he was President and Chief Executive of Visa International. Prior to this he was Group Chief Executive of Bradford & Bingley plc, Group Chief Executive of Thomas Cook and also held several senior management positions with American Express. He is a Steward of Henley Royal Regatta, Chairman of the Windsor Leadership Trust and Chairman of the Almeida Theatre. Age Darren M Shapland FCCA Independent Non-Executive Director Darren was appointed a non-executive director in He is Chairman of Sainsbury s Bank plc, having been Group Development Director from July to July and Chief Financial Officer from 2005 to of J Sainsbury plc. He is also a non-executive director of Carpetright plc, having been Group Finance Director from 2002 to He was Finance Director of Superdrug Stores plc from 2000 to Prior to this he held a number of senior financial and operational management positions with Arcadia Group plc between 1988 and Age C Pippa Wicks Independent Non-Executive Director Pippa was appointed a non-executive director in She joined AlixPartners LLP, London, the specialist performance improvement and turnaround firm as a Managing Director in She is also a non-executive director of Hays plc. She previously held senior positions with Pearson plc and was Group Finance Director of Courtaulds Textiles plc between 1993 and She was a non-executive director of Arcadia Group plc. Age 49.

26 24 Governance Corporate governance The Board continues to be committed to high standards of corporate governance. The Board strives to provide the right leadership, strategic oversight and control environment to produce and sustain delivery of value to all of the Company s shareholders. The Board applies integrity, principles of good corporate governance and accountability throughout its activities and each director brings independence of character and judgement to the role. All of the members of the Board are individually and collectively aware of their responsibilities to the Company s stakeholders. The following describes the Board s approach to corporate governance and how the UK Corporate Governance Code has been applied. Compliance statement In the Company was subject to and complied with all of the provisions of the UK Corporate Governance Code published in by the Financial Reporting Council and which is available at Board The Board currently comprises the non-executive Chairman, three executive directors and six independent non-executive directors. The Chairman has a primary responsibility for the running of the Board and for relations with shareholders. The Chief Executive is responsible for the operations and for the development of strategic plans and initiatives for consideration by the Board. The division of responsibilities between the Chairman and the Chief Executive has been clearly established, set out in writing and agreed by the Board. J M Kelly acts as Senior Independent Director, whose role is to provide a sounding board to the Chairman and to serve as an intermediary for the other directors when necessary. Other roles and responsibilities of the Senior Independent Director are described elsewhere. The Company recognises the value that diversity brings to its boardroom and believes that the Board performs better and supports its overall objectives within the business strategy when it includes the best people representing a range of capabilities, experience, perspectives and backgrounds. In line with this, the Company aims to foster a diverse Board, including a mix of genders and ethnicities. The Board endorses the aims of the Davies Report entitled Women on Boards and when considering future appointments, with the support of the Nominations Committee, will aim to build on its current position. Further information on the diversity of the Board, senior management and employees is provided in the Corporate Responsibility report which is available at The other significant commitments of the Chairman during are detailed in his biography on page 23. There were no significant changes to those commitments during. The Board schedules eight meetings each year, but arranges to meet at other times as appropriate. Of the ten meetings held in, C P Wicks was unable to attend one of the unscheduled additional meetings due to other business commitments. In addition, the Chairman met during the year with the non-executive directors without the executive directors present. The Board has a formal schedule of matters specifically reserved for its decision and approval. These include the approval of the strategic and annual profit plans, key public information releases (e.g. financial statements), dividends, major acquisitions and disposals, material contracts, treasury and other Group policies. The section Internal control and risk management systems on pages 26 and 27 contains further information on how the Board operates. The Company seeks to ensure that the Board is supplied with appropriate and timely information to enable it to discharge its duties. The Board requests additional information or variations to regular reporting as it requires. A procedure exists for directors to seek independent professional advice in the furtherance of their duties, if necessary. All directors have access to the advice and services of the Company Secretary. All directors receive an induction on joining the Board. A combination of tailored Board and committee agenda items and other Board activities, including briefing sessions, assist the directors in continually updating their skills and the knowledge and familiarity with the Company required to fulfil their role both on the Board and on Board committees. In addition, external seminars, workshops and presentations are made available to directors. The Company provides the necessary resources for developing and updating directors knowledge and capabilities. The Board undertakes a formal annual evaluation process of its own performance and that of its committees and individual directors which in was externally facilitated by Lintstock. Questionnaires tailored to the specific circumstances of the Company were completed by each director in relation to their own performance and on the effectiveness of the Board and its committees. The Chairman conducts an appraisal of each director. The Senior Independent Director, having consulted with each of the other directors, conducts an appraisal interview with the Chairman. In a detailed report on the effectiveness of the Board and its committees was produced by Lintstock and the results of which were considered by the Board and the individual committees and actions arising were agreed. The following themes were addressed: Board composition, expertise and dynamics; Board support, time management and Board committees; strategic, operational and risk oversight; succession planning and human resources management; and priorities for change. Whilst all directors are expected to bring an independent judgement to bear on issues of strategy, performance, resources (including key appointments) and standards of conduct, the independent non-executive directors were selected and appointed for this purpose. The Company Secretary is responsible for advising the Board through the Chairman on all governance matters. Appointment and replacement of directors A person who is willing to act as a director, and is permitted by law to do so, may be appointed as a director of the Company by shareholders in general meeting by ordinary resolution (requiring a simple majority of the persons voting on the relevant resolution) or by a decision of the directors. No person, other than a director retiring at that general meeting, shall be appointed or re-appointed a director at any general meeting unless he or she is recommended by the directors or, not less than seven clear days before the date appointed for the meeting, notice executed by that person of his or her willingness to be appointed or re-appointed is lodged at the Company s registered office.

27 25 The articles of association of the Company provide that: at every Annual General Meeting any director who has been appointed as a director by the directors since the last Annual General Meeting, or who was not appointed or re-appointed as a director at one of the preceding two Annual General Meetings, must retire from office (notwithstanding any agreement the director may have with the Company) and that any director so retiring may offer himself or herself for appointment or re-appointment as a director by the members at the meeting; any director may retire from office at any general meeting and that any director so retiring may offer himself or herself for appointment or re-appointment as a director by the members at the meeting; and if a director retires from office at any general meeting, the director shall retain office until the end of the meeting (irrespective of the outcome of any resolution that the director be appointed or re-appointed as a director put to the members at the meeting). The UK Corporate Governance Code specifies that all directors of FTSE 350 companies should be subject to annual election by shareholders. The Company is a FTSE 350 company and all directors will be subject to election or re-election at the 2012 Annual General Meeting. The independent non-executive directors understand that the Board will not automatically recommend their re-election by shareholders. The Chairman and the independent non-executive directors are appointed for a specified term of approximately three years, subject to re-election. The Companies Act 2006 allows shareholders in general meeting by ordinary resolution (requiring a simple majority of the persons voting on the relevant resolution) to remove any director before the expiration of his or her period of office, but without prejudice to any claim for damages which the director may have for breach of any contract of service between him or her and the Company. A person also ceases to be a director if he or she notifies the Company of his or her resignation, ceases to be a director by virtue of any provision of the Companies Act 2006, becomes prohibited by law from being a director, has a bankruptcy order against him or her or is the subject of a relevant insolvency procedure, or if a medical practitioner gives a written opinion stating the director has become physically or mentally incapable of acting as a director and may remain so for more than three months, or is removed from office by notice signed by all the other directors sent to the director, or if the Board so decides following at least six months consecutive absence without permission or he or she becomes subject to relevant procedures under the mental health laws. Powers of the Company s directors Subject to the articles, the directors are responsible for the management of the Company s business, for which purpose they may exercise all the powers of the Company. The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action. The directors exercise of the powers of the Company to borrow money is restricted. The directors have power to issue new shares and to purchase the Company s own shares, in each case to the extent permitted by law or as allowed by shareholder resolution (resolutions to issue and purchase shares are regularly proposed at the Company s Annual General Meetings). Board committees The Board has four standing committees, all of which have written terms of reference clearly setting out their authority and duties. The terms of reference of the Audit, Nomination and Remuneration Committees, which are reviewed annually, can be viewed at The Executive Committee, the Risk Committee and the Compliance Committee referred to elsewhere are not formal Board committees. Audit Committee The members of the Committee are: Appointment date Committee role Darren M Shapland 16 February Chairman John M Kelly 1 September Member C Pippa Wicks 1 June 2004 Member All members of the Committee are independent non-executive directors. Appointments to the Committee are made by the Board at the recommendation of the Nomination Committee, which consults with the Chairman of the Audit Committee. The Board has satisfied itself that the members of the Committee have recent and relevant financial experience. The Committee is provided with sufficient resources to undertake its duties. It has access to the services of the Company Secretary (who acts as secretary to the Committee) and all other employees. The Committee is able to take independent legal or professional advice when it believes it necessary to do so. The Committee meets as required, but not less than three times a year. There was full attendance at the four meetings held in. Although other directors, including the Chief Financial Officer, attend Audit Committee meetings, the Committee also meets for private discussions with the external auditor, who attends all of its meetings, and can do so with the internal auditor. The Committee is the body which carries out the functions required by DTR The main role and responsibilities of the Committee in were to: monitor the integrity of the financial statements of the Company; review the Company s internal financial control and risk management systems; monitor and review the effectiveness of the Company s internal audit function; and oversee the Company s relationship with the external auditor including the recommendation to the Board of its appointment and remuneration. Should the Committee s monitoring and review activities reveal any material cause for concern or scope for improvement, it will make recommendations to the Board on action needed to address the issue or make improvements. Governance

28 26 Governance Corporate governance The main activities of the Committee in were as follows: with the assistance of reports received from management and the external auditor, the critical review of the significant financial reporting issues in connection with the preparation of the Company s financial and related formal statements; assessing the scope and effectiveness of the systems established to identify, assess, manage and monitor financial and non-financial risks; monitoring the integrity of the Company s internal financial controls. The Committee does so by reference to: (a) summaries of business risks and mitigating controls; (b) regular reports and presentations from the heads of key risk functions, internal audit and external audit; and (c) the results of the system of annual self-certification of compliance with key controls and procedures; monitoring and reviewing the plans, work and effectiveness of the internal audit function, including any actions taken following any significant failures in internal controls; reviewing, with the external auditor, its terms of engagement, the findings of its work, and at the end of the audit process reviewing its effectiveness; and reviewing the independence and objectivity of the external auditor. The external auditor reports to the Committee on the actions taken to comply with professional and regulatory requirements and with best practice designed to ensure its independence. The Committee has agreed a policy on the engagement of the external auditor to supply non-audit services, the application of which it monitors. The policy, which can be viewed at specifies services that may not be provided and contains a level of cost at which Committee approval is required enabling the Committee to satisfy itself that auditor objectivity and independence are safeguarded. Finance Committee This Committee meets as required to deal with all routine business that excludes matters that are specifically reserved to the Board or to another committee and specific matters delegated to it by the Board requiring attention between scheduled Board meetings. Any two directors can conduct the business of this Committee. Nomination Committee The members of the Committee are the Chairman of the Board and two or more independent non-executive directors. The current members of the Committee are: Appointment date Committee role Peter Erskine 18 February 2009 Chairman John F Jarvis 14 May Member John M Kelly 15 February Member Christopher J Rodrigues 18 May 2007 Member Appointments to the Committee are made by the Board. The Committee is provided with sufficient resources to undertake its duties. It has access to the services of the Company Secretary (who acts as secretary to the Committee) and all other employees. The Committee is able to take independent legal and professional advice when it believes it necessary to do so. The Committee meets as required but not less than twice a year. Two meetings of the Committee were held in and there was full attendance at these meetings. The main role and responsibilities of the Committee are to: review the structure, size and composition of the Board (which includes an objective and comprehensive evaluation of the balance of skills, knowledge, experience and diversity of the Board) and make recommendations to the Board with regard to any changes; consider succession planning for the directors and other senior executives and make recommendations to the Board; identify and nominate for the approval of the Board candidates to fill Board vacancies as and when they arise; review the leadership of the Company to ensure the ability of the Company to compete effectively in the marketplace; recommend candidates for the role of Senior Independent Director and for membership of the Audit and Remuneration Committees, in consultation with the Chairmen of those Committees; and make recommendations to the Board concerning the re-appointment of non-executive directors at the end of their specified term of office and the re-election by shareholders of any director under the retirement by rotation provisions or otherwise. The Committee performed the above activities as necessary in. I A Bull was appointed as an executive director and as Chief Financial Officer with effect from 4 July. C M Hodgson and R Moross were appointed as non-executive directors with effect from 1 May Descriptions of the roles and capabilities required were prepared and suitable candidates were identified by external advisers. In the case of C M Hodgson s and R Moross appointments, this was following a review of the structure, size and composition (including skills, knowledge, experience and diversity) of the Board. Remuneration Committee Details of the Remuneration Committee, including membership, are set out in the Directors remuneration report, which should be read in conjunction with this section. Internal control and risk management systems The Board has ultimate responsibility for the internal control and risk management systems operating throughout the Group and for reviewing their effectiveness. No such systems can provide absolute assurance against material misstatement or loss. The Group s systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and to provide the Board with reasonable assurance that potential problems will normally be prevented or will be detected in a timely manner for appropriate action. The Company had procedures in place throughout the year and up to 16 February 2012, the date of approval of this Annual Report, which accord with the Internal Control Guidance for Directors on the Combined Code published in September The Board has delegated the detailed design of the systems of internal control and risk management to the executive directors.

29 27 The control framework and key procedures during in relation to the financial reporting process were as follows: the Group operates through five Business Units: Channels; Customer; Product; Finance, Development & International; and Human Resources. There is an Executive Head responsible for each of these Business Units. as well as weekly updates, the Chief Executive and the Executive Heads meet monthly (the Executive Committee) to consider Group strategy, financial performance, business development and management issues. Other senior executives participate as appropriate. In addition there are weekly and monthly financial and operational review meetings together with an annual programme of plan/reforecasting and strategy reviews attended by the Chief Executive and Chief Financial Officer together with, as appropriate, other Executive Heads and executives; the Business Units comprise executives with defined responsibilities. Business Unit management meet regularly to manage their respective operations; key policies and control procedures (including treasury, compliance and information system controls) are documented and have Group-wide application. There are also operating procedure manuals that are integrated with Group-wide controls; high standards of business ethics and compliance with laws, regulations and internal policies are demanded from employees at all levels. To underpin the effectiveness of controls, it is Group policy to recruit and develop management and other employees of high calibre, integrity and with appropriate disciplines; there is an ongoing process for identifying, evaluating and managing the risks faced by the Group. Key risks and their financial implications are appraised by the Executive Committee which is assisted by a committee of Business Unit executives (the Risk Committee). This is an integral part of the strategic planning process. The appropriateness of controls is considered, having regard to cost/benefit, materiality and the likelihood of risks crystallising; key risks and actions to mitigate those risks are considered at each regular Board meeting and are formally reviewed and approved by the Board twice yearly. Each key risk is assigned executive director/executive Head ownership; the Board establishes corporate strategy and Group-wide business objectives which are formally reviewed annually. Business Unit management integrate such objectives into business strategies for presentation to the Board with supporting financial objectives; Business Unit budgets, containing financial and operating targets, capital expenditure proposals and performance indicators, are reviewed by the Executive Committee and support Group strategies. The Group profit plan is approved by the Board; reports on financial and non-financial performance are regularly provided to directors and discussed at Board meetings. Performance against both budgets and objectives together with management of business risks, are reviewed with Group management, as are forecasts and material sensitivities; the Board regularly receives reports from Executive Heads covering areas such as operations, forecasts, business development, strategic planning, human resources, legal and corporate matters, compliance, health and safety and corporate responsibility; there is a Group-wide policy governing appraisal and approval of investment expenditure and asset disposals. A committee of the Chief Executive and the Chief Financial Officer considers all significant financial commitments (the Investment Committee). Major projects are reported on at each scheduled Board meeting. Post-investment appraisals are undertaken on a systematic basis and are formally reviewed by the Board twice yearly; a system of annual self-certification of compliance with key controls and procedures is operated throughout the Group; and the Group has an internal audit function, outsourced to Deloitte LLP, which reports to management and the Audit Committee on Group operations. The role of the Audit Committee in reviewing the effectiveness of the systems of internal control and risk management is explained in the Audit Committee section. The Board also conducts an assessment of the effectiveness of the internal control and risk management systems. The assessment takes account of all significant aspects including: risk assessment; the control environment and control activities; information and communication; and monitoring. Relations with shareholders There is a regular programme of meetings with major institutional shareholders to consider the Group s performance and prospects. In addition, presentations are made twice yearly after the announcement of results, the details of which, together with the Group s financial reports and announcements, can be accessed at The Chairman met in with several institutional investors and their representative bodies in addition to results presentations and the Annual General Meeting. Other directors are available to meet the Company s major shareholders if requested. The Senior Independent Director is available to shareholders if they have concerns, where contact through the usual channels of Chairman, Chief Executive and Chief Financial Officer has failed to solve, or for which such contact is inappropriate. A report on investor relations, which includes updates on meetings with major institutional shareholders, is given at each Board meeting. The Company s brokers also present to the Board annually. Principles of ownership, corporate governance and voting guidelines issued by the Company s major institutional shareholders, their representative bodies and advisory organisations are circulated to, and considered by, the Board. The Company corresponds regularly on a range of subjects with its individual shareholders who have an opportunity to question the Board at the Annual General Meeting. Further information on our relations with shareholders is contained in Shareholder information. Governance

30 28 Governance Corporate governance Rights attaching to the shares and restrictions on voting and transfer The Company s share capital consists of ordinary shares of p each. Subject to any suspension or abrogation of rights pursuant to relevant law or the Company s articles of association, the ordinary shares confer on their holders (other than the Company in respect of its treasury shares): (a) the right to receive out of profits available for distribution such dividends as may be agreed to be paid (in the case of a final dividend in an amount not exceeding the amount recommended by the Board as approved by shareholders in general meeting or in the case of an interim dividend in an amount determined by the Board). All dividends unclaimed for a period of 12 years after having become due for payment are forfeited automatically and cease to remain owing by the Company; (b) the right, on a return of assets on a liquidation, reduction of capital or otherwise, to share in the surplus assets of the Company remaining after payment of its liabilities pari passu with the other holders of ordinary shares; and (c) the right to receive notice of and to attend and speak and vote in person or by proxy at any general meeting of the Company. On a show of hands every member present (or in the case of a corporation, represented) and voting has one vote and every proxy present who has been appointed by one or more members present has one vote (and a second vote where the proxy has been appointed by more than one member and has been instructed by one or more members to vote for the resolution and by one or more other members to vote against the resolution). On a poll every member present (or represented) in person or by proxy has one vote for every share of which that member is the holder. Normally, the appointment of a proxy must be received not less than 48 hours before the time of the holding of the relevant meeting or adjourned meeting; special provision is made in the Company s articles of association as to the delivery of proxies for use on a poll not taken during the meeting at which the poll is demanded. These rights can be suspended. If the member, or any other person appearing to be interested in shares held by that member, has failed to comply with a notice pursuant to section 793 of the Companies Act 2006 (notice by company requiring information about interests in its shares) the Company can suspend (until one week after the default ceases) the right to attend and speak and vote at a general meeting and if the shares represent at least 0.25% of their class the Company can withhold any dividend or other money payable in respect of the shares and refuse to accept certain transfers of the relevant shares. In addition, following certain action by a gambling industry regulator (as more specifically set out in the Company s articles of association), the Company may suspend all or some of the rights attaching to all or some of the shares held by any relevant shareholder to attend and to speak at meetings and to vote, to receive any dividend or other money payable in respect of the shares, and to the issue of further shares or other securities in respect of the shares. Shareholders, either alone or with other shareholders, have other rights as set out in the Company s articles of association and in company law (principally the Companies Act 2006). The Trustee of the Ladbrokes Share Ownership Trust, which is used in connection with certain of the Company s employee share ownership plans, held 1,258,666 ordinary shares in the Company at 31 December which are not voted by plan members and which it can vote in its absolute discretion. A member may choose whether his or her shares are evidenced by share certificates (certificated shares) or held in electronic (uncertificated) form in CREST (the UK electronic settlement system). Any member may transfer all or any of his or her shares subject in the case of certificated shares to the rules set out in the Company s articles of association or in the case of uncertificated shares the regulations governing the operation of CREST (which allow the directors to refuse to register a transfer as therein set out); the transferor remains the holder of the shares until the name of the transferee is entered in the register of members. The directors may refuse to register a transfer of certificated shares in favour of more than four persons jointly or where there is no adequate evidence of ownership or the transfer is not duly stamped (if so required). The directors may also refuse to register a share transfer if it is in respect of a certificated share which is not fully paid up or on which the Company has a lien provided that, where the share transfer is in respect of any share admitted to the Official List maintained by the UK Listing Authority, any such discretion may not be exercised so as to prevent dealings taking place on an open and proper basis, or if in the opinion of the directors (and with the concurrence of the UK Listing Authority) exceptional circumstances so warrant provided that the exercise of such power will not disturb the market in those shares. Whilst there are no squeeze-out and sell out rules relating to the shares in the Company s articles of association, shareholders are subject to the compulsory acquisition provisions in sections 974 to 991 of the Companies Act 2006 and can be required by the Company to transfer their shares following certain action by a gambling industry regulator (as more specifically set out in the Company s articles of association). Significant agreements that take effect, alter or terminate upon a change of control following a takeover bid The agreements between Ladbrokes Group Finance plc ( LGF ), a wholly owned subsidiary of the Company, and eight separate banks for the provision by the banks of revolving credit facilities of up to 540 million on a committed basis provide that the banks may give notice of cancellation if a change of control occurs. On cancellation the amounts drawn would be immediately repayable. In the context of a takeover bid, the acquirer would normally arrange substitute facilities. In addition, LGF issued a bond in March. The bond has a Put Event that allows bondholders to exercise a put option when a change of control occurs. The put option allows the bondholders to require LGF to purchase the bonds at a price of 101 pence. Amendment of the Company s articles of association The Company s articles of association may be amended by the members of the Company by special resolution (requiring a majority of at least 75% of the persons voting on the relevant resolution).

