2011 annual report asx - 26 sept 2011 · 9/26/2011 · 10 tatts pokies 13 maxgaming 14 bytecraft...
TRANSCRIPT
Tatts Group Limited ABN 19 108 686 040 615 St Kilda Road, Melbourne, Victoria, 3004, Australia
Locked Bag 888, St Kilda Road Central, Melbourne, Victoria, 8008, Australia Tel: 61 3 8517 7777 Fax: 61 3 8517 7752
www.tattsgroup.com
26 September 2011
ASX RELEASE
2011 Annual Report
Attached is a copy of the Company’s Annual Report for the year ended 30 June 2011, which will be dispatched to shareholders today. The Company’s Annual Report in both interactive and pdf form is available for download from the Company’s website at www.tattsgroup.com/investors/agm.
Contact: Michael Mangos – General Manager, External Communications – 0419 551 980
Gary Woodford – General Manager, Investor Relations – (03) 8517 7530
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annual report 2011
delivering more than results
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Tatts Group Limited ABN 19 108 686 040
3 Chairman’s report
7 TattsBet
8 Tatts Lotteries
10 Tatts Pokies
13 Maxgaming
14 Bytecraft
17 Talarius
18 Community, environment and employees
20 Corporate governance statement
26 Directors’ report (incorporating the Remuneration report)
52 Auditor’s independence declaration
53 Financial statements
58 Notes to the consolidated financial statements
123 Directors’ declaration
124 Independent auditor’s report
126 Shareholder information
128 Corporate directory
129 Dividend history and shareholder calendar
Contents
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Tatts Group is a portfolio of networked gambling businesses with core operations consisting of lotteries, wagering, gaming and technical services. Tatts is a high volume transaction based business with strong in-house wide-area network technology capability. Annualised revenue is in excess of A$3.6 billion and EBITDA over $600 million. The Group employs more than 3,000 people across all States of Australia, and in the United Kingdom.
Tatts is committed to delivering on new technologies headlined by Tatts.com, ‘the new home of lotto, sports and racing’.
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delivering on our commitment to continually invest in and extend our technology and product delivery
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Chairman’s report
The last financial year has again shown the result of Tatts’ ongoing commitment to continually invest in and extend our technology and product delivery to provide returns to shareholders.
A dividend of 21.5 cents per share was paid in respect of the year, up 2.4% on the previous year. The Board has remained committed to maintaining a high dividend payout ratio, and this year’s dividend brings to five consecutive years a dividend payout ratio above 95%. Total shareholder returns (TSR), comprising dividends and share price performance, of 42% since 1 July 2008, have outperformed the S&P/ASX 200 and our major competitors over this period.
These returns have been achieved against a backdrop of challenging and fluctuating regulatory, economic and environmental conditions during the period over which they have been delivered.
This highlights one of the cornerstone strengths of Tatts – the wide-area network distribution model provides sustainable results with growth opportunities. Through our diverse operations, Tatts brands are represented by almost 5,000 retail outlets across Australia, as well as through our expanding national online presence – Tatts has a strong operational position. In this year alone, Tatts’ technology platforms processed more than 5.7 billion transactions, with our products reaching a significant proportion of the Australian adult population. Importantly, our business operations continue to invest in technology to improve operational efficiency and enhance the customer experience in each of these key areas.
Our wide-area geographically diversified business model not only delivers a resilient financial profile, but also allowed us to absorb the impact from the very serious cyclones and floods in Queensland and floods in Victoria in early 2011 with minimal service disruptions to our customers, and to quickly restore our operations.
It is these characteristics that have contributed to Morningstar, an independent international research house, ranking Tatts in the top 25 least volatile stocks of the S&P/ASX 200 over the period January 2006 to June 2011.
Our achievementsTatts has evolved substantially since listing on the Australian Securities Exchange in 2005. The merger with TattsBet (formerly UNiTAB) in 2006 followed by the acquisitions of Golden Casket Lotteries in 2007, Talarius in 2008 and NSW Lotteries in 2010 have significantly reshaped our profile and positioned the Group to overcome the pending loss of the Tatts Pokies operations in August 2012.
Over this time, the competitive landscape has also evolved. Our TattsBet wagering business has successfully countered competitive offerings through accelerating the migration to fixed price betting and enhancing the reach and competitiveness of our online applications. Results of TattsBet were impacted when the east coast of Australia experienced its worst summer flooding in over 100 years, contributing most of the 1,650 weather related race