31 Annual report and accounts 29 Governance Directors report A review of the Group s activities and future developments, which fulfils the requirements of the business review, including the financial performance during the year, key performance indicators and a description of the principal risks and uncertainties facing the Group is given on pages 8 to 21 and forms part of this report. The description of the Group s corporate governance arrangements on pages 24 to 28 also forms part of this report. A description of the Group s financial risk management objectives and policies and its exposure to price, credit liquidity and cash flow risk is contained in note 24 to the consolidated financial statements and forms part of this report. Other matters material to the appreciation of the Group s position are contained in the Chairman s statement and the Chief Executive s review. Results The results for the year are shown in the consolidated income statement. Dividends The directors recommend the payment of a final dividend of 3.90 pence on each of the ordinary shares entitled thereto, making a total of 7.80 pence for the year. Subject to shareholders approval at the Annual General Meeting to be held on 19 April 2012, the final dividend is expected to be paid on 26 April 2012 to shareholders registered on 16 March Annual General Meeting This year s Annual General Meeting will be held at the Queen Elizabeth II Conference Centre on 19 April 2012 at 11.00am. Directors The directors during the year were those listed on page 23 together with B G Wallace who resigned on 31 August. Biographical details of the directors at 16 February 2012 are on page 23. On 16 February 2012 the Company announced that C P Wicks would not be standing for re-appointment at this year s Annual General Meeting and the appointments of C M Hodgson and R Moross with effect from 1 May Details of directors service contracts, their share interests and other details of their remuneration by the Company are contained in the Directors remuneration report. Pursuant to section 175 of the Companies Act 2006 and the Company s articles of association, the Board has authorised situations of potential conflict arising out of J F Jarvis being a non-executive director of Sandown Park and a member of The Jockey Club and S Bailey being a director of Trinity Mirror plc. Auditor and disclosure of information to the auditor Each of the directors in office as of the date of approval of this report confirms that, so far as he or she is aware, there is no relevant audit information (being information needed by the auditor in connection with preparing its report) of which the auditor is unaware and that he or she has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the auditor is aware of that information. Share capital At 15 February 2012, the Company had been notified of the following holdings of voting rights attaching to the Company s shares in accordance with the Disclosure and Transparency Rules: Deutsche Bank AG 3.74%; FIL Limited 5.04%; Ignis Investment Services Limited 3.10%; Legal & General Group PLC 3.84%; and Schroders plc 12.11%. The Trustee of the Ladbrokes Share Ownership Trust, which is used in connection with certain of the Company s employee share ownership plans, waives dividends on shares in the Trust not allocated to plan members. Further details in respect of the share capital are shown in note 27 to the consolidated financial statements which forms part of this report. Corporate responsibility The Corporate Responsibility (CR) report is available at and highlights, with which the following should be considered in conjunction, are given on pages 19 to 21. The processes described in the section Internal control and risk management systems on pages 26 and 27 applied to CR, as did the practices described on page 24 for ensuring the Board is supplied with appropriate and timely information and training and for assisting the directors to update their knowledge. In addition to business presentations regularly made to the Board at which CR was considered as appropriate, the Board conducts an annual CR review and Board members regularly receive CR updates. CR performance is included in business unit accountability systems and remuneration arrangements. The Remuneration Committee in determining executive remuneration takes into account CR matters as described in the Directors remuneration report. The risks and opportunities relating to CR in and going forward primarily revolve around the reputation of the Group and the quality of its brands. Governance

32 Annual report and accounts 30 Governance Directors report Of particular importance was the promotion of responsible gambling and the protection of children and the vulnerable. CR also impacted (i) the performance of the Group s employees on whom the Group relies for the provision of high quality services to customers and (ii) the health and safety of these employees and the customers they serve. Performance indicators to be developed in accordance with Group-wide CR. No breaches of CR policies and procedures material to the Group were identified by the Board in. The identification and management of CR issues, the CR reporting framework and any associated data has been reviewed by the Company s CR adviser, Acona Partners LLP. Employee policies The Board values two-way communication between senior management and employees on all aspects of the Company s strategy, Company performance, management effectiveness and wellbeing. There is a rolling three year internal communications strategy and delivery plan which includes interventions such as regular management roadshows, visits to operating units, responses to the colleague opinion survey and updates on performance against the Company s strategic vision. The internal communications services channels include face to face events, a powerful corporate intranet, audio broadcasting, SMS alerts, a Company magazine and line manager briefing packs. The UK Staff Council, which has been in place since 1996, provides a further mechanism for employee engagement. In addition, those employees who are eligible are also encouraged to become involved in the Group s performance through participation in share schemes. Throughout the Group, the principles of equal opportunities are recognised in the formulation and development of employment policies. It is the Company s policy to give full and fair consideration to applications from people with disabilities, having regard to their particular aptitudes and abilities. If an employee becomes disabled, the Company s objective is the provision of suitable employment, either in the same or an alternative position, with appropriate adjustments being made if necessary. Employees with disabilities share equally in the opportunities for training, career development and promotion. Supplier payment policy The Company agrees payment terms for its business transactions when goods and services are ordered. It ensures that suppliers are aware of the terms of payment and the relevant terms are included in contracts where appropriate. Subject to satisfactory performance by the supplier, arrangements are adhered to when making payments. At the year end, the Company had no trade creditors. Going concern In assessing the going concern basis, the directors considered the Group s business activities, the financial position of the Group as described in pages 4 to 21 and the Group s financial risk management objectives and policies as included in note 24 to the consolidated financial statements. The directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing its financial statements. By order of the Board M J Noble Secretary 16 February 2012 Directors indemnities and insurance The Company continues to maintain directors and officers liability insurance. In accordance with the Company s articles of association, the Company has entered into a deed of indemnity to the extent permitted by law with each of the directors. Charitable donations During, in addition to donations made to overseas charities, Group companies donated 931,840 to UK charitable organisations for charitable purposes.

33 31 Governance Directors remuneration report Dear Shareholder In my letter last year, I outlined the planned changes to our remuneration structure, and I am pleased to report that these have been fully implemented in. As a result of the changes, long-term incentive arrangements now include a wider group of participants, and the level of awards granted to individuals are well differentiated to reflect their personal contribution to both short-term performance and the longer-term strategic objectives of the Company. was a key development year for the Ladbrokes business. The Executive team have been fully focused on progressing the strategy laid out in, and the annual bonus outturns reflect the progress made in the context of a difficult economic climate. However, the minimum performance targets under the 2009 Performance Share Plan were not met and as a result these awards will not vest. In 2012, no annual salary increases will be awarded to the Executive Committee, although the wider workforce will be eligible for pay reviews following two years of pay freezes. The Committee has also reviewed the bonus structure for the forthcoming year, to ensure that it is fully aligned with the Board s objectives to grow profit, in particular in the Digital business. As a result, the Committee will cap the amount payable under the financial element of the bonus at 60% of maximum unless a significant specified increase in Digital net revenue is achieved. This cap will apply to the executives and senior management team. The Committee continues to monitor the practices and reviews taking place in respect of executive remuneration and it intends to follow good practice as it emerges. We remain committed to transparent reporting of remuneration arrangements and do not believe the remuneration framework in place for Ladbrokes raises environmental, social or governance issues or inadvertently motivates irresponsible behaviours. The Committee appreciates all feedback from shareholders and hopes to receive your support at the forthcoming AGM. Governance Christopher J Rodrigues Chairman of the Remuneration Committee Remuneration Committee remit, composition and activities The Ladbrokes Board entrusts the Committee with the responsibility for the remuneration policy in respect of the executive directors and senior executives. In setting the remuneration for these groups, the Committee takes into account the pay and conditions of the wider workforce as a matter of course. Further details in relation to wider workforce pay can be found on page 36. The Committee s main duties are to: determine and agree with the Board the framework or broad policy for the remuneration of executive directors, the Chairman and certain senior executives; review the ongoing appropriateness and relevance of the remuneration policy; approve the design of, and determine targets for, any performance-related pay schemes; review the design of all share incentive plans for approval by the Board and shareholders; determine the policy for, and scope of, pension arrangements for each executive director and other designated senior executives; and set the individual remuneration packages of all executive directors, certain senior executives and the Chairman within the agreed policy. The Committee comprises independent non-executive directors and the Chairman of the Board, namely: Appointment date Committee role Christopher J Rodrigues 29 October 2003 Chairman since 18 May 2007 John F Jarvis 19 July 2006 Member Peter Erskine 18 February 2009 Member Sly Bailey 14 May Member

34 32 Governance Directors remuneration report Remuneration Committee remit, composition and activities Appointments to the Committee are made by the Board at the recommendation of the Nomination Committee, which consults with the Chairman of the Committee. The Chief Executive, the Group HR director and the HR director Reward & Resourcing attend Committee meetings by invitation, other than when their personal remuneration is discussed. The Company Secretary acts as secretary to the Committee. The Committee met five times during. S Bailey did not attend one meeting during the year due to other commitments. The Committee retained independent remuneration consultants (Deloitte LLP) and has taken advice during the year from them in relation to certain executive remuneration matters. Deloitte LLP is a member of the Remuneration Consultants Group and as such voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. Deloitte LLP also provides the Company with internal audit and miscellaneous tax and consulting services. SJ Berwin LLP, one of the Company s corporate lawyers, has also provided material advice. The Directors remuneration report has been prepared in accordance with the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 (Regulations) and meets the relevant requirements of the Financial Services Authority s Listing Rules. In forming the remuneration policy, the best practice provisions set out in the UK Corporate Governance Code have been followed, and the guidelines issued by the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF) have been noted. During the Committee, amongst other items, considered the following: implementation of the policy changes established in the review; remuneration arrangements for senior hires and departures; determination of short and long-term incentive outcomes based on Company and personal performance of the executive directors and senior executives; and review of the structure, quantum and calibration of the annual bonus and performance share plans for 2012 onwards. Remuneration policy The principles underlying the remuneration policy are that total remuneration packages should: be aligned with and support the business strategy; enable the Company to attract, retain and motivate key individuals; and be strongly aligned with shareholder value creation. Summary of fixed remuneration arrangements for 2012 onwards Element Policy Framework Base salary To set base salaries at a competitive level. Salaries are reviewed annually, with reference to market practice in companies of a similar size and complexity, taking into account business and personal performance. Pension Benefits To provide market competitive arrangements. To provide market competitive arrangements. Executives can opt upon appointment to join the defined contribution scheme or take a cash supplement equivalent to 22.5% of base salary. For longer serving executives in the legacy defined benefit plan, they accrue benefits on base salary up to the relevant earnings cap (/12 129,600) and receive a cash supplement of 22.5% of base salary above the earnings cap. Benefits include private healthcare, life assurance and a cash allowance in lieu of a company car. Summary of variable remuneration arrangements for 2012 onwards Element Policy Framework Performance Conditions Annual bonus Incentivise executive performance on an annual basis measured against the key financial metrics of the business and a set of demanding individual objectives. Maximum awards as a percentage of base salary 170% for the Chief Executive and 130% for other executive directors. One third of any bonus awarded is deferred into shares for a period of three years. Measured annually. 70% of total bonus opportunity is based on financial performance. 30% is based on performance against individual objectives approved by the Committee at the start of the financial year.

35 33 Summary of variable remuneration arrangements for 2012 onwards Element Policy Framework Performance conditions Performance Share Plan Recognise and reward executives for the creation of shareholder value over the longer term. Maximum awards as a percentage of base salary 175% for the Chief Executive and 150% for other executive directors. Award levels are determined by reference to individual performance prior to grant. Awards up to 250% of base salary may be made in exceptional circumstances (e.g. recruitment or retention) at the Committee s discretion. Performance is assessed over three financial years. 50% of the award is based on Total Shareholder Return (TSR) of the Company against a select group of industry peers. 25% of this element of the award vests for median performance and 100% for upper quartile performance. Vesting will be on a straight line basis between median and upper quartile. The comparator group for 2012 is unchanged and is as follows: 888 Holdings Boyd Gaming Bwin PartyGaming Enterprise Inns Lottomatica Mitchells and Butlers OPAP Paddy Power Punch Taverns Rank Group Sportingbet Whitbread William Hill Governance The remaining 50% of the award is based on the achievement of stretching absolute EPS growth targets. 25% of this element of the award vests for absolute EPS growth of 6% per annum and 100% for growth of 10% per annum. Vesting will be on a straight line basis between minimum and maximum EPS targets. Performance is assessed over a five year period. Awards are subject to stretching share price performance conditions. Any share price target must be attained throughout a period of 30 consecutive dealing days. 25% of the award will vest if a share price of 2.00 is achieved. 100% of the award will vest if a share price of 2.97 is achieved. Vesting will be on a straight line basis between the minimum and maximum share price targets (i.e. between 2.00 and 2.97). Ladbrokes Growth Plan A one-off long-term plan to support the revitalisation of the business which rewards substantial value creation between 400 million to 1.3 billion for shareholders. Awards were made under this plan in to the CEO and in to other participants. It is not intended for further awards to be made under the plan in Executive directors are required to invest up to 150% of base salary and receive up to a four times matching award. In the case of the Chief Executive he was required to invest in circa one million Ladbrokes shares and received a four times matching award.

36 34 Governance Directors remuneration report Remuneration mix In support of the remuneration philosophy, the mixture of fixed and variable reward is heavily weighted towards the performancerelated elements. In particular, there is an emphasis on long-term share based incentives, i.e. the Performance Share Plan and the Ladbrokes Growth Plan. The mixture of fixed and variable remuneration is broken down as follows: at target performance 35% is fixed and 65% is variable at maximum performance 15% is fixed and 85% is variable For the purpose of the analysis above, fixed remuneration represents base salary but excludes pension (or cash equivalent) and benefits. Variable remuneration represents annual bonus, Performance Share Plan and the Ladbrokes Growth Plan awards (on an annualised basis). Base salary, pension and benefits In January 2012, no annual salary increases were awarded to the executive directors. The table below shows the current base salaries for the executive directors: Base salary with effect Executive from 1 January 2012 R I Glynn 580,000 I A Bull 380,000 R J Ames 370,000 A summary of pension and benefits arrangements can be found in the table on page 32. Further details of the retirement benefits for individual executive directors are set out on page 41. Annual bonus Executive directors participate in the annual bonus plan and the Deferred Bonus Plan ( DBP ). For 2012, the maximum bonus opportunity remains unchanged at 170% of base salary for the Chief Executive and 130% of base salary for the other executive directors. The table on page 32 provides a high-level summary of the plan design in The financial element of the bonus will be assessed by reference to profit. In setting the level of profit required to achieve threshold and maximum performance under this element, the Committee pays particular attention to the level of stretch inherent in the Company s profit plan for the year. Given the increased level of stretch in the profit plan against the backdrop of unsettled economic conditions, the Committee has set the threshold below which no bonus is paid at 94% of the profit target. The maximum award under this element of the bonus will be delivered for achieving 106% of the profit target, which would reflect substantial improvement in profitability in the prevailing economic conditions. Given the importance of growing the Company s Digital business, the Committee will cap the amount payable under the financial element of the bonus at 60% of maximum unless a significant specified increase in Digital net revenue is achieved. High Rollers profits are excluded from the performance profit calculations for annual bonus purposes, however they may be included in the individual performance element of the bonus for those directly responsible for this area of the business. Individual performance objectives are set at the start of the year and are clearly aligned to the strategic objectives of the Company. One third of any annual bonus earned will be delivered in shares under the DBP and will only vest subject to employment after a three year vesting period. Performance Share Plan ( PSP ) In, as a result of the introduction of the Ladbrokes Growth Plan, the level of awards for executive directors (excluding the Chief Executive) under the PSP was reduced. In addition, it was determined that annual award levels would be based on an assessment of individual performance prior to grant and will not normally be made at the maximum levels. The maximum award levels, and individual awards for 2012, are provided in the table below: Maximum PSP award level as a % of base salary 2012 PSP award level as % of base salary Executive R I Glynn 175% 150% I A Bull 150% 135% R J Ames 150% 115% Details of the plan design and performance conditions can be found in the table on page 33. Ladbrokes Growth Plan ( LGP ) In May, shareholders approved a one-off long-term incentive plan designed to incentivise key senior executives to create significant, sustainable long-term shareholder value. The first award was made in June to R I Glynn. He is required to hold 1,008,946 Ladbrokes shares for the duration of the five-year plan. This ensures strong alignment between his interests and those of the shareholders. He received a four times matching award on his investment shares, which is subject to very stretching share price growth performance targets. The Committee also determined in that it was important for all key senior executives in the business to be consistently incentivised. Awards were therefore made to these individuals on similar terms as soon as practicable in. It is intended that no further awards will be made under the plan from 2012 onwards. Executive directors were required to make an investment of 150% of base salary in Ladbrokes shares and received a four times matching award. Matching awards are subject to the extremely stretching share price growth performance targets outlined on page 33. No benefit arises until the share price reaches 2.00, and maximum vesting only occurs if a share price of 2.97 is achieved. If maximum vesting occurs, 1.3 billion of additional value to shareholders would have been created since the inception of the plan. Up to one third of the award may vest at the end of year three if the targets have been achieved at that time. A further third may vest at the end of year four if the targets have been met at this time. The remainder of the award may vest at the end of year five, subject to the achievement of the performance targets. The Committee is mindful that absolute share price targets must demand a real stretch performance. In particular, the Committee will retain responsibility to amend the targets if it is necessary to

37 35 take account of exceptional factors including, for example, corporate events or exceptional market or industry factors which would otherwise render the targets inappropriate. Executive directors shareholding guidelines Shareholding guidelines require executive directors to build up over time a personal shareholding equivalent in value to at least one year s base salary. Executives are encouraged to retain vested shares earned under the Company s incentive plans until the shareholding guideline has been met. Incentives performance periods ended 31 December Annual bonus 70% of the annual bonus was based on financial performance assessed against the profit plan and the remaining 30% on individual performance objectives. In respect of the profit plan: it was set by the Board at the beginning of by reference to internal projections and the prevailing economic conditions at the time; the minimum threshold below which no payments are made is 95% of the profit plan; and maximum awards would be delivered for achieving 107% of the profit plan. The maximum bonus opportunity for was 170% for the Chief Executive and 130% of base salary for other continuing executive directors. One third of any annual bonus earned will be delivered in shares under the DBP and will only vest subject to employment after a three year vesting period. The Company exceeded the bonus plan threshold for the financial year despite stretching performance targets and a challenging economic environment, and bonuses have been determined as follows for the executive directors: Governance Financial and individual objectives Achievement % of base salary Cash bonus 000 DBP number of shares to be delivered in 2015 Total value of annual bonus 000 Cash and DBP shares award % of maximum bonus Executive R I Glynn 85% , % I A Bull 68% 86 32, % R J Ames 60% , % PSP The performance period for the 2009 PSP awards ended 31 December. The structure of the 2009 PSP was the same as outlined on page 33 for the 2012 awards. 50% of the award was based on TSR performance against selected industry peers, using the same comparator group as outlined on page 33 for the 2012 awards (including the combined Bwin PartyGaming entity). The Company was positioned below median and therefore this element of the award will not vest. The remaining 50% of the award was subject to EPS performance and the same performance targets applied as outlined on page 33 for the 2012 awards. The minimum threshold was not attained and therefore this element of the award will not vest. Service contracts In line with Company policy, all executive directors are now employed on conventional one year rolling contracts: Executive Date of contract Company notice period Director notice period R I Glynn 30 March 1 year 1 year I A Bull 4 July 1 year 6 months R J Ames 1 January year 6 months B G Wallace 5 March year 6 months New appointments to the Board will normally be made on a one year rolling contract. The Company normally expects executive directors upon departure to mitigate their loss. In any specific case that may arise, the Committee will carefully consider any compensatory payments having regard to performance, age, service, health or other circumstances that are relevant. The Company may terminate employment by making a payment in lieu of notice equivalent to the value of base salary and benefits in respect of the notice period.

38 36 Governance Directors remuneration report Matters relating to Board changes I A Bull It was announced on 15 April that I A Bull would be joining the plc Board as Chief Financial Officer reporting to R I Glynn. He was appointed to the Board on 4 July. His base salary is 380,000 per annum and his annual and long-term incentive arrangements are made on the same basis as all other executive directors, including the Performance Share Plan and Ladbrokes Growth Plan. He received an incremental PSP award in October of a further 50% of base salary to reflect the terms of his appointment. The overall structure of his remuneration arrangements were set with reference to the remuneration review in, and reflect a reduction in both fixed and variable remuneration in comparison to his predecessor. B G Wallace B G Wallace announced his intention to stand down as a director of the Company on 17 February and this took effect from 31 August. His salary, cash supplement in lieu of pension, and benefits entitlement ceased on his departure date. He was eligible for a payment in respect of bonus for the financial year, up to a maximum of 150% of salary pro-rated for time served. He also received an additional payment of 55,600 to compensate him for the PSP award he would have normally received in. Due to a close period being in place at the time of the regular grant cycle in February, the award was ultimately not made. The value of this additional payment has been calculated taking into account his normal award potential, with assumed vesting around target levels on a time pro-rata basis. His PSP award will vest at the end of the original performance period, subject to the performance conditions being met and time pro-rating to reflect the proportion of the performance period in which he remained in employment. All share awards under the DBP vested in accordance with the scheme rules. Awards under all other share plans were treated in accordance with the relevant scheme rules. Mr Wallace did not receive a Ladbrokes Growth Plan or PSP award. J P O Reilly As disclosed in the Directors remuneration report, in accordance with his contract, Mr O Reilly was entitled to receive a termination payment in respect of salary, pension and benefits for his 12 month notice period following leaving in November. Instalments totalling 364,000 were made during, with the remainder to be paid on a phased basis during subject to mitigation based on Mr O Reilly s earnings from other activities in the 12 month period. The instalments payable during were reduced from 291,000 to 191,000 following discussion with Mr O Reilly regarding his activities within the relevant period. Wider workforce remuneration The Committee takes into consideration the pay and conditions of employees throughout the Group when determining remuneration arrangements for executive directors. Following two years of pay freezes within the wider employee population, Ladbrokes will be making salary increases in March However, as outlined on page 34 no annual salary increases will be awarded to the executive directors. In 2012 the Company will continue to align employee bonus arrangements with those of the executive directors to ensure consistency across the organisation and delivery of strategic goals. The Committee considers it important to maximise this alignment of bonus structures whilst also retaining line of sight for individual business units. This has been supported by a Company-wide initiative to improve communication, awareness and understanding of the total reward offerings within Ladbrokes. This has included total reward statements to all management levels including executive directors and booklets to all employees covering pay, pensions, benefits, bonuses, recognition and incentive arrangements. Ladbrokes is committed to strengthening and widening employee share ownership. It therefore operates an additional discretionary share plan (Restricted Share Plan) below Board level and two all-employee share incentive plans. Further details on each of these plans are provided below: Restricted Share Plan ( RSP ) The RSP is used from time to time as an attraction and retention vehicle for key management positions. Awards vest at the end of a three year period, subject to employment. Executive directors are not eligible to participate in the plan. Savings Related Share Option Scheme The Company offers a Savings Related Share Option Scheme which is approved by HMRC ( the 1983 Scheme ), and is linked to a Save As You Earn contract under which participants save a regular monthly sum by deducting from earnings up to 250 per month for either three or five years. Subject to common service criteria, the 1983 Scheme is open to all UK employees (including executive directors). Options are normally exercisable during a period of six months following the expiry of three and five years (as previously selected by the participant) from the dates of grant and there are no performance conditions. Option prices are calculated by reference to the average mid-market quotation of shares as shown by the Stock Exchange Daily Official List for the five business days immediately preceding the date of grant, discounted by up to 20% per share. Share Incentive Plan The Share Incentive Plan which is approved by HMRC is open to all UK employees (including executive directors) who have completed at least 12 months service. To encourage employee participation, the Company provides a match of one bonus share for every two shares purchased by employees. The bonus shares are held conditionally upon satisfaction of a one year service requirement. The maximum monthly contribution by employees has been set at 75 per month.

39 37 Non-executive directors Non-executive directors are retained on terms set out in their letters of appointment. They do not have service contracts with either the Company or any of its subsidiaries. The appointment of a non-executive director is terminable without notice. The standard letter of appointment for non-executive directors is available for inspection upon request. The Committee determines the fees of the Chairman of the Board and the Board as a whole determines the remuneration of each of the non-executive directors. Non-executive directors receive fees set relative to median market practice and are regularly reviewed. There was no increase in the remuneration of the Chairman or other non-executive directors as at 1 January Non-executive directors are not eligible for annual bonus, share incentives, pensions or other benefits. The annual fees are payable as follows: Role Fee Chairman 250,000 Senior Independent Director 60,000 Board member 43,000 Audit Committee Chairman 10,000 Remuneration Committee Chairman 10,000 Member of one or both of Audit/ Remuneration Committee* 7,000 Governance *Excludes the Chairman and the Senior Independent Director. Performance graph As the Company is a constituent company of the FTSE250, the FTSE250 index provides an appropriate indication of market movements against which to benchmark the Company s performance. The chart below summarises the Company s TSR performance against the FTSE250 index over the five year period ended 31 December. Growth in value of a hypothetical 100 holding over five years: /12/06 31/12/07 31/12/08 31/12/09 31/12/10 31/12/11 Ladbrokes FTSE250 The impact of the Company s performance is reflected in the lapsing of both the 2008 and 2009 Performance Share Plan awards and sustained performance at this level would mean that the Ladbrokes Growth Plan is unlikely to vest. This demonstrates the link between executive remuneration at Ladbrokes and the creation of long-term shareholder value.

40 38 Governance Directors remuneration report Directors remuneration and interests Audited information The following table shows the emoluments of the executive directors and non-executive directors for the year ended 31 December excluding gains from the exercise of share options and contributions to money purchase schemes. Name Base salary 000 Annual bonus value (cash & DBP) 000 One-off special incentive 000 Benefits 000 Pension supplement 000 Performance share plan 000 Executive directors R I Glynn ,220 1,020 I A Bull R J Ames B G Wallace (1) ,347 1,229 Total 1,468 1, ,587 2,970 Non-executive directors P Erskine J F Jarvis C Rodrigues C P Wicks S Bailey D M Shapland J M Kelly Total (1) In relation to B G Wallace a special one-off incentive was disclosed in last year s Directors remuneration report of 70% of salary paid in March. This incentive was put in place for reflecting the critical requirement to maintain continuity during the transition period following the departure of C Bell and the initial employment period of R I Glynn. Details relating to B G Wallace s annual bonus payment and additional payment to compensate him for the PSP award he would have normally received in can be found on page 36. B G Wallace served elsewhere as a non-executive director and retained fees in (up to 31 August ) of 27,367. Total 000 Total 000

41 39 Share schemes Awards and options granted in under the Company s share schemes, together with the number of shares and options outstanding as at 31 December (or earlier date of cessation) are detailed in the following tables. Plan Name Performance Share Plan Deferred Bonus Plan Bonus and Free Shares Ladbrokes Growth Plan Outstanding awards at 31 Dec 10 (or later date of appointment) Awards made during the year (or period to cessation) Awards vested during the year (or period to cessation) Awards lapsed during the year (or period to cessation) Outstanding awards at 31 Dec 11 (or earlier date of cessation) Share price on date of award (pence) Performance period end Date of award R J Ames 372, , , , , , , , Total 792, , ,274 1,054,590 I A Bull 510, , Total 510, ,684 R I Glynn 682, , , , Total 637, ,032 1,319,274 B G Wallace 629, , , ,122 66, , , , Total 1,506, , ,827 R J Ames 89,413 89, ,147 43, ,774 9, Total 52,921 89,413 9, ,560 R I Glynn 132, , Total 132, ,842 B G Wallace 143, , , , ,780 72, Total 243, ,061 72, ,381 R J Ames ,213 See note (4) Total ,213 R I Glynn See note (4) Total B G Wallace See note (4) Total R J Ames 1,493,240 1,493, Total 1,493,240 1,493,240 I A Bull 1,533,598 1,533, Total 1,533,598 1,533,598 R I Glynn 4,035,784 4,035, Total 4,035,784 4,035,784 Governance (1) Conditional Performance Share Plan Awards made on 29 February 2008 lapsed in their entirety on 17 February as the performance conditions were not achieved. (2) The performance measures for 2009, and PSP awards are the same as those outlined for the 2012 awards on page 33. (3) Awards were made under the Deferred Bonus Plan to R J Ames and B G Wallace on 29 February 2008 based on an award price of pence. Awards vested on 19 May. (4) Bonus shares were awarded under the Share Incentive Plan on a monthly basis on award dates between 5 January and 5 December. Share prices on the award dates ranged from pence to pence. (5) B G Wallace resigned from the Board on 31 August. His outstanding PSP award will vest at the end of the original performance period, subject to performance conditions being met and have been time pro-rated to reflect the proportion of the performance period he remained in employment. His 2009 PSP award will lapse as the performance conditions have not been satisfied as outlined on page 35. Any outstanding awards under the Deferred Bonus Plan vested 31 days following his cessation of employment. Bonus and Free shares were transferred into B G Wallace s name following his cessation of employment. (6) R I Glynn s Ladbrokes Growth Plan award comprises the following: a restricted interest in a share held jointly with the Trustees of the Employee Benefit Trust; and a nil cost option, which together entitle him to the value of a whole share. The nil cost option entitles R I Glynn to such number of shares that have an aggregate market value of 6,901, on the date of exercise, subject to the achievement of the performance conditions. The option expires on 30 June 2020.

42 40 Governance Directors remuneration report Share schemes Plan 1978 Share Option Scheme International Share Option Scheme 1983 Savings Related Share Option Scheme Share Award Plan Number of options at 31 Dec 10 Options granted during the year Options exercised/ lapsed during the year Number of options at 31 Dec 11 (or earlier date of cessation) Date of grant Exercise price (pence) Date from which exercisable Name R J Ames 11,839 11, Total 11,839 11,839 R J Ames 49,478 49, ,981 46, ,651 11, Total 108, ,110 R I Glynn 7,610 7, Total 7,610 7,610 B G Wallace 7,020 7, Total 7,020 7,020 R I Glynn 1,177,103 1,177, Total 1,177,103 1,177,103 (1) All options granted to executive directors have either met the applicable performance conditions or have lapsed in accordance with the plan rules. (2) The mid-market price of the Company s shares on 30 December was pence (31 December : pence). The highest price of shares during the financial year was pence (: pence). The lowest price of the Company s shares during the financial year was pence (: pence). (3) B G Wallace resigned from the Board on 31 August and the table above details his options up to this date. He has six months following the date of departure to exercise his options held under the 1983 Savings Related Share Option Scheme. (4) R I Glynn was awarded a nil cost option over 1,177,103 shares as a one-off compensatory award under the Share Award Plan as part of the terms of his appointment. This award was fully disclosed at the time of his appointment and in the Directors remuneration report. Rights issue Adjustments to share option/awards To take account of the effects of the rights issue completed in October 2009, adjustments were made at that time to awards and options held under the Company s employee share schemes. For the PSP, RSP and DBP, the number of shares under award were appropriately adjusted. In the case of the share options plans (1978 Scheme, International Scheme and 1983 Scheme), both the number of options under award and the exercise price were adjusted. Under the Share Incentive Plan, all participants received the right to buy one new share for every two shares already held in the plan. All of the executive directors took up their rights under the rights issue, and as a result, new shares were allotted to each individual. Ladbrokes shares previously held under the Share Incentive Plan will continue to be held in the plan on the same terms. The treatment outlined above was in accordance with the relevant scheme rules. Adjustments in respect of the 1978 Scheme and the 1983 Scheme were approved by HMRC. Expiry date

43 41 Review of performance conditions under the PSP and other share option schemes In January, the performance conditions under the PSP and the other share option schemes were reviewed by the Committee and appropriate adjustments were made to reflect the dilutive effect of the rights issue. In relation to awards with an EPS performance condition under the PSP and the other share option schemes (1978 Scheme and International Scheme), the relevant EPS target has been appropriately adjusted in accordance with IAS 33 for awards outstanding at the time of the rights issue. For the TSR performance condition under the PSP, historic share prices prior to the rights issue were reduced by a factor of , determined by dividing the closing share price on the last trading day before the rights issue ( ) by the theoretical ex-rights price ( ). Retirement provision R I Glynn and I A Bull have received a cash supplement of 22.5% of base salary since their appointment in April and July respectively. B G Wallace received a cash supplement of 30% of base salary since he rejoined the Group in March 2007 until cessation of employment. The pension benefits accrued during his previous employment with the Group were transferred to non-group pension arrangements in 2006 and are not included in these disclosures. R J Ames is a member of the Ladbrokes Pension Plan ( LPP ). He also received a cash supplement of 22.5% of base salary in (reduced from 30% of base salary in ) above the LPP-specific Earnings Cap. The transfer value figures below have been provided by the independent actuarial advisors appointed by the Trustees of the LPP, calculated in accordance with the LPP s agreed transfer policy. The accrued pension benefit is an annual figure. The transfer value represents the amount that would be paid to another pension scheme if this accrued pension benefit were to be transferred away from the LPP. A transfer value represents a liability of the LPP but not a sum paid or due to an individual. Governance Directors pension provision LPP The information below details the pension benefits payable on retirement at age 65, to which R J Ames as the only remaining Executive Director member of the LPP is entitled at 31 December. The figures shown, including the accrued pensions, are the total pension entitlements in respect of all pensionable service with the Company including any service with Ladbrokes prior to becoming a director. The transfer value increase over the year includes the effect of any increase in pensionable salary, completing further service, being a year closer to the normal pension retirement date and changes in market conditions. Increase, excluding inflation, in accrued pension over 000 Transfer value of increase, excluding inflation, less director s contributions over 000 Increase in transfer value, less director s contributions over 000 Accrued pension at 31 December Accrued pension at 31 December Increase in accrued pension over Transfer value at 31 December Transfer value at 31 December Increase in transfer value over Name R J Ames

44 42 Governance Directors remuneration report Directors interests in shares The interests of the directors in the Company s shares, excluding interests under share options, the PSP and the LGP, at the dates stated, are shown in the table below: Ordinary shares at 31 December Ordinary shares at 31 December (or later date of appointment) Name P Erskine 90,095 75,000 R I Glynn 1,310,382 1,177,103 R J Ames 197,317 71,829 I A Bull 209,570 82,986 S Bailey J F Jarvis 15,000 15,000 J M Kelly 18,041 C J Rodrigues 22,646 22,646 D M Shapland 25,000 25,000 C P Wicks 1,384 1,384 (1) All the share interests above are beneficial. (2) Under the Share Incentive Plan, R J Ames holds 3,867 shares (31 December : 2,691 shares) and R I Glynn holds 437 shares (31 December : nil shares). Under the Deferred Bonus Plan, R J Ames holds 132,560 shares (31 December : 52,921 shares) and R I Glynn holds 132,842 (31 December : nil shares). (3) The following changes have occurred to the directors share interests since the year end: 160 shares were purchased by/awarded under the Share Incentive Plan to R J Ames (84 on 5 January 2012 and 76 on 6 February 2012) and 160 to R I Glynn (84 on 5 January 2012 and 76 on 6 February 2012). No other changes to directors share interests have taken place between 31 December and 16 February (4) R I Glynn was entitled to receive an interest in Ladbrokes shares with a value of 1.75 million on appointment. He is required to hold this interest for a minimum of three years forming the basis of a long-term holding in the Company. Except for the service contracts on page 35, none of the directors was materially interested during the year in any contract of significance in relation to the Company s business entered into by the Company or its subsidiaries or, other than is shown in this report, has any interest in the shares or debentures of the Company or its subsidiaries. By order of the Board C J Rodrigues 16 February 2012

45 43 Statutory reports and financial statements Consolidated financial statements contents 44 Consolidated income statement 45 Consolidated statement of comprehensive income 46 Consolidated balance sheet 47 Consolidated statement of changes in equity 48 Consolidated statement of cash flows 49 Notes to the consolidated financial statements 49 1 Corporate information 49 2 Basis of preparation 49 3 Changes in accounting policies 49 4 Summary of significant accounting policies 56 5 Segment information 58 6 Non-trading items (continuing operations) 58 7 Profit before tax and net finance expense 59 8 Finance expense and income 59 9 Staff costs Income tax expense Dividends Earnings per share Dis operations Goodwill and intangible assets Impairment testing of goodwill and indefinite life intangible assets Property, plant and equipment Interest in joint venture Interest in associates and other investments Trade and other receivables Cash and short-term deposits Trade and other payables Provisions Interest bearing loans and borrowings Financial risk management objectives and policies Financial instruments Net debt Share capital Employee share ownership plans Notes to the statement of cash flows Retirement benefit schemes Share-based payments Commitments and contingencies Related party disclosures 88 Statement of directors responsibilities in relation to the consolidated financial statements 89 Independent auditor s report to the members of Ladbrokes plc Financial statements

46 44 Statutory reports and financial statements Consolidated income statement Before non-trading items (1) Total Before non-trading items (1) For the year ended 31 December Notes Continuing operations Amounts staked (2) 16, , , ,011.7 Revenue Cost of sales before depreciation and amortisation (655.7) (656.7) (639.7) (639.7) Administrative expenses (82.9) (89.9) (82.9) (92.0) Share of results from joint venture and associates EBITDA Depreciation and amounts written off non-current assets (50.8) (62.6) (53.5) (72.9) Profit before tax and net finance expense Finance expense 8 (33.4) (34.0) (34.6) (53.1) Finance income (3) Profit before tax Income tax expense 10 (18.4) (16.8) (35.6) (33.6) Income tax settlement credit (3) Profit for the year continuing operations Dis operations Loss for the year from dis operations (8.7) (27.1) Profit for the year Attributable to: Equity holders of the parent Non-controlling interests Earnings per share from continuing operations basic p 13.0p 46.4p 41.5p diluted p 12.9p 46.3p 41.4p Earnings per share on profit for the year basic p 13.0p 45.4p 38.5p diluted p 12.9p 45.3p 38.4p Proposed dividends (4) p 3.90p 3.75p 3.75p (1) Non-trading items are profits or losses on disposal or impairment of non-current assets or businesses; unrealised gains and losses on derivative financial instruments; corporate transaction costs and business restructuring costs. Details of the non-trading items are given in note 6 and of dis operations in note 13, to the consolidated financial statements. (2) Amounts staked does not represent the Group s statutory revenue and comprises the total amounts staked by customers on betting and gaming activities. (3) In the prior year the Group reached a settlement with HMRC which resulted in the recognition within the tax charge of a million tax credit in relation to prior years (note 10). Finance income also increased by 20.0 million to reflect the interest consequences of the settlement (note 8). (4) A final dividend of 3.90 pence (: 3.75 pence) per share, amounting to 35.2 million (: 33.8 million), was declared by the directors on 16 February These financial statements do not reflect the dividend payable. The interim dividend of 3.90 pence per share ( 35.2 million) was paid on 1 December. Total

47 45 Consolidated statement of comprehensive income For the year ended 31 December Notes Profit for the year Currency translation differences (2.5) (7.5) Recycling of currency translation differences 13 (10.8) Total foreign currency translation expense (2.5) (18.3) Actuarial (losses)/gains on defined benefit pension scheme 30 (3.7) 15.6 Tax on actuarial (losses)/gains on defined benefit pension scheme 0.9 (4.2) Total actuarial (losses)/gains on defined benefit pension scheme, net of tax (2.8) 11.4 Net losses on cash flow hedges (0.4) Tax on net losses on cash flow hedges 0.1 Total net losses on cash flow hedges, net of tax (0.3) Recycling of losses on cash flow hedges Tax on recycling of losses on cash flow hedges (0.1) (2.5) Total recycling of losses on cash flow hedges, net of tax Total other comprehensive expense for the year, net of tax (4.9) (0.6) Total comprehensive income for the year Attributable to: Equity holders of the parent Non-controlling interests Financial statements

48 46 Statutory reports and financial statements Consolidated balance sheet At 31 December Notes Assets Non-current assets Goodwill and intangible assets Property, plant and equipment Interest in joint venture Interest in associates and other investments Other financial assets Deferred tax assets Retirement benefit asset Current assets Trade and other receivables Cash and short-term deposits Total assets 1, ,046.9 Liabilities Current liabilities Interest bearing loans and borrowings 23 (131.4) (108.3) Derivatives 25 (0.1) Trade and other payables 21 (142.7) (134.4) Corporation tax liabilities (0.7) (26.2) Other financial liabilities 25 (1.0) (1.1) Provisions 22 (4.3) (1.3) (280.2) (271.3) Non-current liabilities Interest bearing loans and borrowings 23 (348.9) (401.6) Other financial liabilities 25 (10.4) (10.8) Deferred tax liabilities 10 (82.3) (93.3) Provisions 22 (9.4) (12.9) (451.0) (518.6) Total liabilities (731.2) (789.9) Net assets Shareholders equity Issued share capital Share premium Treasury and own shares (113.3) (114.4) Retained earnings (49.5) (99.7) Foreign currency translation reserve Equity shareholders funds Non-controlling interests Total shareholders equity Approved by the Board of Directors on 16 February R I Glynn I A Bull Directors

49 47 Consolidated statement of changes in equity Issued share capital Share premium Treasury and own shares Retained earnings (1) Foreign currency translation reserve (2) Attributable to the equity shareholders of the Company Noncontrolling interests Total shareholders equity At 1 January (112.5) (430.8) 28.8 (60.4) (60.4) Profit for the year Other comprehensive income/ (expense) 17.7 (18.3) (0.6) (0.6) Total comprehensive income (18.3) Issue of shares Share-based payments charge Net movement in shares held in ESOP trusts (1.9) (4.0) (5.9) (5.9) Equity dividends (34.7) (34.7) (34.7) Non-controlling interests At 31 December (114.4) (99.7) At 1 January (114.4) (99.7) Profit for the year Other comprehensive expense (2.4) (2.5) (4.9) (4.9) Total comprehensive income (2.5) Issue of shares Share-based payments charge Net movement in shares held in ESOP trusts 1.1 (3.2) (2.1) (2.1) Equity dividends (69.0) (69.0) (69.0) Non-controlling interests At 31 December (113.3) (49.5) Financial statements (1) At 31 December, there was no deferred losses on cash flow hedges within retained earnings (: 0.5 million). (2) The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.

50 48 Statutory reports and financial statements Consolidated statement of cash flows For the year ended 31 December Notes Net cash flows from operating activities Cash flows from investing activities: Interest received Dividends received from associates Payments for intangible assets (39.9) (15.9) Purchase of property, plant and equipment (37.4) (32.9) Proceeds from the sale of property, plant and equipment Proceeds from the sale of intangible assets 4.3 Purchase of interest in joint venture 17 (2.5) (0.8) Purchase of interest in associates and other investments 18 (0.2) Costs of disposal of dis operations (2.7) Cash consideration in respect of sale of dis operations (0.9) Cash disposed of with dis operations (3.1) Net cash used in investing activities (76.5) (38.6) Cash flows from financing activities: Proceeds from issue of ordinary shares 0.4 Proceeds from borrowings, net of issue costs Purchase of ESOP shares (2.1) Repayment of borrowings (157.0) (435.1) Dividends paid 11 (69.0) (34.7) Net cash used in financing activities (100.8) (248.7) Net increase/(decrease) in cash and cash equivalents 8.7 (10.3) Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year Cash and cash equivalents comprise: Cash at bank and in hand Bank overdraft (0.2)

51 49 Notes to the consolidated financial statements 1 Corporate information Ladbrokes plc (the Company) is a limited company incorporated and domiciled in the United Kingdom whose shares are publicly traded. The address of its registered office and principal place of business is disclosed in the corporate information section of the Annual Report. The consolidated financial statements of the Company and its subsidiaries (together, the Group ) for the year ended 31 December were authorised for issue in accordance with a resolution of the directors on 16 February The principal activities of the Group are described in note 5. 2 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted for use in the European Union. The consolidated financial statements are presented in pounds sterling, which is the Group s functional and presentational currency. All values are in millions () rounded to one decimal place except where otherwise indicated. To assist in understanding its underlying performance, the Group has defined the following items of income and expense as non-trading in nature: profits or losses on disposal or impairment of non-current assets or businesses; unrealised gains and losses on derivative financial instruments; corporate transaction costs; and business restructuring costs. The non-trading items have been included within the appropriate classifications in the consolidated income statement. 3 Changes in accounting policies From 1 January the Group adopted the following new and amended IFRSs and IFRIC interpretations. These did not have a material impact on the results or financial position of the Group. In addition the Group has commenced amortisation of the customer relationships intangible asset in the year (see note 4). The revision of IAS 24 Related Party Disclosures simplified the disclosure requirements for government-related entities and clarified the definition of a related party. It clarified that nonexecutive directors should be included in the disclosure of key management personnel compensation and the related party definition now includes parties with joint control over the entity and joint ventures in which the entity is a venturer. The amendment to IAS 32 Financial Instruments: Presentation on classification of rights issue addresses the accounting for rights issues. The definition of a financial liability has been amended to classify rights issues (and certain options or warrants) as equity instruments under certain conditions. The amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement provides guidance on assessing the recoverable amount of a net pension asset and permits an entity to treat the prepayment of a minimum funding requirement as an asset. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value, unless this cannot be reliably measured, in which case they are measured at the fair value of the liability extinguished. Any gain or loss is recognised immediately in profit or loss. The International Accounting Standards Board s Second Annual Improvements Project (published in May 2009) made minor amendments to a number of standards, primarily with a view to removing inconsistencies and clarifying wording. The amendments to these standards did not have any impact on the accounting policies, financial position or performance of the Group. 4 Summary of significant accounting policies Basis of consolidation The consolidated financial statements comprise the financial statements of the Group at 31 December each year. The underlying financial statements of subsidiaries are prepared for the same reporting year as the Company, using consistent accounting policies. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. All intercompany transactions, balances, income and expenses are eliminated on consolidation. Subsidiaries are consolidated, using the purchase method of accounting, from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred from the Group. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at fair value at the date of acquisition. Any excess of the cost of acquisition over the fair values of the separately identifiable net assets acquired is recognised as goodwill. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those used by the Group. Critical accounting estimates and judgements The preparation of financial information requires the use of assumptions, estimates and judgements about future conditions. Use of available information and application of judgement are inherent in the formation of estimates. Actual results in the future may differ from those reported. In this regard, management believes that the accounting policies where judgement is necessarily applied are those that relate to: the measurement and impairment of indefinite life intangible assets; the measurement of pension and other post-employment benefit obligations; the determination of the initial fair value of betting and gaming transactions; the recoverable amount of trade receivables; income tax and the valuation of financial guarantee contracts. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Further information about key assumptions concerning the future and other key sources of estimation uncertainty are set out below. Indefinite life intangible assets The Group has determined that betting shop licences have indefinite lives. The Group determines whether indefinite life intangible assets are impaired at least on an annual basis. This requires an estimation of the value in use of the cash generating units to which the intangible assets are allocated. Estimating a value in use amount requires management to make an estimate of the expected future cash flows from the cash generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Further details are given in notes 14 and 15. Financial statements

52 50 Statutory reports and financial statements Notes to the consolidated financial statements 4 Summary of significant accounting policies Pension and other post-employment benefit obligations The cost of defined benefit pension plans and other postemployment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. Further details are given in note 30. Betting and gaming transactions Betting and gaming transactions are measured at the fair value of the consideration received or receivable from customers. This is normally the nominal amount of the consideration but on certain occasions, the fair value is estimated using valuation techniques, taking into account the credit profile of customers in determining the collectability of the consideration. In addition, where there are indicators that any trade receivable is impaired at the balance sheet date, management makes an estimate of the asset s recoverable amount. Further details are given in note 19. Income tax The Group is subject to tax in a number of jurisdictions. Significant judgement is required in determining the provision for income taxes due to uncertainty of the amount of income tax that may be payable, and in respect of determining the level of the future taxable profits of the Group that support the recoverability of deferred tax assets. Further details are given in note 10. Financial guarantee contracts The valuation of financial guarantee contracts and related indemnities requires use of assumptions of the risks of default of the guaranteed entities and the credit profiles of the counterparties. Further details are given in note 25. Investments in joint ventures A joint venture is an entity in which the Group holds an interest on a long-term basis and which is jointly controlled by the Group and one or more other venturers under a contractual agreement. The Group s share of results of joint ventures is included in the Group consolidated income statement using the equity method of accounting. Investments in joint ventures are carried in the Group consolidated balance sheet at cost plus post-acquisition changes in the Group s share of net assets of the entity less any impairment in value. The carrying value of investments in joint ventures includes acquired goodwill. If the Group s share of losses in the joint venture equals or exceeds its investment in the joint venture, the Group does not recognise further losses, unless it has incurred obligations to do so or made payments on behalf of the joint venture. Investments in associates Associates are those businesses in which the Group has a long-term interest and is able to exercise significant influence over the financial and operational policies but does not have control or joint control over those policies. The Group s share of results of associates is included in the Group consolidated income statement using the equity method of accounting. Investments in associates are carried in the Group consolidated balance sheet at cost plus post-acquisition changes in the Group s share of net assets of the entity less any impairment in value. The carrying value of investments in associates includes acquired goodwill. Goodwill Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the Group s interest in the net fair value of the separately identifiable assets, liabilities and contingent liabilities of a subsidiary or associate at the date of acquisition. In accordance with IFRS 3 Business Combinations, goodwill is not amortised but reviewed annually for impairment and as such, is stated at cost less any provision for impairment of value. Any impairment is recognised immediately in the consolidated income statement and is not subsequently reversed. On acquisition, any goodwill acquired is allocated to cash generating units for the purpose of impairment testing. Where goodwill forms part of a cash generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Intangible assets Intangible assets acquired separately are capitalised at cost and those acquired as part of a business combination are capitalised separately from goodwill if the fair value can be measured reliably on initial recognition. The costs relating to internally generated intangible assets, principally software costs, are capitalised if the criteria for recognition as assets are met. Other expenditure is charged against profit in the year in which the expenditure is incurred. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of these intangible assets are assessed to be either finite or indefinite. Where amortisation is charged on assets with finite lives, this expense is taken to the consolidated income statement through the depreciation and amounts written off non-current assets line item. Useful lives are reviewed on an annual basis. Intangible assets with indefinite useful lives are tested for impairment annually, either individually, or at the cash generating unit level. A summary of the policies applied to the Group s intangible assets is as follows: Customer Licences Software relationships (1) Useful lives indefinite finite finite Method used not depreciated or revalued 3-5 years straight line 15.5 years straight line Internally generated or acquired Impairment testing/ recoverable amount testing acquired acquired and internally generated annually and where an indicator of impairment exists useful lives reviewed at each financial year end acquired where an indicator of impairment exists (1) From 1 January, the Group changed its estimate of useful economic life of customer relationships from being indefinite to a finite period of 15.5 years and started amortising the asset over the period. An intangible asset is derecognised upon disposal, with any gain or loss arising (calculated as the difference between the net disposal proceeds and the carrying amount of the item) included in the consolidated income statement in the year of disposal.

53 51 4 Summary of significant accounting policies Property, plant and equipment Land is stated at cost less any impairment in value. Buildings, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated using the straight line method to allocate the cost of each asset to its residual value over its useful economic life as follows: Buildings 50 years or estimated useful life of the building, or lease, whichever is less, to estimated residual value. Fixtures, fittings and equipment four to 10 years as considered appropriate to write down cost to estimated residual value. The carrying values of plant and equipment are reviewed for impairment annually as to whether there are events or changes in circumstances indicating that the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash generating units are written down to their recoverable amount. The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. Impairment losses are recognised in the consolidated income statement in the depreciation and amounts written off non-current assets line item. An item of property, plant and equipment is derecognised upon disposal, with any gain or loss arising (calculated as the difference between the net disposal proceeds and the carrying amount of the item) included in the consolidated income statement in the year of disposal. Leases Leases that transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalised at the inception of the lease at the fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term. Leases where the lessor retains substantially all the benefits and risks of ownership of the asset are classified as operating leases. Operating lease payments, other than contingent rentals, are recognised as an expense in the consolidated income statement on a straight line basis over the lease term. Recoverable amount of non-current assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. The recoverable amount is the higher of an asset s or cash generating unit s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Cash and cash equivalents Cash and cash equivalents consists of cash at bank and in hand and short-term deposits with an original maturity of less than three months, net of outstanding bank overdrafts. Financial assets Financial assets are recognised when the Group becomes party to the contracts that give rise to them. The Group classifies financial assets at inception as either loans and receivables or as financial assets at fair value through profit or loss. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. On initial recognition, loans and receivables are measured at fair value net of transaction costs. Subsequently, the fair values are measured at amortised cost, using the effective interest method, less any allowance for impairment. Financial assets at fair value through profit or loss comprise derivative financial instruments and guarantees provided to the Group. Financial assets through profit or loss are measured initially at fair value with transaction costs taken directly to the consolidated income statement. Subsequently, the fair values are remeasured, and gains and losses from changes therein are recognised in the consolidated income statement. Trade receivables are generally accounted for at amortised cost. The Group reviews indicators of impairment on an ongoing basis and where such indicators exist, the Group makes an estimate of the asset s recoverable amount. Financial guarantees provided to the Group are classified as financial assets and are measured at fair value by estimating the probability of the guarantees being called upon and the related cash inflows to the Group. Financial liabilities Financial liabilities comprise interest bearing loans and borrowings, derivative financial instruments, ante post bets and guarantees given to third parties. On initial recognition, financial liabilities are measured at fair value plus transaction costs where they are not categorised as financial liabilities at fair value through profit or loss. Financial liabilities at fair value through profit or loss include derivative financial instruments and guarantees. Financial liabilities at fair value through profit or loss are measured initially at fair value, with transaction costs taken directly to the consolidated income statement. Subsequently, the fair values are remeasured and gains and losses from changes therein are recognised in the consolidated income statement. Financial statements

54 52 Statutory reports and financial statements Notes to the consolidated financial statements 4 Summary of significant accounting policies All interest bearing loans and borrowings are initially recognised at fair value net of issue costs associated with the borrowing. After initial recognition, fixed rate interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. The Group has provided financial guarantees to third parties in respect of lease obligations of certain of the Group s former subsidiaries within the disposed hotels division. Financial guarantee contracts are classified as financial liabilities and are measured at fair value by estimating the probability of the guarantees being called upon and the related cash outflows from the Group. Derecognition of financial assets and liabilities Financial assets are derecognised when the right to receive cash flows from the assets has expired or when the Group has transferred its contractual right to receive the cash flows from the financial assets or has assumed an obligation to pay the received cash flows in full without material delay to a third party, and either: substantially all the risks and rewards of ownership have been transferred; or substantially all the risks and rewards have neither been retained nor transferred but control is not retained. Financial liabilities are derecognised when the obligation is discharged, cancelled or expires. Derivative financial instruments and hedge accounting The Group uses derivative financial instruments such as cross currency swaps, foreign exchange swaps and interest rate swaps, to hedge its risks associated with interest rate and foreign currency fluctuations. Derivative financial instruments are recognised initially and subsequently at fair value. The gains or losses on remeasurement are taken to the consolidated income statement except where the derivative is designated as a cash flow hedge or a net investment hedge. Fair values of over the counter derivatives are obtained using valuation techniques, including discounted cash flow models and option pricing models. Derivative financial instruments are classified as assets where their fair value is positive, or as liabilities where their fair value is negative. Derivative assets and liabilities arising from different transactions are only offset if the transactions are with the same counterparty, a legal right of offset exists and the parties intend to settle the cash flows on a net basis. The derivative financial instruments taken out as hedges were designated and documented as hedges on the date that the relevant derivative contract was committed to, as one of the following: a hedge of the fair value of an asset and liability (fair value hedge); a hedge of the income/cost of a highly probable forecasted transaction or commitment (cash flow hedge); or a hedge of a net investment in a foreign entity (net investment hedge). In relation to fair value hedges that meet the conditions for hedge accounting, any gain or loss from remeasuring the hedging instrument at fair value is recognised immediately in the consolidated income statement. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognised in the consolidated income statement. In relation to cash flow hedges that meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion is recognised in the consolidated income statement. For all cash flow hedges, the gains or losses that are recognised in equity are transferred to the consolidated income statement in the same year in which the hedged cash flow affects the consolidated income statement. Hedge accounting is dis when the hedging instrument expires or is sold, terminated or exercised, no longer qualifies for hedge accounting or as a result of a management decision to cease hedging. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until, in the case of a hedge of a forecast transaction, the transaction occurs or, in the case of net investment hedging, until the Group disposes of its investment in the foreign entity being hedged. Where a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the consolidated income statement for the year. For derivative financial instruments that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the consolidated income statement for the year. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the directors best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present value where the effect is material using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance expense. Foreign currency translation The presentation and functional currency of Ladbrokes plc and the functional currencies of its UK subsidiaries is pounds sterling ( ). Transactions in foreign currencies are initially recorded in sterling at the foreign currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the foreign currency rate of exchange ruling at the balance sheet date.

55 53 4 Summary of significant accounting policies All foreign currency translation differences are taken to the consolidated income statement with the exception of differences on foreign currency borrowings that provide a post-tax hedge against a net investment in a foreign entity. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in the consolidated income statement. Tax charges and credits attributable to exchange differences on those borrowings are also dealt with in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value was determined. The main functional currency of overseas subsidiaries is the Euro. At the reporting date, the assets and liabilities of these overseas subsidiaries are translated into sterling at the rate of exchange ruling at the balance sheet date and their income statements are translated at the average exchange rates for the year. The post-tax exchange differences arising on the retranslation, since the date of transition to IFRSs, are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign entity is recognised in the consolidated income statement. Income tax Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date, between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences: except where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor the tax profit; and associated with investments in subsidiaries and associates, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences and carry forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and carry forward of unused tax assets and unused tax losses can be utilised: except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor the tax profit; and in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are only recognised to the extent that it is probable that the deductible temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax balances are not discounted. Income tax relating to items recognised directly in equity is recognised in equity and not in the consolidated income statement. Revenues, expenses and assets are recognised net of the amount of sales tax except: where the sales tax incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of sales tax included. The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the consolidated balance sheet. Pensions and other post-employment benefits The defined benefit pension fund holds assets separately from the Group. The pension cost relating to this fund is assessed in accordance with the advice of independent qualified actuaries using the projected unit credit method. Actuarial gains or losses are recognised in the consolidated statement of comprehensive income in the period in which they arise. Any past service cost is recognised immediately to the extent that the benefits have already vested and otherwise is amortised on a straight line basis over the average period until the benefits vest. The retirement benefit asset recognised in the balance sheet represents the fair value of scheme assets less the value of the defined benefit obligations as adjusted for unrecognised past service cost. The Group s contributions to defined contribution plans are charged to the consolidated income statement in the period to which the contributions relate. For defined benefit schemes, management makes annual estimates and assumptions in respect of discount rates, future changes in salaries, employee turnover, inflation rates and life expectancy. In making these estimates and assumptions, management considers advice provided by external advisers, such as actuaries. Where actual experience differs to these estimates, actuarial gains and losses are recognised directly in equity. Refer to note 30 for details of the values of assets and obligations and key assumptions used. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs. Financial statements

56 54 Statutory reports and financial statements Notes to the consolidated financial statements 4 Summary of significant accounting policies Treasury shares Own equity instruments that are reacquired (treasury shares) are deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group s own equity instruments. ESOP trusts Where the Group holds its own equity shares through ESOP trusts these shares are shown as a reduction in equity. Any consideration paid or received for the purchase or sale of these shares is shown in the reconciliation of movements in shareholders funds and no gain or loss is recognised within the consolidated income statement or the statement of comprehensive income on the purchase, sale, issue or cancellation of these shares. Dividends Final dividends proposed by the Board of Directors and unpaid at the year end are not recognised in the financial statements until they have been approved by shareholders at the Annual General Meeting. Revenue Revenue is measured at the fair value of the consideration received or receivable from customers for goods and services provided in the normal course of business, net of discounts, VAT and other sales-related taxes. For licensed betting offices, on course betting, Core Telephone Betting, mobile betting, High Rollers, Digital businesses (including sportsbook, casino, games, other number bets and mobile betting), revenue represents gains and losses, being the amounts staked and fees received, less total payouts and the fair value of reward points issued from betting activity in the period. Open betting positions are carried at fair market value and gains and losses arising on these positions are recognised in revenue. When a bet is placed and reward points are issued under the Odds On loyalty scheme, the fair value of the reward points is deferred and recorded as a liability. The deferred revenue is recognised when the reward points are used or when they expire. Revenue from the online poker business reflects the net income (rake) earned from poker games completed by the period end. In the case of the greyhound stadia, revenue represents income arising from the operation of the greyhound stadia in the period, including sales of refreshments. Finance expense and income Finance expense and income arising on interest bearing financial instruments carried at amortised cost are recognised in the consolidated income statement using the effective interest rate method. Finance expense includes the amortisation of fees that are an integral part of the effective finance cost of a financial instrument, including issue costs, and the amortisation of any other differences between the amount initially recognised and the redemption price. Net gains and losses in respect of mark-to-market adjustments on financial instruments carried at fair value, fair value adjustments to the carrying value of hedged items that form part of fair value hedges and foreign exchange adjustments are included in non-trading items in the consolidated income statement. Net gains and losses on financial guarantees are included in dis non-trading items. Share-based payment transactions Certain employees (including directors) of the Group receive remuneration in the form of equity settled share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (equity settled transactions). The cost of equity settled transactions is measured by reference to the fair value at the date on which they are granted. The fair value is determined using a binomial model, further details of which are given in note 31. In valuing equity settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Ladbrokes plc (market conditions). The cost of equity settled transactions is recognised together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (vesting date). The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of awards that, in the opinion of the directors of the Group at that date, based on the best available estimate of the number of equity instruments, will ultimately vest. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share as shown in note 12. The Group has an employee share incentive plan and an employee share trust for the granting of non-transferable options to executives and senior employees. Shares in the Group held by the employee share trust are treated as treasury shares and presented in the balance sheet as a deduction from equity. Refer to consolidated statement of changes in equity. The Group has taken advantage of the transitional provisions of IFRS 2 Share-based Payment in respect of equity settled awards and has applied IFRS 2 only to equity settled awards granted after 7 November 2002 that had not vested on 1 January Future accounting developments The following new standards, interpretations and amendments have been issued but were not effective for the financial year beginning 1 January and have not been early adopted: The amendments to IAS 12 Income Taxes are effective for annual periods beginning on or after 1 January It provides an exception that the measurement of deferred tax assets and deferred tax liabilities should reflect the tax consequences that would follow from the manner in which the entity expects to recover the carrying amount of an asset. The amendments to IAS 1 Presentation of Financial Statements are effective for annual periods beginning on or after 1 July 2012 and require the Group to separate items of other comprehensive income into two distinct categories: items that will not be reclassified subsequently to the income statement; and items that will be reclassified subsequently to the income statement when specific conditions are met. Income tax on items of other comprehensive income is required to be allocated on the same basis.

57 55 4 Summary of significant accounting policies On 12 May, the IASB issued IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures which are all effective for accounting periods beginning on or after 1 January IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. IFRS 11 replaces IAS 31 Interests in Joint Ventures and removes the option to account for jointly-controlled entities using proportionate consolidation. Instead entities that meet the definition of a joint venture, based on rights to net assets only, must be accounted for using the equity method. IFRS 12 includes all of the disclosures required by IFRS 10, IAS 27, IAS 28 and IFRS 11 in one standard. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required including how the entity determines that it controls another entity where judgement is used. As a consequence of the IASB consolidations project, IAS 27 is renamed Separate Financial Statements and is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. IAS 28 has been renamed Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. IFRS 13 Fair Value Measurement is effective for annual periods beginning on or after 1 January It establishes a single source of guidance for fair value measurements. The standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. In general, the disclosure requirements in IFRS 13 are more extensive than those required in the current standards. The revision of IAS 19 Employee Benefits is effective for annual periods beginning on or after 1 January The most significant change relates to the accounting for changes in defined benefit obligations and plan assets. The amendments require the recognition of changes in defined benefit obligations and in fair value of plan assets when they occur, and hence eliminate the corridor approach permitted under the previous version of IAS 19 and accelerate the recognition of past service costs. The amendments require all actuarial gains and losses to be recognised immediately through other comprehensive income in order for the net pension asset or liability recognised in the consolidated statement of financial position to reflect the full value of the plan deficit or surplus. The amendment also requires you to calculate the net interest on the pension asset based on a single discount rate. The amendments to IFRS 7 Financial Instruments increase the disclosure requirements for transactions involving transfers of financial assets. IFRS 9 Financial Instruments was reissued in October. The Group is required to adopt this standard for the year ended 31 December The first phase of IFRS 9 addresses the classification and measurement of financial assets. The key requirements of IFRS 9 are that at initial recognition, all financial assets are measured at fair value with different requirements for subsequent measurement for debt and equity instruments. The standard provides relief from the requirement to restate comparative financial statements for the effect of applying IFRS 9. Phase 1 of IFRS 9 can be early adopted. The Group has decided not to early adopt the above standards, and is currently assessing their impact on its financial statements. There are no other IFRSs or IFRICs in issue but not yet effective that are expected to have a significant impact for the Group. Financial statements

58 56 Statutory reports and financial statements Notes to the consolidated financial statements 5 Segment information Management has determined the Group s operating segments based on the reports reviewed by the Board of Directors to make strategic decisions. In September, the Group reorganised its internal operating structure into three main business units: Product, Customer and Channels. However, the performance of the Group s continuing businesses is assessed and measured according to the nature of the services provided. IFRS 8 requires segment information to be presented on the same basis as that used by the Board for assessing performance and allocating resources, and the Group s operating segments are aggregated into the five reportable segments detailed below: UK Retail: comprises betting activities in the shop estate in Great Britain. European Retail: comprises all activities connected with the Ireland (North and South), Belgium and Spain shop estates. Digital: comprises betting and gaming activities from online and mobile operations. Core Telephone Betting: comprises activities relating to bets taken on the telephone, excluding High Rollers. High Rollers: comprises activities relating to bets taken on the telephone from High Rollers. Dis operations comprise Hotels in both years and Italy Retail in the prior year. The Board continues to assess the performance of operating segments based on a measure of net revenue, profit before tax, net finance expense and amortisation of customer relationships. This measurement basis excludes the effect of non-trading income and expenditure from the operating segments. Transfer prices between operating segments are on an arm s-length basis in a manner similar to transactions with third parties. UK Retail European Retail Digital Core Telephone Betting Continuing operations High Rollers Total Dis operations (note 13) Segment revenue (4.2) Segment profit/(loss) before non-trading items (4.0) (3.2) Non-trading items (1) (2.6) (12.1) (1.4) (0.6) (16.7) 0.4 (16.3) Segment profit/(loss) (4.6) (3.2) Corporate costs (26.3) (26.3) Profit before tax and net finance expense Net finance expense (33.3) (33.3) Profit before tax Income tax expense (16.8) (16.8) Profit for the year Other disclosures: Share of results from joint venture and associates (1) 2.4 (0.8) Depreciation and amortisation (1) Capital expenditure (1) (1) Non-trading items, depreciation and amortisation, share of results from joint venture and associates and capital expenditure include amounts not allocated to reportable segments of 3.1 million, 0.1 million, loss of 0.6 million and 1.7 million, respectively. Group Total

59 57 5 Segment information UK Retail European Retail Digital Core Telephone Betting Continuing operations High Rollers Total Dis operations (note 13) Segment revenue Segment profit/(loss) before non-trading items (0.4) (9.1) Non-trading items (1) (13.5) (5.6) (4.5) (23.6) (17.4) (41.0) Segment profit/(loss) (0.4) (26.5) Corporate costs (27.9) (27.9) Profit/(loss) before tax and net finance expense (26.5) Net finance expense (31.7) (31.7) Profit/(loss) before tax (26.5) Income tax credit/(expense) (0.6) Profit/(loss) for the year (27.1) Other disclosures: Share of results from joint venture and associates 3.8 (0.5) Depreciation and amortisation (1) Capital expenditure (1) (1) Non-trading items, depreciation and amortisation, and capital expenditure include amounts not allocated to reportable segments of 22.6 million, 0.1 million and 1.0 million, respectively. Geographical information Revenue by destination and non-current assets on a geographical basis for the Group, are as follows: Non-current Revenue assets (1) Revenue Group Total Non-current assets (1) United Kingdom Rest of the world Total Financial statements (1) Non-trading assets excluding deferred tax assets and retirement benefit assets.

60 58 Statutory reports and financial statements Notes to the consolidated financial statements 6 Non-trading items (continuing operations) Business restructuring costs (1) (4.4) (7.4) Corporate transaction costs (2) (2.6) (0.7) Impairment loss (3) (10.9) (9.2) Loss on closure of UK Retail shops (4) (1.2) (3.0) Loss on closure of European Retail shops (0.7) (0.1) Termination of machines contract (8.1) Bond termination costs and termination of interest rate swaps (5) (0.5) (17.7) Total non-trading items (20.3) (46.2) Non-trading tax credit Non-trading items after taxation (18.7) (44.2) (1) Business restructuring costs in the year related mainly to the reorganisation of the Group to a new cross-channel, centralised structure. These costs have been incurred as follows: 1.4 million in UK Retail, 0.5 million in European Retail, 1.4 million in Digital, 0.6 million in Core Telephone Betting and 0.5 million in corporate costs. In the year ended 31 December, business restructuring costs related to a strategic review resulting in changes to senior executives and operational structures within UK Retail of 0.5 million, Digital of 1.9 million, corporate costs of 4.8 million and European Retail of 0.2 million. (2) The Group incurred 2.6 million (: 0.7 million) in relation to corporate transaction costs reported within Corporate costs. These costs related to potential acquisition projects that took place throughout the financial year. (3) The impairment loss of 10.9 million during the year relates to Ireland shops. In the year ended 31 December, the impairment loss related to Ireland shops of 5.3 million, UK Retail shops of 2.0 million and 1.9 million losses in relation to the withdrawal from the French joint venture with Groupe Canal+. (4) The 1.2 million loss on closure of UK Retail shops and 0.7 million loss on closure of European Retail shops consisted of loss on disposal of intangible assets of 0.3 million (: 2.6 million), loss on disposal of property, plant and equipment of 0.6 million (: 0.5 million) and cost accruals of 1.0 million (: nil). (5) Following the termination of the Group s interest rate swaps in, the remaining 0.5 million of losses deferred in equity have been recycled to the income statement as a non-trading finance expense to match the interest payments on the underlying borrowings. In the year ended 31 December, the Group repurchased million of the 250 million 7.125% bonds due 2012 and issued 225 million 7.625% bonds maturing in The early repayment premium on the 2012 bonds of 8.6 million and 9.1 million of recycled losses relating to the early termination of interest rate swaps were reported as non-trading items. Non-trading items relating to dis operations are shown in note Profit before tax and net finance expense Profit before tax and net finance expense has been arrived at after charging: Continuing operations Dis operations Betting duty, gross profits tax, horse and dog levy Depreciation of property, plant and equipment (note 16) (1) Amortisation of intangible assets (note 14) Staff costs (note 9) Foreign exchange (0.3) 0.3 (0.3) 0.3 (1) After non-trading items of nil (: 7.1 million). Fees payable to Ernst & Young LLP were as follows: Audit and audit-related services: Audit of the Group financial statements Audit of the Company s subsidiaries Audit-related assurance services Non-audit services: Tax advisory services Corporate finance services Total fees Total

61 59 7 Profit before tax and net finance expense Analysis of expense by function is: Cost of sales after depreciation and amounts written off non-current assets Administrative expenses Finance expense and income Bank loans and overdrafts (1) (1.4) (2.8) Bonds and private placements at amortised cost (1) (27.2) (28.4) Fee expenses (4.8) (3.4) Finance expense before non-trading items (33.4) (34.6) Recycling of losses on cash flow hedges (0.5) (9.1) Losses on derivatives not in a hedging relationship (0.1) Bond early repayment costs (8.6) Losses on retranslation of foreign currency borrowings held at amortised cost (0.8) Total finance expense (34.0) (53.1) Interest receivable (1)(2) Finance income before non-trading items Gains on derivatives not in a hedging relationship 0.8 Gains on retranslation of foreign currency borrowings held at amortised cost 0.1 Total finance income Net finance expense before non-trading items (32.8) (14.0) Non-trading net losses (0.5) (17.7) Net finance expense after non-trading items (33.3) (31.7) Financial statements (1) Calculated using the effective interest rate method. (2) In, 20.0 million of interest income was in relation to the HMRC tax settlement. 9 Staff costs The average weekly number of employees (including executive directors) was: Continuing operations Number Number UK Retail 13,170 12,877 European Retail 1,566 1,515 Digital Telephone Betting Central services ,512 15,289 There were no people employed relating to dis operations during the year (: 154). The number of people employed by the Group at 31 December was 15,220 (: 15,157).

62 60 Statutory reports and financial statements Notes to the consolidated financial statements 9 Staff costs Continuing operations Dis operations Total Wages and salaries Social security costs Pension costs (note 30) Share-based payments (note 31) In addition to salary, employees may qualify for various benefit schemes operated by the Group. Eligibility for benefits is normally determined primarily according to an employee s length of service and level of responsibility. The amounts of some benefits are proportionate to individual salary. Benefits may include paid leave for holidays, maternity and illness, as well as insured benefits. The latter can cover private healthcare for the employee and their immediate family, long-term disability, personal accident and death in service cover. Company cars, including fuel benefits, are provided predominantly to meet job requirements but also to certain executives. The principal benefit schemes are: (i) Pensions (a) Ladbrokes Group Stakeholder Pension Plan New employees in the UK are offered membership of Ladbrokes Group Stakeholder Pension Plan, a defined contribution pension scheme. Subject to meeting certain eligibility and employment grade criteria, the Group matches employees contributions up to a maximum of 15% of base salary. (b) Ladbrokes Pension Plan (LPP) This was closed to new employees on 1 August Members contribute on average six per cent of pensionable salary per annum. Benefit generally accrues to provide a target pension of two thirds (for joiners after June 2002: half) of final pensionable salary for an employee attaining age 65 with at least 40 years membership. A spouse s pension is payable following death. LPP Executive Section Members contribute on average seven per cent of pensionable salary per annum. Benefit accrues to provide a target pension from all sources of two thirds of final pensionable salary for an executive attaining age 60 with at least 20 years membership (for joiners after June 2002, employees attaining age 65 with at least 26.7 years service). A spouse s and children s pensions are payable following death. Senior executives subject to the Earnings Cap: Following the A-Day pensions review, the pre-a-day Revenue limits regime has been maintained as the framework for the LPP, including a LPP-specific Earnings Cap. Executive directors and senior executives have a choice between: (i) membership of the Executive Section of the LPP plus a cash supplement of up to 22.5% (30% prior to 1 January ) of base salary above the Earnings Cap; or (ii) a cash supplement of up to 22.5% (30% prior to 1 January ) of base salary in lieu of membership of the LPP. (ii) Share-based payments Details of employee share schemes operated by the Group are shown in the Directors remuneration report on pages 31 to 42 that forms part of the Annual Report. Details of options granted in and outstanding at 31 December are shown in note 31. Details of directors remuneration and the policies adopted in determining it can be found in the Directors remuneration report on pages 31 to 42.

63 61 10 Income tax expense Analysis of charge for the year: Current income tax: UK overseas adjustments in respect of previous years (1) (34.1) (203.7) Deferred tax: relating to origination and reversal of temporary differences tax rate reduction (1.8) (0.6) adjustments in respect of previous years (1) 23.2 (58.5) Income tax expense/(credit) reported in the income statement 16.8 (227.7) Deferred tax (credited)/charged directly to other comprehensive income (0.8) 6.6 A reconciliation of income tax expense applicable to profit before tax at the UK statutory income tax rate to the income tax expense for the years ended 31 December and 31 December is as follows: Profit/(loss) before tax: continuing operations dis operations 0.4 (26.5) Corporation tax charge thereon at 26.5% (: 28.0%) Adjusted for the effects of: Lower effective tax rates on overseas earnings (8.0) (11.8) Recognition of tax losses (6.3) (7.0) Non-deductible expenses Non-deductible expenses included in dis operations and non-trading items Tax rate reduction (1.8) (0.6) Adjustments in respect of prior periods (1) (10.9) (262.2) Other 1.1 (2.1) Income tax expense/(credit) 16.8 (227.7) Reported as: continuing operations in consolidated income statement (before non-trading items) 18.4 (226.3) continuing operations in consolidated income statement (tax on non-trading items) (note 6) (1.6) (2.0) Total continuing operations 16.8 (228.3) dis operations (note 13) 0.6 Income tax expense/(credit) 16.8 (227.7) Financial statements (1) The Group has made progress in the resolution of historic tax matters and as a result reduced the level of the tax creditor required. The Group has also reassessed the availability of suitable profits of its subsidiaries against which agreed losses can be offset in the foreseeable future and reduced the level of deferred tax asset recognised. The impact of these is a net 10.9 million reduction in the income tax charge for the year. In, the adjustment in respect of prior periods of million includes million as a result of the HMRC tax settlement. The Group reached a settlement with HMRC which covered substantially all outstanding items in respect of tax years to 31 December The settlement resulted in the recognition within the tax charge of a million tax credit in relation to prior years. The settlement included 46.2 million relating to the recognition of a deferred tax asset. The asset primarily reflected the recognition of tax losses available for offset in future periods. The settlement resulted in a cash repayment of 80.0 million of corporation tax by HMRC, which were offset by payments of 28.1 million. There was also interest income of 20.0 million in respect of an interest rebate following the HMRC tax settlement.

64 62 Statutory reports and financial statements Notes to the consolidated financial statements 10 Income tax expense Deferred tax Deferred tax at 31 December relates to the following: Consolidated balance sheet Consolidated income statement Deferred tax liabilities Accelerated depreciation for tax purposes (1.8) (5.9) Betting licences (9.2) (6.4) Retirement benefit asset Deferred tax liabilities Deferred tax assets Retirement benefit obligation 0.5 Accelerated depreciation for tax purposes (5.4) (5.4) Losses (25.0) (45.9) 20.9 (36.1) Share-based payments (1.7) (1.7) Fair value adjustments to revenue (1.9) (22.3) 20.4 (8.5) Other temporary differences (0.9) (1.1) Deferred tax assets (34.9) (69.3) Deferred tax charge/(credit) 24.3 (55.4) Net deferred tax liability The Group has further tax losses at 31 December of 90.4 million (: 71.3 million) that are available indefinitely for offset against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as there is insufficient certainty that there will be suitable taxable profits from which the future reversal of temporary differences may be deducted. There are no significant taxable temporary differences associated with investments in subsidiaries, associated undertakings and joint ventures. The Chancellor, in the Budget on 23 March, announced an additional 1% reduction in the main rate of corporation tax, over that announced in from 28% to 26%. The standard rate of UK Corporation Tax will be reduced from 26% to 25% from 1 April 2012, and there will be progressive annual reductions of a further 1% until a rate of 23% is reached with effect from 1 April The deferred tax assets and liabilities at the balance sheet date are calculated at the substantively enacted rate of 25%. Whilst detailed calculations have not been prepared at this stage, it is estimated that the impact of the remaining annual corporation tax rate reductions would be to reduce the value of the group s deferred tax liabilities at the balance sheet date by approximately 6.6 million, and to reduce the value of the group s deferred tax assets at the balance sheet date by approximately 2.8 million. 11 Dividends Pence per share Interim dividend paid Final dividend proposed (1) (1) A final dividend of 3.90 pence (: 3.75 pence) per share, amounting to 35.2 million (: 33.8 million) in respect of the year ended 31 December was declared by the directors on 16 February These financial statements do not reflect the dividend payable. The interim dividend of 3.90 pence per share ( 35.2 million) was paid on 1 December. pence pence

65 63 12 Earnings per share Basic earnings per share has been calculated by dividing the profit for the year attributable to shareholders of the Company of million (: million) by the weighted average number of shares in issue during the year of million (: million). At 31 December, there were million 28 1 /3 pence ordinary shares in issue excluding treasury shares (939.6 million including treasury shares). At 31 December, there were million 28 1 /3 pence ordinary shares in issue excluding treasury shares (939.1 million including treasury shares). At 31 December, 6.2 million (: 12.7 million) shares were deemed anti-dilutive for the purpose of calculating adjusted earnings per share. The calculation of adjusted earnings per share before non-trading items is included as it provides a better understanding of the underlying performance of the Group. Non-trading items are defined in note 2 and disclosed in notes 6, 10 and 13. Continuing operations Profit attributable to shareholders Non-trading items net of tax (note 6) Adjusted profit attributable to shareholders Dis operations Profit/(loss) attributable to shareholders 0.4 (27.1) Non-trading items net of tax (note 13) (0.4) 18.4 Adjusted loss attributable to shareholders (8.7) Group Profit attributable to shareholders Non-trading items net of tax Adjusted profit attributable to shareholders Financial statements Weighted average number of shares (millions) Shares for basic earnings per share Potentially dilutive share options and contingently issuable shares Shares for diluted earnings per share Earnings per share (pence) Before non-trading items After non-trading items Continuing operations: Basic earnings per share Diluted earnings per share Dis operations: Basic loss per share (1.0) (3.0) Diluted loss per share (1.0) (3.0) Group: Basic earnings per share Diluted earnings per share

66 64 Statutory reports and financial statements Notes to the consolidated financial statements 13 Dis operations The profit/(loss) for dis operations comprises the following: Hotels Italy Retail Hotels Total Revenue Expenses (17.4) (17.4) Loss before tax and non-trading items (9.1) (9.1) Gain on financial guarantee contracts Loss on disposal of business/assets (17.3) (17.3) Litigation costs (1.3) (1.3) Profit/(loss) before tax 0.4 (27.7) 1.2 (26.5) Tax credit on trading items Tax charge on non-trading items (1.0) (1.0) Profit/(loss) for the year from dis operations 0.4 (28.3) 1.2 (27.1) Loss for the year from dis operations before non-trading items (8.7) (8.7) There were no cash flows from dis operations in the year. In the year ended 31 December, the net cash flows from dis operations were as follows: Net cash used in operating activities (9.1) Net cash used in investing activities (0.4) Net cash used in financing activities (0.9) Cost of disposal of dis operations (2.7) Cash disposed of with dis operations (3.1) Net cash flows relating to dis operations (16.2) In the year ended 31 December, the Group completed the sale of its Italian operations. The effect of the disposal was as follows: Initial cash consideration 4.4 Working capital adjustment (5.3) Final cash consideration (0.9) Net assets sold (24.5) Cost of disposal (2.7) Currency translation difference reclassified on disposal 10.8 Loss on disposal (17.3)

67 65 14 Goodwill and intangible assets Goodwill Licences Software Customer relationships Cost At 1 January Exchange adjustment (0.1) (1.6) (1.7) Additions Disposals (3.4) (13.1) (16.5) At 31 December Exchange adjustment (0.1) (1.5) (0.1) (1.7) Additions Disposals (0.4) (0.1) (0.5) At 31 December Total Amortisation At 1 January Exchange adjustment Amortisation charge Impairment loss (1) At 31 December Exchange adjustment (0.3) (0.3) Amortisation charge Impairment loss (1) At 31 December Net book value At 31 December At 31 December Financial statements (1) The impairment loss of 10.2 million in the current year relates to European Retail. The impairment of 8.5 million included 3.4 million in respect of UK Retail and 5.1 million for European Retail. Goodwill and intangible assets included in continuing operations Goodwill relates to the consideration exceeding the fair value of net assets of business combinations including the deferred tax liability arising on statutory licence acquisitions. Licences comprises the cost of acquired betting shop licences. The acquired betting shop licences are not amortised as they are considered to have an indefinite life for a combination of reasons: Ladbrokes is a leading operator in well-established markets; there is a proven, sustained demand for bookmaking services; and existing law acts to restrict entry. Ladbrokes has a very strong track record of renewing its betting permits and licences at minimal cost. Software relates to the cost of software acquisition and the capitalised costs in respect of internally generated software. The customer relationships intangible asset relates to the Group s acquisition of its former partner in the Nordic region. During the year, the Group has concluded that the intangible asset has a finite life of 15.5 years. As a result, it has started to amortise the customer relationships using the straight line method of amortisation.

68 66 Statutory reports and financial statements Notes to the consolidated financial statements 15 Impairment testing of goodwill and indefinite life intangible assets Goodwill and indefinite life intangible assets are tested annually for impairment at each reporting date by comparing the carrying amounts of these assets with their recoverable amounts (being the higher of fair value less costs to sell and value in use). Goodwill Goodwill is tested for impairment by allocating its carrying amount to groups of cash generating units (CGUs) expected to benefit from the synergies of the combination. If the recoverable amount of a group of CGUs exceeds its carrying amount, the group and any goodwill allocated to that group would be regarded as not impaired. The carrying amounts of goodwill by segment are as follows: Goodwill UK Retail European Retail No impairments were identified in both years. Licences Licences have been allocated to the individual UK and European Retail CGUs that are expected to benefit from the assets. Each CGU represents the lowest level within the Group at which the licences are monitored for internal management purposes which in the majority of instances is an individual shop. The carrying value of licences at 31 December was million (: million) allocated as million to UK Retail (: million) and million to European Retail (: million). Basis on which recoverable amount has been determined The recoverable amounts of the CGUs are determined from value in use calculations. These are based on budgets approved by management for the next three years extrapolated thereafter using a 2.5% growth rate (: 2.5%). This rate does not exceed the average long-term growth rate for the relevant markets. Key assumptions used in value in use calculations The key assumptions taken into account by management are the amounts staked, the gross win margin and the discount rate applied. The estimated amounts staked and gross win margin are based upon historic experience, management s best estimate of future trends and performance taking account of industry sources. The pre-tax discount rates applied to cash flow projections for CGUs in UK and European Retail, due to the similar nature of operations, range between 10.0% and 11.5% (: between 10.2% and 11.7%). The recoverable amounts of certain individual European Retail CGUs were below their carrying amounts at 31 December and accordingly an impairment loss of 10.2 million has been recognised in the consolidated income statement for the year ended 31 December (: 8.5 million) within the non-trading Depreciation and amounts written off non-current assets line item to European Retail. The recoverable amount of individual CGUs is sensitive to changes in cash flows or discount rate. Change in the cash flow projections or the discount rate would trigger a further impairment loss. For example, an increase of 0.5% in the pre-tax discount rate would have resulted in an impairment loss of approximately 0.7 million (: 0.5 million) for UK Retail and a further impairment loss of 3.1 million (: 5.9 million) for European Retail, or a reduction in projected cash flows of 5% would have resulted in an impairment loss of approximately 0.5 million (: 0.9 million) for UK Retail and a further impairment loss of 2.4 million (: 7.5 million) for European Retail.

69 67 16 Property, plant and equipment Land and buildings Fixtures, fittings and equipment Cost At 1 January Exchange adjustment (0.4) (1.6) (2.0) Additions Disposals (5.6) (26.3) (31.9) At 31 December Exchange adjustment (0.4) (1.8) (2.2) Additions Disposals (1.9) (6.4) (8.3) At 31 December Total Depreciation At 1 January Exchange adjustment (0.3) (0.7) (1.0) Depreciation charge (1) Net reversal of impairment (2) (0.6) (0.6) (1.2) Disposals (5.1) (24.8) (29.9) At 31 December Exchange adjustment (0.4) (1.1) (1.5) Depreciation charge Disposals (1.2) (5.3) (6.5) Impairment loss (3) At 31 December Financial statements Net book value At 31 December At 31 December (1) The depreciation charge for the prior year included accelerated depreciation of 7.1 million recorded in non-trading items (note 6). (2) The recoverable amounts of certain property, plant and equipment within individual UK and European Retail CGUs were assessed as at 31 December and accordingly an impairment reversal of 1.4 million in UK Retail and an impairment loss of 0.2 million in European Retail had been recognised in the consolidated income statement within the non-trading Depreciation and amounts written off non-current assets line item. (3) The impairment loss of 0.7 million in the current year relates to European Retail. At 31 December, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to 1.3 million (: 1.2 million).

70 68 Statutory reports and financial statements Notes to the consolidated financial statements 17 Interest in joint venture Share of joint venture s net assets Cost At 1 January 2.6 Exchange adjustment 0.1 Additions 0.8 Share of loss after tax (0.5) At 31 December 3.0 Exchange adjustment (0.4) Additions 2.5 Share of loss after tax (0.8) At 31 December 4.3 The joint venture is the Group s investment in Sportium Apuestas Deportivas SA in which it holds a 50% equity interest (note 33). Summarised financial information in respect of the Group s share of the joint venture s net assets is set out below: Non-current assets Current assets Current liabilities (4.4) (2.2) Share of joint venture s net assets Group s share of joint venture s revenue for the year Group s share of joint venture s loss for the year (0.8) (0.5)

71 69 18 Interest in associates and other investments Share of associates net assets Other investments Cost At 1 January Additions Share of profit after tax At 31 December Share of profit after tax Dividends received (1.6) (1.6) At 31 December Total Associates Summarised financial information in respect of the Group s associates is set out below: Total share of associates assets Total share of associates liabilities (19.2) (25.3) Share of associates net assets Group s share of associates revenue for the year Group s share of associates profit for the year Further details of the Group s principal associates are listed in note 33. The financial year end of Satellite Information Services (Holdings) Limited (SIS), an associate of the Group, is 31 March. The Group has included the results for SIS for the 12 months ended 31 December. Other investments Other investments consists of investments in ordinary shares, which therefore have no fixed maturity rate or coupon rate. Financial statements

72 70 Statutory reports and financial statements Notes to the consolidated financial statements 19 Trade and other receivables Trade receivables Other receivables Prepayments and accrued income Trade receivables are non-interest bearing and are generally on day terms. Trade receivables are reviewed for impairment on an ongoing basis, taking account of the ageing of outstanding amounts and the credit profile of customers. Impaired receivables, including all trade receivables that are a year old, are provided for in an allowance account. Impaired receivables are derecognised when they are assessed as irrecoverable. At 31 December, trade receivables with an initial fair value of 2.8 million (: 4.2 million) were provided for in full. Movements in the provision for impairment of trade receivables were as follows: At 1 January Charge in the year 0.2 Utilised (1.4) (0.1) At 31 December At 31 December, the analysis of trade receivables that were past due but not impaired is as follows: Total Neither past due nor impaired < 30 days days Past due but not impaired Cash and short-term deposits Cash and short-term deposits in the balance sheet comprises: Cash at bank and in hand Cash and cash equivalents in the consolidated statement of cash flows comprises cash at bank with a maturity of three months or less and overdrafts. 21 Trade and other payables Trade payables Other payables Other taxation and social security Accruals and deferred income days 90+ days

73 71 22 Provisions Vacant property provision (1) Other provisions At 1 January Provided Utilised (3.4) (3.4) At 31 December Provided Utilised (4.1) (4.1) At 31 December (1) The periods of vacant property commitments range from one to 13 years (: one to 13 years). Of the total provisions at 31 December, 4.3 million (: 1.3 million) is current and 9.4 million (: 12.9 million) is non-current. Total 23 Interest bearing loans and borrowings Current Unsecured 7.125% bonds due Loan notes Bank loans Overdrafts Non-current Unsecured Bank loans % bonds due % bonds due Total interest bearing loans and borrowings Financial statements All of the Group s borrowings in and were denominated in pounds sterling. The Group has undrawn committed borrowing facilities of million at 31 December (: million). The expiry profile of these is as follows: In less than one year In more than one year but not more than two years In more than two years but not more than five years Total undrawn committed facilities

74 72 Statutory reports and financial statements Notes to the consolidated financial statements 24 Financial risk management objectives and policies The Group s treasury function provides a centralised service for the provision of finance and the management and control of liquidity, foreign exchange rates and interest rates. The function operates as a cost centre and manages the Group s treasury exposures to reduce risk in accordance with policies approved by the Board. The Group s principal financial instruments comprise bank loans, overdrafts, loan notes, bonds, financial guarantee contracts, and cash and short-term deposits, together with certain derivative financial instruments. The main purpose of these financial instruments is to raise finance for the Group s operations. The Group has various other financial instruments such as trade receivables, trade payables and accruals that arise directly from its operations. The Group enters into derivative transactions, such as forward foreign exchange contracts, currency swaps and interest rate swaps. The purpose of these transactions is to assist in the management of the Group s financial risk and to generate the desired effective currency and interest rate profile. At 31 December, the Group had an interest rate swap with a nominal value of million and a fair value of 0.1 million (: nil). It is, and has been throughout the year under review, the Group s policy that no trading in financial instruments shall be undertaken other than betting and gaming transactions. The Group s exposure to ante post betting and gaming transactions is not significant. The Group has a 2.0 billion Euro Medium Term Note (EMTN) programme that it uses to increase the flexibility of funding with regards to source, cost, size and maturity. At 31 December, one public Eurobond issue remained under this programme, being million of the 250 million 7.125% bond, maturing July In addition, the Group has a 225 million 7.625% Sterling bond due During the year the maturity of committed facilities was extended. All existing committed borrowing facilities, maturing in 2013, were cancelled and new facilities of million were entered into, maturing in December The main financial risks for the Group are interest rate risk, foreign currency risk, credit risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. The Group also monitors the market price risk arising from all financial instruments. Interest rate risk The Group is exposed to interest rate risk on interest bearing loans and borrowings and on cash and cash equivalents. The Group s policy for the year ended 31 December was to maintain a minimum of 25% (: 25%) of total borrowings at fixed interest rates to reduce its sensitivity to movements in variable short-term interest rates. At 31 December, after taking account of interest rate swaps, million or 46.3% (: million or 69.2%) of the Group s gross borrowings were at fixed rates. Interest on financial instruments at floating rates is re-priced at intervals of less than six months. Interest on financial instruments at fixed rates is fixed until the maturity of the instrument. Interest rate sensitivity The table below demonstrates the sensitivity to reasonably possible changes in interest rates on income and equity for the year when this movement is applied to the carrying value of financial assets and liabilities. Profit before tax Equity Effect on: 100 basis points increase (1.7) (0.8) 200 basis points increase (3.5) (1.7) The sensitivity has been estimated by applying the basis points movement to the carrying value of the financial assets and liabilities, subject to interest at floating rates, held by the Group at the year end. Due to current low interest rates, any further decline would not have a material impact on income and equity for the year. As such, sensitivity to a decrease in interest rates has not been presented. Foreign currency risk Other than the translation of foreign currency subsidiaries, there is no significant foreign currency exposure. The Group had no foreign currency borrowings at 31 December (: nil). Credit risk The Group is not subject to significant concentration of credit risk, with exposure spread across a large number of counterparties and customers. It is the Group s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis. Any changes to credit terms are assessed and authorised by senior management on an individual basis. The Group s High Rollers division consists of individuals who place sizeable stakes. The Group manages this activity and the associated risk exposure by utilising senior management expertise to manage the levels of stakes placed. Of the 4.5 million (: 3.4 million) trade receivables balance, 4.0 million (: 2.8 million) relates to the Group s Core Telephone Betting and High Rollers divisions.

75 73 24 Financial risk management objectives and policies With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents and a loan to a joint venture, the Group s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Credit risk in respect of cash and cash equivalents is managed by restricting those transactions to banks that have a defined minimum credit rating and by setting an exposure ceiling per bank. The Group also has exposure to credit risk arising from the financial guarantee contracts provided by the Group. This risk is partly mitigated by the indemnity received from Hilton Hotels Corporation for any loss incurred in connection with these guarantees. For further detail of these guarantees refer to note 25. Liquidity risk The Group s objective is to maintain a balance between continuity of funding and flexibility through the use of borrowings with a range of maturities. The Group s policy on liquidity is to ensure that there are sufficient medium-term and long-term committed borrowing facilities to meet the medium-term funding requirements. At 31 December, there were undrawn committed borrowing facilities of million (: million). Total committed facilities had an average maturity of 4.9 years (: 2.5 years). The total gross contractual undiscounted cash flows of financial liabilities, including interest payments, fall due as follows: On demand or within 1 year 1-2 years 2-5 years > 5 years Interest bearing loans and borrowings Derivatives Other financial liabilities Trade and other payables Total On demand or within 1 year 1-2 years 2-5 years > 5 years Interest bearing loans and borrowings Other financial liabilities Trade and other payables Total Total Total Financial statements The total gross contractual undiscounted cash inflows in relation to interest rate swaps used to hedge the risks associated with interest bearing loans and borrowings are 0.7 million (: nil) within one year. Cash flow hedges In the prior year, 9.1 million of losses, which had been deferred in equity, were reclassified to the consolidated income statement as a non-trading finance expense. During the year the remaining 0.5 million of deferred losses were reclassified to the consolidated income statement as a non-trading finance expense to match the interest payments on the underlying borrowings. The Group no longer has any cash flow hedges. Derivatives not designated as hedging instruments The Group uses interest rate swaps to manage its fair value exposure to interest rate movements by swapping borrowings from fixed to floating rates in accordance with the policy of the Group. Contracts with nominal values of million (: nil) have fixed interest receipts and floating interest payments based on LIBOR. The fair value of the swaps at 31 December is a liability of 0.1 million (: nil) and has been charged through the consolidated income statement. These swaps were not designated as fair value hedges under IAS 39 but were economic hedges of the Group s borrowings. Capital risk management The primary objective of the Group s capital management is to ensure that it maintains a credit rating that enables the Group to raise funds at an economic interest rate and to maintain healthy capital ratios in order to support its business and maximise shareholder value. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Group monitors capital using a net debt to EBITDA ratio. The target range has remained at less than 3.0 (: less than 3.0) times net debt to EBITDA ratio, following the refinancing of borrowing facilities to The ratio at 31 December was 1.9 (1.9 adjusted to remove loss from High Rollers) and at 31 December was 1.9 (2.0 adjusted to remove loss from High Rollers).

76 74 Statutory reports and financial statements Notes to the consolidated financial statements 25 Financial instruments The table below analyses the Group s financial instruments into their relevant categories: Loans and receivables Assets/ (liabilities) at fair value Loans at through amortised profit or cost loss 31 December Assets Non-current: Other financial assets Current: Trade and other receivables Cash and short-term deposits Total Liabilities Current: Interest bearing loans and borrowings (131.4) (131.4) Derivatives (0.1) (0.1) Trade and other payables (133.7) (8.6) (142.3) Other financial liabilities (1.0) (1.0) Non-current: Interest bearing loans and borrowings (348.9) (348.9) Other financial liabilities (2.7) (7.7) (10.4) Total (616.7) (17.4) (634.1) Net financial assets/(liabilities) 46.8 (616.7) (17.4) (587.3) Total

77 75 25 Financial instruments Loans and receivables Loans at amortised cost Assets/ (liabilities) at fair value through profit or loss 31 December Assets Non-current: Other financial assets Current: Trade and other receivables Cash and short-term deposits Total Total Liabilities Current: Interest bearing loans and borrowings (108.3) (108.3) Trade and other payables (128.4) (6.0) (134.4) Other financial liabilities (1.1) (1.1) Non-current: Interest bearing loans and borrowings (401.6) (401.6) Other financial liabilities (2.7) (8.1) (10.8) Total (641.0) (15.2) (656.2) Net financial assets/(liabilities) 40.3 (641.0) (15.2) (615.9) Financial statements Fair value of financial instruments Assets and liabilities designated at fair value through profit or loss are carried at fair value. There were no derivatives in a hedging relationship in both years. The fair value of cash at bank and in hand approximates to book value due to its short-term maturity. The fair value of the 250 million 7.125% bond at 31 December, of which million remained outstanding, was million (: million). The fair value of the 225 million 7.625% bond at 31 December was million (: million). The amortised cost of interest bearing loans and borrowings, with the exception of the 250 million 7.125% bond and 225 million 7.625% bond, the carrying value of all other assets and liabilities approximates to fair value. Fair value hierarchy The following tables illustrate the Group s financial assets and liabilities measured at fair value at 31 December and 31 December : Liabilities measured at fair value Derivatives (0.1) (0.1) Financial guarantee contracts (7.7) (7.7) Trade and other payables (8.6) (8.6) Other current financial liabilities (1.0) (1.0) Total (0.1) (17.3) (17.4) Level 1 Level 2 Level 3 Total

78 76 Statutory reports and financial statements Notes to the consolidated financial statements 25 Financial instruments Level 1 Level 2 Level 3 Total Liabilities measured at fair value Financial guarantee contracts (8.1) (8.1) Trade and other payables (6.0) (6.0) Other current financial liabilities (1.1) (1.1) Total (15.2) (15.2) No financial instruments are classified as level 1, for which fair value is based on quoted prices in active markets for identical assets or liabilities. The Group classifies all derivatives as level 2 financial instruments, as their fair value is determined based on techniques for which all significant inputs are observable, either directly or indirectly. Included in trade and other payables are 8.6 million of ante post liabilities (: 6.0 million). Other current financial liabilities are deferred revenues associated with the fair value of reward points issued; both are classified as level 3 financial instruments as their fair value is measured using techniques where the significant inputs are not based on observable market data. Changes in the fair value of these instruments are recorded in the consolidated income statement. Financial guarantee contracts, included within other non-current financial liabilities, are classified as level 3 financial instruments, as their fair value is measured using techniques where the significant inputs are not based on observable market data. Further information about financial guarantee contracts, including sensitivities, and a reconciliation of changes in fair value in the year, is included below. Financial guarantee contracts The Group has given guarantees to third parties in respect of lease liabilities of former subsidiaries within the disposed hotels division. The Group received an indemnity from Hilton Hotels Corporation (HHC), at the time of the hotels disposal, in relation to any loss the Group may subsequently incur under these third party guarantees. The guarantees expire between 2012 and 2042 and the lease liabilities comprise a combination of minimum contractual and turnover based elements. The undiscounted maximum liability exposure in respect of the guarantees for all periods up to 2042 is million (: million), with a maximum indemnity receivable of the same amount. Included in the maximum liability exposure is million (: million) in relation to the turnover based element of the hotel rentals and million ( million) in relation to the minimum contractual based element. The undiscounted maximum liability represents the total of all guaranteed rentals under the non-cancellable agreements into which the Group has entered. The net present value of the maximum exposure at 31 December is million (: million). Included in the net present value of the maximum exposure is million (: million) in relation to the turnover based element of the hotel rentals and million (: million) in relation to the minimum contractual based element. The Group monitors its exposure under these guarantees on a regular basis and seeks, where appropriate, to novate its obligations. The financial guarantees liability has been valued using a probability based model to estimate the net present value of the liabilities payable in the event of a default by the hotels covered by the guarantees, and the probability of such a default and new tenants being identified. At 31 December the Group has recognised a financial liability of 7.7 million (: 8.1 million) in respect of these guarantees. The reduction is due to time lapse. The change in the year in the fair value of the financial guarantees liability has been recognised in the consolidated income statement and classified in dis operations. No asset has been recognised in respect of the indemnity in both years. The key assumption in the probability model is the hotels default rate. A rate of 2.2% has been used at 31 December (: 2.2%). A 0.5 percentage point increase in the default rate would increase the financial liability by 1.3 million.

79 77 26 Net debt The components of the Group s net debt are as follows: Current assets Cash and short-term deposits Notes Current liabilities Bank overdrafts 23 (0.2) Interest bearing loans and borrowings 23 (131.4) (108.1) Non-current liabilities Interest bearing loans and borrowings 23 (348.9) (401.6) Net debt (453.9) (492.0) 27 Share capital Number of 28 1 / 3p ordinary shares Issued and fully paid: At 1 January 933,766, During the year 5,371, At 31 December 939,138, During the year (1) 509, At 31 December 939,647, (1) During the year, the following fully paid shares of 28 1 / 3 pence each were issued: 146,799 shares under the OWN Plan, 344,460 shares on exercise of options under the International Share Option Scheme, 10,148 shares on exercise of options under the 1978 Share Option Scheme and 8,165 shares on exercise of options under the 1983 Savings Related Share Option Scheme. At the Annual General Meeting held on 13 May, shareholders authorised the Company to purchase up to 90,737,766 of its ordinary shares in the market. At 16 February 2012, no purchases have been made pursuant to such authority. Financial statements Number of 28 1 / 3p ordinary shares Shares issued at 31 December 939,138,232 Treasury shares (31,760,568) Shares issued at 31 December excluding treasury shares 907,377,664 Shares issued at 31 December 939,647,804 Treasury shares (31,760,568) Shares issued at 31 December excluding treasury shares 907,887,236

80 78 Statutory reports and financial statements Notes to the consolidated financial statements 28 Employee share ownership plans The Ladbrokes Share Ownership Trust ( LSOT ) is used in connection with the Company s Deferred Bonus Plan, the Ladbrokes Growth Plan, the Restricted Share Plan and the Share Award Plan (together the Plans ) (refer to note 31 for further details of the Plans and the various performance conditions). The LSOT may also be used in connection with the Company s other share-based plans, including the 1978 Share Option Scheme and the International Share Option Scheme. The trustee of the LSOT, Computershare Trustees (CI) Limited, subscribes for the Company s shares or purchases them in the open market, as required, on the basis of regular reviews of the anticipated commitments of the Group, with financing provided by the Company. The Ladbrokes Share Incentive Plan ( LSIP ) is currently used in connection with the Company s OWN share plan ( the OWN plan ) and Freeshare share plan ( Freeshare ) (refer to note 31 for further details). The trustee of the LSIP, Computershare Trustees Limited, purchases the Company s shares in the open market, as required, using: (i) deductions made from the salaries of participants in the OWN plan; and (ii) dividends paid on the shares held by the LSIP. Under the OWN plan, to match those shares acquired using participants salary deductions, one additional share is allotted by the Company to the LSIP for every two held per employee. All expenses of the LSOT and LSIP are settled directly by the Company and charged in the financial statements as incurred. The following table shows the number of shares held in trust that have not yet vested unconditionally and the associated reduction in shareholders funds. Shares held Number LSOT LSIP Total Cost of shares Shares held Number Cost of shares Shares held Number Cost of shares At 1 January (1) 6,531, ,129, ,661, Shares purchased/allotted 1,383, , ,697, Vested in year (1,328,028) (2.2) (503,007) (1.3) (1,831,035) (3.5) At 31 December 6,587, , ,528, Market value of shares in trusts Unallocated shares in trusts 81,563 81,563 (1) Includes an award of 4,035,784 shares allotted by the Company in and held jointly between the participant and Computershare Trustees (CI) Limited under the Ladbrokes Growth Plan (refer to the Directors remuneration report). 29 Notes to the statement of cash flows Reconciliation of profit to net cash inflow from operating activities: Profit before tax and net finance expense continuing (1) Loss before tax and net finance expense dis (1) (9.1) Profit before tax and net finance expense (1) Adjustments for: Depreciation of property, plant and equipment Amortisation of intangible assets Share-based payments charge (Increase)/decrease in other financial assets (0.4) 1.2 Decrease in trade and other receivables Decrease in other financial liabilities (0.1) (7.9) Increase in trade and other payables Decrease in provisions (0.7) (2.3) Contribution to retirement benefit scheme (7.9) (6.7) Share of results from joint venture Share of results from associates (1.8) (3.8) Other items (6.0) (5.8) Cash generated by total operations Income taxes (paid)/received (18.1) 51.9 Finance expense (36.3) (47.8) Net cash generated from operating activities (1) Before non-trading items.

81 79 30 Retirement benefit schemes Defined contribution schemes The total cost charged to the consolidated income statement of 1.0 million (: 0.9 million) represents contributions payable to these schemes by the Group at rates specified in the rules of the scheme. Defined benefit plans The Group s only significant defined benefit retirement plan is the Ladbrokes Pension Plan, which is a final salary pension plan for UK employees. This was closed to new employees on 1 August Assets are held separately from those of the Group. Although the Group is responsible for the operation of this arrangement, professional advisers are appointed to assist the trustees in running it. The last formal actuarial valuation of the Ladbrokes Pension Plan was carried out with an effective date of 30 June. The latest actuarial valuation was updated to 31 December by an independent qualified actuary in accordance with IAS 19 Employee Benefits. The value of the defined benefit obligation and current service cost have been measured using the projected unit credit method, as required by IAS 19. In July, the Government announced that in future statutory indexation for pensions would be linked to the Consumer Prices Index (CPI) rather than the, historically, higher Retail Prices Index (RPI). The effect of this change was to reduce the Group s pension liabilities. To reflect this, in the prior year the Group recognised an actuarial gain of 8.6 million outside profit and loss through other comprehensive income. In the current year, following further government publications, it has been concluded by the Group that the gap between the RPI and the CPI is expected over the long-term to be 1.0% pa compared to 0.7% pa assumed at 31 December thus further reducing the value of the Group s pension liabilities. To reflect this, the Group has recognised a further actuarial gain of 3.5 million through other comprehensive income. The amounts recognised in the balance sheet are as follows: Present value of funded obligations (243.3) (228.6) Fair value of plan assets Net asset Disclosed in the balance sheet as: Retirement benefit asset The amounts recognised in the income statement are as follows: Analysis of amounts charged to staff costs (continuing operations) Current service cost (excluding employee element) Interest on obligation Expected return on plan assets (14.4) (13.7) Total expense recognised in the income statement in staff costs Financial statements The actual return on plan assets over the year was a gain of 19.3 million (: a gain of 24.5 million). The amount recognised in the statement of comprehensive income is as follows: Actual return on assets Less: Expected return on assets (14.4) (13.7) Actuarial gains on defined benefit plan assets Actuarial (losses)/gains on defined benefit obligation (8.6) 4.8 Actuarial (losses)/gains recognised in the statement of comprehensive income (3.7) 15.6 The cumulative amount of actuarial gains and losses recognised in the statement of comprehensive income at 31 December is a loss of 28.8 million (: loss of 25.1 million).

82 80 Statutory reports and financial statements Notes to the consolidated financial statements 30 Retirement benefit schemes Changes in the present value of the defined benefit obligation are as follows: At 1 January (228.6) (227.4) Current service cost (excluding employee element) (3.3) (3.5) Employee contributions (1.1) (1.3) Interest cost (12.4) (13.0) Actuarial (losses)/gains (8.6) 4.8 Benefits paid At 31 December (243.3) (228.6) Changes in the fair value of plan assets are as follows: At 1 January Expected return on plan assets Actuarial gains Contributions by sponsoring companies Employee contributions Benefits paid (10.7) (11.8) At 31 December The Group expects to contribute 9.9 million to its defined benefit plan in The major categories of plan assets as a percentage of total plan assets are as follows: Equity instruments (%) Debt instruments (%) Principal actuarial assumptions at the balance sheet date (expressed as weighted averages where appropriate): % pa % pa Discount rate Expected return on plan assets Future salary growth 3% in 2012 and 4.1% pa thereafter, plus promotional scale 0% in and 4.5% pa thereafter, plus promotional scale Price inflation 2.1/ /3.5 Future pension increases LPI 5% LPI 3% LPI 2.5%

83 81 30 Retirement benefit schemes In the prior year the UK government announced that the CPI rather than the RPI should be used as the basis of the calculation of inflation for the statutory index-linked features of the retirement benefits. Accordingly, the obligations of the Plan have been calculated with reference to the CPI where permitted by the scheme rules. For the year ended 31 December, the price inflation rate applied for CPI and RPI are 2.1% and 3.1% respectively (: CPI 2.8%, RPI 3.5%). The overall expected return on plan assets was derived as an average of the long-term expected rates of return on each of the major asset classes invested in, weighted by the allocations of assets among the classes over the long term. The sources used to determine the best estimate of long-term returns include bond yields, inflation and investment market expectations derived from market data and analysts or government s expectations. At 31 December, the long-term expected rates of return on equity instruments and debt instruments were assumed to be 7.3% pa and 3.4% pa, respectively, for the plan. The equivalent assumptions at 31 December were 8.0% pa and 4.4% pa respectively. The post-retirement mortality assumed for most members is based on the standard SAPS mortality table with the CMI 2009 projections, which takes into account future improvements, adjusted to reflect plan specific experience. The assumption used implies that the expected future lifetime of members aged 65 in is 86.7 years for males and 88.4 years for females. For members with large pensions a longer lifetime is assumed (90.0 for males and 90.4 for females). The post-retirement mortality assumption has been updated since when expected future lifetimes were generally assumed to be 86.6 years for males aged 65 and 87.6 years for females, with longer lifetimes assumed for members with large pensions of 89.9 years for males and 90.4 years for females. Changes to the assumptions will impact the amounts recognised in the consolidated balance sheet and the consolidated income statement in respect of the plan. For the significant assumptions, the following sensitivity analysis provides an indication of the impact for the year ended 31 December, excluding the impact on the associated deferred tax items: 0.5% pa decrease in the discount rate would have the following approximate effect: Increase in the current service cost (excluding employee element) Decrease in the balance sheet asset at 31 December This ignores the potential positive impact that a general fall in bond yields may have on the value of the bond assets held by the plan. Financial statements 1.0% pa decrease in the expected return on plan assets would have the following approximate effect: Increase in the amount charged to staff costs one year increase in life expectancy would have the following approximate effect: Increase in the current service cost (excluding employee element) Decrease in the balance sheet asset at 31 December % pa increase in price inflation would have the following approximate effect: Increase in the current service cost (excluding employee element) Decrease in the balance sheet asset at 31 December History of the plans and experience adjustments are as follows: Defined benefit obligation (243.3) (228.6) (227.4) (196.5) (208.5) Plan assets Surplus Experience gain/(loss) on plan liabilities (1.7) (5.8) Experience gain/(loss) on plan assets (37.5) (3.0)

84 82 Statutory reports and financial statements Notes to the consolidated financial statements 31 Share-based payments Ladbrokes plc has the following share-based payment plans, all of which are settled by equity: the Deferred Bonus Plan, the Performance Share Plan, the Ladbrokes Growth Plan, the International Share Option Scheme, the 1978 Share Option Scheme, the Restricted Share Plan, Sharesave, the OWN Plan, Freeshare and the Share Award Plan. The plans and the various performance conditions are discussed in more detail below. (i) Restricted Share Plan Awards made under the Restricted Share Plan from onwards will vest in their entirety after three years. However, for awards granted prior to, employees could elect for 50% of the award to vest after two years. Awards are not subject to performance conditions. (ii) Deferred Bonus Plan For certain senior executives, one third of the gross annual bonus is delivered in shares that vest after three years. For other employees, one third of the gross annual bonus is delivered in shares that vest after two years. (iii) Performance Share Plan An award under the Performance Share Plan consists of a conditional allocation of shares that will vest, subject to the achievement of performance conditions, at the end of the three year performance period. The awards have two separate performance conditions; half of the award vests based on TSR and half of the award vests based on EPS growth. (iv) Ladbrokes Growth Plan Awards are subject to share price growth performance conditions. Any share price target must be attained throughout a period of 30 consecutive dealing days and performance is assessed over a five year period. Up to one third of the award may vest at the end of year three if the performance targets have been achieved at that time. A further third may vest at the end of year four if the targets have been met at that time. The remainder of the award may vest at the end of year five, subject to the achievement of the performance targets. (v) Share Award Plan An award under the Share Award Plan consists of a one-off compensatory share award to the Chief Executive in the form of a nil cost option. The award is not subject to performance conditions and will vest after three years. (vi) International Share Option Scheme and the 1978 Share Option Scheme The share options granted are all market value options with a three year vesting period. Vested options lapse if they have not been exercised within ten years of the date of grant. All options have an EPS growth based performance condition. Options have not been granted since 2009 and there is no present intention to grant options in the future. (vii) 1983 Savings Related Share Option Scheme ( Sharesave ) Under Sharesave, options are granted at a 20% discount to market value. The scheme operates with a savings period of either three or five years, at the end of which the option may be exercised. (viii) OWN Plan Under the OWN Plan, employees can contribute up to 75 per month to acquire shares. For every two shares purchased, the Group provides a match of one additional share. (ix) Freeshare Under Freeshare, an award of up to 250 in value was made to participating employees on reaching one year s service. Freeshares have not been awarded since and there is no present intention to make awards in the future. For a more detailed description of each of the above plans, refer to the Directors remuneration report. The following table illustrates the number of shares outstanding at the beginning of the year, the number of shares granted, lapsed and vested during the year together with the outstanding share balances as at the end of the year in respect of the Restricted Share Plan, Deferred Bonus Plan, Performance Share Plan, Ladbrokes Growth Plan and Share Award Plan. Restricted Share Plan Deferred Bonus Plan Performance Share Plan Ladbrokes Growth Plan Share Award Plan Total Outstanding at 1 January 292,746 1,069,664 6,166,489 4,035,784 1,177,103 12,741,786 Granted 157,757 1,288,546 5,644,985 15,460,661 22,551,949 Lapsed (141,283) (46,492) (1,939,295) (1,713,864) (3,840,934) Vested (116,142) (1,211,886) (1,328,028) Outstanding at 31 December 193,078 1,099,832 9,872,179 17,782,581 1,177,103 30,124,773

85 83 31 Share-based payments The following table shows the number and weighted average exercise prices of share options granted, exercised and lapsed during the year in respect of the 1978 and International Share Option Schemes and also Sharesave and International Schemes Sharesave Number WAEP Number WAEP Outstanding at 1 January 11,011,991 3,599,020 14,611, ,706, Granted 1,310,915 1,310, ,456, Exercised (354,608) (8,165) (362,773) 1.21 (9,066) 1.22 Lapsed (4,877,620) (1,120,216) (5,997,836) 2.20 (3,543,204) 2.52 Outstanding at 31 December (1)(2) 5,779,763 3,781,554 9,561, ,611, Exercisable at 31 December 3,664, ,228 4,091, ,713, (1) Included within this balance are options over 285,301 shares that have not been recognised in accordance with IFRS 2 as the options were granted on or before 7 November These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2. (2) Of the 9,561,317 share options outstanding at 31 December, 6,203,843 (31 December : 12,686,675) are at a price above the year end share price of pence (31 December : pence). The total value of these shares is 14.6 million (: 28.4 million). The weighted average share price at the date of exercise for share options exercised during the year was 1.44 (: 1.52). The weighted average fair value of options granted during the year was 41.0 pence (: 24.9 pence). The weighted average remaining contractual life for the share options outstanding at 31 December is between three and seven years (: between three and eight years). The range of exercise prices for options outstanding at the end of the year was (: ). At 31 December, there were 6,234,438 options outstanding with an exercise price between 1.10 and 2.00, 1,560,036 options outstanding with an exercise price between 2.01 and 3.00, and 1,766,843 options outstanding with an exercise price between 3.01 and At 31 December, there were 8,622,081 options outstanding with an exercise price between 1.10 and 2.00, 3,416,505 options outstanding with an exercise price between 2.01 and 3.00, and 2,572,425 options outstanding with an exercise price between 3.01 and The inputs into the binomial model are as follows: Weighted average share price ( ) Weighted average exercise price ( ) Expected volatility (%) Expected life (years) Risk free rate (%) Expected dividends (%) Financial statements Expected volatility was determined by calculating the historical volatility of the Group s share price over the previous three years. The expected life used in the model has been adjusted, based on management s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The Group recognised total expenses before tax of 6.6 million (: 3.8 million) relating to equity settled share-based payment transactions. Share awards granted during the year in respect of the Performance Share Plan: Number 5,644,985 3,369,375 Weighted average fair value The fair value of share awards was measured by calculating the present value of the dividends receivable between the grant date and the vesting date and valuing the market related performance conditions through the use of a closed-form model, similar to a Monte Carlo simulation.

86 84 Statutory reports and financial statements Notes to the consolidated financial statements 32 Commitments and contingencies Operating lease commitments Group as lessee The Group has a number of lease agreements that, pursuant to their economic substance, qualify as non-cancellable operating lease agreements. These primarily relate to rents payable on land and buildings. The terms of the leases vary significantly but can broadly be summarised as follows: Lease terms Shop leases are typically 15 years with a tenant only break clause at 10 years and rent reviews every five years. Other leases are typically between three and 10 years. Determination of rent payments Rent payments are based on the amount specified in the agreement. Terms of renewal The agreements are not terminated automatically after expiry of the lease term and in the majority of cases, lease extension options have been agreed upon and in many other cases, there will be an opportunity to negotiate lease extensions with the lessor. Restrictions There are no restrictions imposed upon the Group, concerning dividends, additional debt or further leasing under any of the existing lease arrangements. Subleases The Group does sublease areas of leased properties and receives sublease payments from third parties. Lease payments recognised as an expense for the year: Minimum lease payments Analysis of minimum lease payments by division: UK Retail European Retail Digital Total Future minimum rentals payable under non-cancellable operating leases at 31 December are as follows: Within one year After one year but not more than five years After five years Total

87 85 32 Commitments and contingencies Operating lease commitments Group as lessor The Group has entered into sublease agreements for unutilised space in the UK shop estate. These non-cancellable leases have remaining lease terms of between one and 10 years. Lease receipts recognised as income for the period: Minimum lease receipts Future minimum rentals receivable under non-cancellable operating leases at 31 December are as follows: Within one year After one year but not more than five years After five years Contingent liabilities Guarantees have been given in the ordinary course of business in respect of loans and derivative contracts granted to subsidiaries amounting to million (: million). In addition, subsidiaries have guaranteed loans of 0.1 million (: 0.1 million) given in the normal course of business to other subsidiary companies. Bank guarantees have been issued on behalf of subsidiaries and joint venture with a value of 22.1 million (: 24.0 million). 33 Related party disclosures The consolidated financial statements include the financial statements of Ladbrokes plc and its subsidiaries. The principal subsidiaries, all of which are wholly owned by the Group, are listed in the following table. % equity interest Country of incorporation Betting and Gaming Ladbrokes Betting & Gaming Limited United Kingdom Ladbroke (Ireland) Limited Ireland Ladbrokes Leisure (Ireland) Limited Ireland Ladbrokes International Limited Gibraltar Ladbrokes Sportsbook Limited Partnership Gibraltar Tiercé Ladbroke SA (1) Belgium Financial statements Central services Ladbrokes Group Finance plc (1) United Kingdom (1) Directly owned by Ladbrokes plc. In addition to the above principal subsidiaries, the Group holds a 60% interest in Ladbrokes (SA) (Pty) Limited (formerly Main Street 684 (Proprietary) Limited ), a venture with Kai Ro (International) Holdings Limited that operates an online sportsbook in South Africa. The results of the venture are consolidated in full in the Group financial statements with a deduction for the non-controlling interest. In January 2012, the Group acquired a majority stake in Stadium Technology Group, a Las Vegas based supplier of software and in play betting applications to sportsbook operators, for 1.9 million ($3.0 million).

88 86 Statutory reports and financial statements Notes to the consolidated financial statements 33 Related party disclosures The following table provides details of the Group s joint venture: % equity interest Country of incorporation Sportium Apuestas Deportivas SA Spain The following table provides details of the Group s associates: % equity interest Country of incorporation Satellite Information Services (Holdings) Limited United Kingdom Asia Gaming Technologies Limited Hong Kong A full list of subsidiary and other related undertakings will be annexed to the next annual return of Ladbrokes plc to be filed with the Registrar of Companies. Other than its associates and joint venture, significant related parties of the Group are the executive and non-executive directors of the Group. Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its associates and joint venture and other related parties are disclosed below. Trading transactions During the year, Group companies entered into the following transactions with related parties who are not members of the Group: Equity investment Joint venture (1) Associates (2) 0.2 Loans Movement in loan balance with joint venture partner (0.4) 0.8 Loan provided to joint venture 0.5 Dividends received Associates (3) 1.6 Sundry expenditure Associates (4) (1) Equity investment in Sportium Apuestas Deportivas SA. (2) Equity investment in Asia Gaming Technologies Limited. (3) Dividend received from Satellite Information Services (Holdings) Limited. (4) Payments in the normal course of business made to Satellite Information Services (Holdings) Limited.

89 87 33 Related party disclosures Details of related party outstanding balances Loan balances outstanding Joint venture partner Joint venture 0.5 Other receivables outstanding Associates Terms and conditions of transactions with related parties Sales to and purchases from related parties are made at normal market prices and in the ordinary course of business. Outstanding balances at 31 December are unsecured and settlement occurs in cash. For the year ended 31 December, the Group has not raised any provision (: nil) for doubtful debts relating to amounts owed by related parties as the payment history has been good. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates. Compensation of key management personnel of the Group The remuneration of the key management personnel is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Key management personnel comprise executive directors, non-executive directors and members of the newly formed Executive Committee, following a reorganisation of the structure. Further information about the remuneration of individual directors, which totalled 4.2 million (: 3.5 million), is provided in the audited part of the Directors remuneration report on pages 31 to 42. Short-term employee benefits Retirement benefits Termination benefits Share-based payments Total compensation paid to key management personnel Financial statements Directors interests in the employee share incentive plan and employee share trust are disclosed within the Directors remuneration report.

90 88 Statutory reports and financial statements Statement of directors responsibilities in relation to the consolidated financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under Company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether the applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained by the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements and the Directors remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Company s website and legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Directors statement pursuant to the Disclosure and Transparency Rules Each of the directors, whose names and functions are listed in pages 22 and 23 of this Annual Report, confirm that, to the best of each person s knowledge and belief: the financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and the directors report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that they face. By order of the board R I Glynn I A Bull Directors

91 89 Independent auditor s report to the members of Ladbrokes plc We have audited the Group financial statements of Ladbrokes plc for the year ended 31 December which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related notes 1 to 33. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the Company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the statement of directors responsibilities set out on page 100, the directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion, the Group financial statements: give a true and fair view of the state of the Group s affairs as at 31 December and of its profit for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: the information given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the Group financial statements; and the information given in the Corporate Governance Statement set out on pages 24 to 28 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit; or a Corporate Governance Statement has not been prepared by the Company. Under the Listing Rules we are required to review: the directors statement, set out on page 30, in relation to going concern; and the part of the Corporate Governance Statement relating to the Company s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and certain elements of the report to shareholders by the Board on directors remuneration. Other matter We have reported separately on the parent Company financial statements of Ladbrokes plc for the year ended 31 December and on the information in the Directors Remuneration Report that is described as having been audited. R W Wilson (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 16 February 2012 Financial statements

92 90 Statutory reports and financial statements Company financial statements contents 91 Company balance sheet 92 Notes to the company financial statements 92 1 Basis of accounting 92 2 Change in accounting policies 92 3 Summary of significant accounting policies 93 4 Profit and loss account disclosures 93 5 Dividends 94 6 Fixed asset investments 94 7 Debtors 94 8 Creditors amounts falling due within one year 94 9 Creditors amounts falling due after more than one year Provisions for liabilities Financial risk management objectives and policies Share capital Reconciliation of shareholders funds and movements on reserves Employee share ownership plans Pensions Share-based payments Contingencies 100 Statement of directors responsibilities in relation to the Company financial statements 101 Independent auditor s report to the members of Ladbrokes plc

93 91 Company balance sheet At 31 December Note Fixed assets Investments 6 4, ,760.5 Current assets Debtors Cash at bank and in hand Creditors amounts falling due within one year 8 (2,911.4) (2,575.6) Net current liabilities (2,599.6) (2,297.9) Total assets less current liabilities 2, ,462.6 Creditors amounts falling due after more than one year 9 (10.4) (149.7) Provisions for liabilities and charges 10 (0.8) Net assets excluding pension asset 2, ,312.1 Net pension asset Net assets 2, ,337.3 Capital and reserves Called up share capital Share premium account Treasury and own shares 13 (113.3) (114.4) Capital reserve Profit and loss account 13 1, ,991.4 Shareholders funds 2, ,337.3 Financial statements Approved by the Board of Directors on 16 February R I Glynn I A Bull Directors

94 92 Statutory reports and financial statements Notes to the company financial statements 1 Basis of accounting The financial statements have been prepared under the historical cost convention except as otherwise stated. They have been drawn up to comply with applicable UK accounting standards. The parent Company profit for the year was 12.9 million (: loss of million). The Company has taken advantage of the exemption from preparing a cash flow statement under the provisions of FRS 1 (revised 1996) Cash flow statements. The Ladbrokes plc consolidated financial statements for the year ended 31 December contain a consolidated statement of cash flows. 2 Change in accounting policies The following new standards, amendments and interpretations were adopted by the Company in the year. Adoption had no effect on the results, financial position of the Company or its disclosures: Amendment to FRS 25 (IAS 32) Financial instruments: Presentation on the classification of rights issues FRS 30 Heritage Assets UITF 47 (Abstract 17) Extinguishing financial liabilities with equity instruments UITF 48 on accounting implications of the replacement of RPI with CPI Improvements to FRSs 3 Summary of significant accounting policies Investments Investments held as fixed assets are stated at cost less provision for impairment. The Company assesses these investments for impairment wherever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. If any such indication of impairment exists, the Company makes an estimate of the recoverable amount. If the recoverable amount is less than the value of the investment, the investment is considered to be impaired and is written down to its recoverable amount. An impairment loss is recognised immediately in the profit and loss account. An undertaking is regarded as a subsidiary undertaking if the Company has control over its operating and financial policies. An undertaking is regarded as an associate if the Company holds a participating interest and has significant influence, but not control, over its operating and financial policies. Financial assets Financial assets are recognised when the Company becomes party to the contracts that give rise to them. The Company classifies financial assets at inception as either financial assets at fair value or loans and receivables. On initial recognition, loans and receivables are measured at fair value. Financial assets at fair value comprise guarantees provided to the Company. Financial assets at fair value through profit or loss are measured initially at fair value, with transaction costs taken directly to the profit and loss account. Subsequently, the fair values are remeasured and gains and losses from changes therein are recognised in the profit and loss account. Financial guarantees provided to the Company are classified as financial assets and are measured at fair value by estimating the probability of the guarantees being called upon and the related cash inflows to the Company. Financial liabilities Financial liabilities comprise guarantees given to third parties. On initial recognition, financial liabilities are measured at fair value plus transaction costs where they are not categorised as financial liabilities at fair value through profit or loss. Financial liabilities at fair value through profit or loss are measured initially at fair value, with transaction costs taken directly to the profit and loss account. Subsequently, the fair values are remeasured and gains and losses from changes therein are recognised in the profit and loss account. Financial guarantee contracts The Company has provided financial guarantees to third parties in respect of lease obligations of certain of the Company s former subsidiaries within the disposed hotels division. Financial guarantee contracts are classified as financial liabilities and are measured at fair value by estimating the probability of the guarantees being called upon and the related cash outflows from the Company. Derecognition of financial assets and liabilities Financial assets are derecognised when the right to receive cash flows from the assets has expired or when the Company has transferred its contractual right to receive the cash flows from the financial assets or has assumed an obligation to pay the received cash flows in full without material delay to a third party, and either: substantially all the risks and rewards of ownership have been transferred; or substantially all the risks and rewards have neither been retained nor transferred but control is not retained. Financial liabilities are derecognised when the obligation is discharged, cancelled or expires. Deferred tax Deferred tax is recognised as an asset or liability, at appropriate rates, in respect of transactions and events recognised in the financial statements of the current and previous periods that give the entity a right to pay less, or an obligation to pay more, tax in future periods. Deferred tax assets are only recognised to the extent it is probable that there will be suitable taxable profits from which they can be recovered. No provision is made for any taxation on capital gains that would arise from the future disposal of any fixed assets shown in the financial statements at valuation, except to the extent that at the balance sheet date there is a binding sale agreement. Deferred tax balances are not discounted. Foreign currency translation The presentation and functional currency of the Company and the functional currencies of its UK subsidiaries, is pounds sterling ( ). Transactions in foreign currencies are initially recorded in sterling at the foreign currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into pounds sterling at the rates of exchange ruling at the balance sheet date (the closing rate). All foreign currency translation differences are taken to the profit and loss account with the exception of differences on foreign currency borrowings that provide a post-tax hedge against a net investment in a foreign entity. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in the profit and loss account. Tax charges and credits attributable to exchange differences on those borrowings are also dealt with in equity.

95 93 3 Summary of significant accounting policies Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value was determined. Pensions The Company is the principal employer of the Ladbrokes Pension Plan, a funded defined benefit group plan. The pension cost relating to the plan is assessed in accordance with the advice of independent qualified actuaries using the projected unit credit method. Any actuarial gains or losses are taken to equity in the period in which they arise. Any past service costs are recognised immediately to the extent that benefits have already vested and, otherwise, are amortised on a straight line basis over the average period until the benefits vest. The defined benefit asset recognised in the balance sheet represents the fair value of plan assets less the present value of defined benefit obligations as adjusted for any unrecognised past service costs. If necessary, the net defined benefit surplus is limited to the amount that can be recovered through reduced Company contributions in the future plus any refunds that have been agreed at the balance sheet date. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs. Share-based payments The cost of equity settled transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value is determined using a binomial model, further details of which are given in note 31 of the consolidated IFRSs financial statements. In valuing equity settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Ladbrokes plc (market conditions). The cost of equity settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (vesting date). The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of awards that, in the opinion of the directors of the Company at that date, based on the best available estimate of the number of equity instruments, will ultimately vest. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. ESOP trusts Where the Company holds its own equity shares through an ESOP trust these shares are shown as a reduction in equity. Any consideration paid or received for the purchase or sale of these shares is shown in the reconciliation of movements in shareholders funds and no gain or loss is recognised within the profit and loss account or the statement of total recognised gains and losses on the purchase, sale or cancellation of these shares. Treasury shares Own equity instruments that are reacquired (treasury shares) are deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company s own equity instruments. Financial statements 4 Profit and loss account disclosures As permitted by section 408 of the Companies Act 2006, the profit and loss account and the statement of total recognised gains and losses of the parent Company have not been separately presented in these financial statements. 5 Dividends Pence per share Interim dividend paid Final dividend proposed (1) (1) A final dividend of 3.90 pence (: 3.75 pence) per share amounting to 35.2 million (: 33.8 million) in respect of the year ended 31 December was declared by the directors on 16 February These financial statements do not reflect the dividend payable. The interim dividend of 3.90 pence per share ( 35.2 million) was paid on 1 December. pence pence

96 94 Statutory reports and financial statements Notes to the company financial statements 6 Fixed asset investments Shares in Group companies Unlisted investments at cost Cost At 1 January 8, ,009.9 Additions At 31 December 8, ,113.9 Provision At 1 January and 31 December 3, ,249.4 Net book value At 1 January 4, ,760.5 At 31 December 4, ,864.5 Principal subsidiaries are listed in note 33 of the consolidated IFRSs financial statements. 7 Debtors Amounts falling due within one year: Amounts due from Group companies Corporation tax recoverable 24.0 Deferred tax 7.1 Other debtors Amounts falling due after more than one year: Amounts due from Group companies Total Creditors amounts falling due within one year Other financial liabilities 35.1 Other creditors Corporation tax 21.6 Accruals and deferred income Amounts due to Group companies 2, , , , Creditors amounts falling due after more than one year Amounts due to Group companies Other financial liabilities

97 95 9 Creditors amounts falling due after more than one year Financial guarantee contracts The Company has given guarantees to third parties in respect of lease liabilities of former subsidiaries within the disposed hotels division. The Company received an indemnity from Hilton Hotels Corporation (HHC), at the time of the hotels disposal, in relation to any loss the Company may subsequently incur under these third party guarantees. The guarantees expire between 2012 and 2042 and the lease liabilities comprise a combination of minimum contractual and turnover based elements. The undiscounted maximum liability exposure in respect of the guarantees for all periods up to 2042 is million (: million), with a maximum indemnity receivable of the same amount. Included in the maximum liability exposure is million (: million) in relation to the turnover based element of the hotel rentals and million (: million) in relation to the minimum contractual based element. The undiscounted maximum liability represents the total of all guaranteed rentals under the non-cancellable agreements into which the Company has entered. The net present value of the maximum exposure at 31 December is million (: million). Included in the net present value of the maximum exposure is million (: million) in relation to the turnover based element of the hotel rentals and million (: million) in relation to the minimum contractual based element. The Company monitors its exposure under these guarantees on a regular basis and seeks, where appropriate, to novate its obligations. The financial guarantees liability has been valued using a probability based model to estimate the net present value of the liabilities payable in the event of a default by the hotels covered by the guarantees, and the probability of such a default and new tenants being identified. At 31 December the Company has recognised a financial liability of 7.7 million (: 8.1 million) in respect of these guarantees. The reduction is due to time lapse. No asset has been recognised in respect of the indemnity at 31 December (: nil). The key assumption in the probability model is the hotels default rate. A rate of 2.2% has been used at 31 December (: 2.2%). A 0.5 percentage point increase in the default rate would increase the financial liability by 1.3 million. 10 Provisions for liabilities Deferred tax At 31 December 0.8 Amounts credited to the profit and loss account for the year (7.9) At 31 December (shown as a deferred tax asset within debtors) (7.1) Financial statements Analysis of deferred tax by type of timing difference: Deferred tax liability on pension asset (9.3) (9.3) Capital allowances 5.4 (0.8) Share-based payments 1.7 (2.2) (10.1) Reported as: Deferred tax liability on pension asset (9.3) (9.3) Deferred tax assets 7.1 Other deferred tax liabilities (0.8) (2.2) (10.1) Analysis of movements in deferred tax: At 1 January (10.1) (10.3) Amounts credited to the profit and loss account for the year Tax on items recognised directly in equity (5.3) At 31 December (2.2) (10.1)

98 96 Statutory reports and financial statements Notes to the company financial statements 11 Financial risk management objectives and policies The financial risk management objectives and policies applied by the Company are in line with those of the Group as disclosed in note 24 to the IFRSs consolidated financial statements. 12 Share capital Number of 28 1 /3p ordinary shares Issued and fully paid: At 1 January 933,766, During the year 5,371, At 31 December 939,138, During the year (1) 509, At 31 December 939,647, (1) During the year, the following fully paid shares of 28 1 /3 pence each were issued: 146,799 shares under the OWN Plan, 344,460 shares on exercise of options under the International Share Option Scheme, 10,148 shares on exercise of options under the 1978 Share Option Scheme and 8,165 shares on exercise of options under the 1983 Savings Related Share Option Scheme. Number of 28 1 /3p ordinary shares Shares issued at 31 December 939,138,232 Treasury shares (31,760,568) Shares issued at 31 December excluding treasury shares 907,377,664 Shares issued at 31 December 939,647,804 Treasury shares (31,760,568) Shares issued at 31 December excluding treasury shares 907,887, Reconciliation of shareholders funds and movements on reserves Called up share capital Share premium account Treasury and own shares Capital reserve Profit and loss account At 1 January (112.5) 0.1 2, ,558.3 Loss for the year (206.2) (206.2) Issue of shares Share-based payments charge Actuarial gains on defined benefit pension schemes Net movement in shares held in ESOP trusts (1.9) 1.6 (0.3) Tax on items taken directly to equity (5.3) (5.3) Equity dividends (34.7) (34.7) At 31 December (114.4) 0.1 1, ,337.3 Profit for the year Issue of shares Share-based payments charge Actuarial gains on defined benefit pension schemes (3.7) (3.7) Net movement in shares held in ESOP trusts 1.1 (3.2) (2.1) Equity dividends (69.0) (69.0) At 31 December (113.3) 0.1 1, ,282.6 Total

99 97 14 Employee share ownership plans Details of the employee share ownership plans of the Company are given in note 28 of the consolidated IFRSs financial statements. The following table shows the number of shares held in trust that have not yet vested unconditionally and the associated reduction in shareholders funds. Shares held Number LSOT LSIP Total Cost of shares Shares held Number Cost of shares Shares held Number At 1 January (1) 6,531, ,129, ,661, Shares purchased/allocated 1,383, , ,697, Vested in year (1,328,028) (2.2) (503,007) (1.3) (1,831,035) (3.5) At 31 December 6,587, , ,528, Market value of shares in trusts Unallocated shares in trusts 81,563 81,563 Cost of shares (1) Includes an award of 4,035,784 shares allotted by the Company in and held jointly between the participant and Computershare Trustees (CI) Limited under the Ladbrokes Growth Plan (refer to the Directors remuneration report). 15 Pensions The Company s main pension plan is the Ladbrokes Pension Plan. This was closed to new employees on 1 August The last formal actuarial valuation of the plan was carried out with an effective date of 30 June. The latest actuarial valuation was updated to 31 December by an independent qualified actuary in accordance with FRS 17. The defined benefit obligations and current service cost have been measured using the projected unit credit method. In July, the Government announced that in future statutory indexation for pensions would be linked to the Consumer Prices Index (CPI) rather than the, historically, higher Retail Prices Index (RPI). The effect of this change was to reduce the Company s pension liabilities. To reflect this, in the prior year the Company recognised an actuarial gain of 8.6 million outside profit and loss through the statement of total recognised gains and losses. In the current year, following further government publications, it has been concluded by the Company that the gap between the RPI and the CPI is expected over the long-term to be 1.0% pa compared to 0.7% pa assumed at 31 December thus further reducing the value of the Company s pension liabilities. To reflect this, the Company has recognised a further actuarial gain of 3.5 million through the statement of total recognised gains and losses. The following table sets out the key FRS 17 principle assumptions used for the plan. The table also sets out at 31 December and 31 December, the fair value of assets, a breakdown of the assets into the main asset classes, the present value of the FRS 17 liabilities, the surplus (or deficit) of assets compared to the FRS 17 liabilities, the related deferred tax liability (or asset) and the net pension asset (or liability). Assumptions: RPI Inflation CPI Inflation 3.1% pa 2.1% pa 3.5% pa 2.8% pa Pension increases: LPI 5% 2.1% pa 2.8% pa LPI 3% 2.4% pa 2.7% pa LPI 2.5% 1.8% pa 2.1% pa Salary growth 3% in 2012 and 4.1% pa thereafter, plus promotional scale 0% in and 4.5% pa thereafter, plus promotional scale Discount rate 4.9% pa 5.5% pa Life expectancy for males/females aged 65 now 86.7/ /87.6 (members with higher pensions have a different assumption) (90.0/90.4) (89.9/90.4) Expected long-term return for: Equities 7.3% pa 8.0% pa Bonds 3.4% pa 4.4% pa Fair value of plan assets 280.7m 263.1m Composed of: Equities 36% 42.0% Bonds 64% 58.0% Present value of liabilities (243.3m) (228.6)m Surplus 37.4m 34.5m Related deferred tax liability (9.3m) (9.3)m Net pension asset 28.1m 25.2m Financial statements

100 98 Statutory reports and financial statements Notes to the company financial statements 15 Pensions The overall expected return on plan assets was derived as an average of the expected rates of return on each of the major asset classes invested in, weighted by the allocations of assets among the classes at the balance sheet date, using the figures shown above. The sources used to determine the expected rates of return include: bond yields, inflation and investment market expectations derived from market data and analysts or government s expectations. The contributions made by the employers in, in respect of the Ladbrokes Pension Plan, were 7.9 million (: 6.7 million). The currently agreed level of employer contributions is 22.2% of pensionable payroll, plus an additional 441,667 per month to remove the shortfall in funding identified at 30 June and 62,500 per month towards the regular expenses of maintaining the plan. These lead to an expected contribution of 9.9 million in As the plan is closed to new entrants and, under the method used to calculate pension costs in accordance with FRS 17, the service cost as a percentage of covered pensionable payroll will tend to increase over time as the average age of the membership increases. The following table sets out the amounts charged to the profit and loss account and directly in equity for the year ended 31 December in accordance with the requirements of FRS 17, together with the prior year comparative. Analysis of amounts charged to operating profit: Current service cost (excluding employee element) Analysis of the amount charged/(credited) to other finance income: Expected return on plan assets (14.4) (13.7) Interest on plan liabilities Net return (2.0) (0.7) Total expense included in profit and loss Reconciliation of the present value of the defined benefit obligation during the year: At 1 January (228.6) (227.4) Employer s part of current service cost (3.3) (3.5) Interest cost (12.4) (13.0) Contributions by plan members (1.1) (1.3) Actuarial (loss)/gain (8.6) 4.8 Benefits paid At 31 December (243.3) (228.6) Reconciliation of the fair value of plan assets during the year: At 1 January Expected return on plan assets Actuarial gain Contributions by the employer Contributions by plan members Benefits paid (10.7) (11.8) At 31 December The actual return on the plan s assets over the year was a gain of 19.3 million (: a gain of 24.5 million).

101 99 15 Pensions The amount recognised in the statement of total recognised gains and losses for is a loss of 3.7 million (: gain of 15.6 million). The cumulative amount recognised outside profit and loss at 31 December is a loss of 85.3 million (: loss of 81.6 million). 31 December 31 December 31 December December December 2007 Present value of defined benefit obligation (243.3) (228.6) (227.4) (196.5) (208.5) Fair value of plan assets Surplus Experience adjustments on plan assets: Gain/(loss) (39.2) (3.1) Percentage of plan assets (%) 1.7% 4.1% 5.8% 18.0% 1.3% Experience adjustments on plan liabilities Gain/(loss) (1.7) (5.8) Percentage of present value of plan liabilities (%) 1.7% 1.5% 0.9% 2.8% 16 Share-based payments Details of share-based payments are given in note 31 of the consolidated IFRSs financial statements. 17 Contingencies Guarantees have been given in the ordinary course of business in respect of loans and derivative contracts granted to subsidiaries amounting to million (: million). In addition, subsidiaries have guaranteed loans of 0.1 million (: 0.1 million) given in the normal course of business to other subsidiary companies and companies in which they hold minority equity investments. Bank guarantees have been issued on behalf of subsidiaries and joint ventures with a value of 22.1 million (: 24.0 million). For UK corporation tax purposes, the Company has made collective payment arrangements with other undertakings in the Group. Under these arrangements the Company has a joint and several liability for amounts owed by those undertakings to HM Revenue & Customs. Financial statements

102 Annual report and accounts 100 Statutory reports and financial statements Statement of directors responsibilities in relation to the Company financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether the applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained by the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors remuneration report comply with the Companies Act They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Company s website and legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Directors statement pursuant to the Disclosure and Transparency Rules Each of the directors, whose names and functions are listed in pages 22 and 23 of this Annual Report, confirm that, to the best of each person s knowledge and belief: the financial statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and the Directors report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that they face. By order of the Board R I Glynn I A Bull Directors

103 Annual report and accounts 101 Statutory reports and financial statements Independent auditor s report to the members of Ladbrokes plc We have audited the parent Company financial statements of Ladbrokes plc for the year ended 31 December which comprise the Company Balance Sheet and the related notes 1 to 17. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the statement of directors responsibilities set out on page 100, the directors are responsible for the preparation of the parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent Company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the parent Company financial statements: give a true and fair view of the state of the Company s affairs as at 31 December ; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act Opinion on other matters prescribed by the Companies Act 2006 In our opinion: the part of the Directors remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and the information given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the parent Company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the parent Company financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the Group financial statements of Ladbrokes plc for the year ended 31 December. R W Wilson (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 16 February 2012 Financial statements

104 102 Statutory reports and financial statements Five year financial record Revenue Continuing operations , , ,221.3 Dis operations , , ,251.8 Profit before tax and net finance expense (1) Continuing operations: UK Retail European Retail Digital (3) Core Telephone Betting (4.0) (0.4) (3.3) High Rollers (3.2) Corporate costs (1),(2) (23.2) (23.0) (17.1) (19.8) (26.5) Dis operations (1) (9.1) (10.8) (8.0) Net finance expense (1) (32.8) (14.0) (44.0) (65.8) (69.2) Profit before taxation (1) Income tax (expense)/credit (1) (18.4) (28.4) (39.4) (56.2) Profit for the year (1) Non-controlling interests Profit attributable to equity holders of the parent (1) Non-trading items (19.9) (63.6) (88.2) (18.0) 38.2 Tax credit on non-trading items Profit attributable to equity holders of the parent Dividends (69.0) (34.7) (75.4) (85.0) (84.6) Non-current assets , Equity shareholders funds/(deficit) (60.4) (328.0) (450.8) Dividend per share 7.80p 7.60p 2.98p 12.05p 11.83p Basic earnings per share (1) 15.0p 45.4p 20.3p 30.8p 40.9p Basic earnings per share 13.0p 38.5p 9.9p 28.4p 46.3p (1) Before non-trading items. (2) In the published consolidated financial statements for the years 2009, 2008 and 2007, Corporate costs were shown separately as International development costs and Corporate costs. (3) Included in the profit before tax and net finance expense in the Digital segment is 2.6 million of amortisation of customer relationships in

105 103 Shareholder information Shareholder enquiries The Registrar Computershare Investor Services PLC For address see the next page Telephone: Website: Investor Centre is a free, secure share management website provided by our Registrar. This service allows you to view your share portfolio and see the latest market price of your shares, check your dividend payment and tax information, change your address, update payment instructions and receive your shareholder communications online. To take advantage of this service, please log in at and enter your Shareholder Reference Number and Company Code. This information can be found on your last dividend voucher or share certificate. Other shareholder enquiries For any other shareholder enquiries, please contact the Head of Investor Relations: Matt Sharff. investor.relations@ladbrokes.co.uk; Telephone: +44 (0) ; Fax: +44 (0) ; Ladbrokes plc, Investor Relations, Imperial House, Imperial Drive, Rayners Lane, Harrow, Middlesex HA2 7JW. Share dealing service A share dealing service for Ladbrokes shares is available through The Share Centre Ltd, a member of the London Stock Exchange, which is authorised and regulated by the Financial Services Authority. For further details, please contact: The Share Centre Ltd, PO Box 2000, Aylesbury, Bucks HP21 8ZB; Telephone: Dividend information This year, the directors are recommending the payment of a final dividend of 3.90 pence per share. If you add this to the interim dividend of 3.90 pence per share (paid on 1 December ), the total dividend recommended for will be 7.80 pence per share (: 7.60 pence). Ladbrokes is keen to encourage all its shareholders to have their dividends paid directly into a bank or building society account. If you wish dividends to be paid directly into your bank account through the BACSTEL-IP (Bankers Automated Clearing Services) system, you should apply online at or contact our Registrar for a dividend mandate form. The table below details the interim, final and total dividends declared in the last five years. Please note that these dividend figures have not been adjusted for the rights issue in October Interim dividend pence Final dividend pence Total pence Dividend reinvestment plan The Company provides a dividend reinvestment plan, which enables shareholders to apply all of their cash dividends to buy additional shares in Ladbrokes. To obtain more information and a mandate to join the plan, you should apply online at or contact our Registrar. Annual Report A copy of our Annual Report is available to download as a pdf or can be viewed as an html version at We actively encourage shareholders to play their part in reducing our impact on the environment and elect to be notified by when your communications are available online. Sign up to receive ecommunications at By providing your address you will no longer receive paper copies of annual reports or any other shareholder communications that are available electronically. Instead you will receive s advising you when and how to access documents online. Alternatively, if you would like a hard copy of the Annual Report please send an to investor.relations@ladbrokes.co.uk or phone +44 (0) UK tax on capital gains A leaflet for UK capital gains tax purposes, which includes details of rights and capitalisation issues which have occurred since 31 March 1982, is available from the Company Secretary whose address is given on the next page. American depositary receipts (ADRs) An ADR is a receipt that is issued by a depositary bank representing ownership of the Company s underlying ordinary shares. ADRs are quoted in US Dollars and trade just like any other US security. Ladbrokes has a sponsored level 1 ADR programme for which Deutsche Bank Trust Company Americas acts as depositary. The ADRs are traded on the Over the Counter market in the US under the symbol LDBKY, where one ADR is equal to one ordinary share. When dividends are paid to shareholders, the depositary makes the equivalent payment in US Dollars to ADR holders. For enquiries, brokers may contact the Deutsche Bank Trust Company Americas Broker Service Desk on or Registered ADR holders may contact the Ladbrokes ADR shareholder services line on Further information, including an ADR share price quote, is available at Unsolicited calls Over the last year the Company has become aware of a rise in shareholders receiving unsolicited calls or correspondence concerning investment matters. Calls are typically from people stating they are brokers based overseas and they offer to buy the individual s shares at inflated prices claiming that there is a secret takeover or merger. Shareholders are advised to be very wary of any unsolicited advice, offers to sell or buy their shares or offers of free company reports. Operations to buy shares at inflated prices or to sell what often turn out to be worthless, high risk or even non-existent shares are commonly known as boiler room scams. More detailed information on boiler room scams is available at If you think you have been contacted by share fraudsters, you can report the matter to the FSA by calling or by completing the online form available at Financial calendar Event Date full year results announcement 16 February 2012 Ex-dividend date for final dividend 14 March 2012 Record date for final dividend 16 March 2012 Annual General Meeting and Interim Management Statement 19 April 2012 Payment date for final dividend 26 April 2012 Half year results and 2012 interim dividend to be announced 2 August 2012 Ex-dividend date for 2012 interim dividend 12 September 2012 Record date for 2012 interim dividend 14 September 2012 Payment date for 2012 interim dividend 25 October 2012 Financial statements

106 104 Statutory reports and financial statements Corporate information Registered number England Secretary and registered office Mike Noble Ladbrokes plc Imperial House, Imperial Drive Rayners Lane Harrow Middlesex HA2 7JW Telephone: +44 (0) Fax: +44 (0) Registrar Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Telephone: Auditor Ernst & Young LLP 1 More London Place London SE1 2AF Corporate stockbrokers Deutsche Bank AG, London UBS Investment Bank Solicitors SJ Berwin LLP Slaughter and May Principal UK bankers Barclays Bank PLC The Royal Bank of Scotland plc Principal offices UK Imperial House, Imperial Drive Rayners Lane Harrow Middlesex HA2 7JW Telephone: +44 (0) Fax: +44 (0) Customer enquiries: Belgium Chaussée de / Steenweg op Waterloo 715/ Brussels Belgium Telephone: (00) Fax: (00) Gibraltar Suite 6-8, Fifth Floor Europort Gibraltar Telephone: (00) Fax: (00) Republic of Ireland First Floor, Otter House, Naas Road Dublin 22 Republic of Ireland Telephone: (00) Fax: (00) Spain Sportium Apuestas Deportivas SA C/ Santa Maria Magdalena, 10-12, 4º Madrid Spain Telephone: (00) Fax: (00)

107 105 Glossary ABB Association of British Bookmakers. Adjusted Cost per Acquisition Total of all online and offline recruitment marketing spend (including promotions and bonuses netted from revenue), all affiliate expenses relating to deals where affiliates are paid a one-off fee for each sign-up and all bonus costs (except those relating to sign-ups from revenue share affiliates) divided by the aggregate number of real money sign-ups from non-affiliate sources and the number of real money sign-ups through affiliates that are paid a one-off fee. AMLD (amusement machine licence duty) An annual duty payment relating to gaming machines. The rate of duty payable varies according to machine category. Average Monthly Active Player Days The sum of, for all Unique Active Players in the period, the number of days they have played during the period. Bet in Play Betting-in-Play allows bettors the opportunity to bet on outcomes during a live event. Category B2 gaming machine Gaming machine with maximum stake of 100 and maximum prize of 500. Category B3 gaming machine Gaming machine with maximum stake of 1 and maximum prize of 500. Cost per Acquisition Total of all online and offline marketing spend (including promotions and bonuses netted from revenue), all affiliate expenses relating to deals where affiliates are paid a one-off fee for each sign-up and all bonus costs (except those relating to sign-ups from revenue share affiliates) divided by the aggregate of the number of real money sign-ups from non-affiliate sources and the number of real money sign-ups through affiliates that are paid a one-off fee. EBITDA Earnings before interest, tax, depreciation and amortisation. FOBTs or Fixed Odds Betting Terminals Computerised machines which allow players to bet on the outcome of various games and events with fixed odds, including roulette. Also referred to as B2 machines. Gambling Act The Gambling Act 2005 is the primary piece of legislation governing gambling regulations in Great Britain. GamCare A charitable organisation which provides counselling to those with gambling-related problems. Gambling Commission Set up under the Gambling Act 2005, the Gambling Commission regulates casinos, bingo, gaming machines and lotteries. It is also responsible for the regulation of betting and remote gambling, as well as helping to protect children and vulnerable people. Gaming Machines Betting shops can operate machines with B2 content (including old FOBT content) and B3 content, as defined by the 2005 Gambling Act. GREaT Foundation (GREaT) A charity that funds treatment, education and research related to problem gambling. Gross Win Total customer stakes less customer winnings plus commission i.e. the amount of money left behind by the customer. Net Revenue Gross win less fair value adjustments (e.g. fair value of reward points, free bets and promotional bonuses), VAT and associate income. Odds On Ladbrokes Loyalty scheme which awards customers with a point for every amount staked Over the Counter. These points are then accumulated and can be redeemed for free bets, odds enhancements or win bonuses. Operating profit Profit before net finance expense and tax. Operating margin Operating profit expressed as a percentage of net revenue. OTC Over the Counter. Real Money Sign-up A new player who has registered and deposited funds into an account with the Company. To address the issues posed by shared wallets, customers are categorised between lines of business according to where they first register on the gaming site. SIS (Satellite Information Services) Ladbrokes owns 23.4% of SIS, a leading supplier of television programming and sports data to licensed betting offices in the UK, Ireland, Isle of Man and Channel Islands. Unique Active Player A player who has contributed to rake and/or placed a wager in the period. Yield per Unique Active Player Net Gaming Revenue divided by the number of Unique Active Players in the period. Designed and produced by MerchantCantos. Printed by Pureprint Group using their environmental print technology, a guaranteed, low carbon, low waste, independently audited process that reduces the environmental impact of the printing process. Pureprint Group is a CarbonNeutral company and is certified to Environmental Management System, ISO and registered to EMAS, the Eco Management and Audit Scheme.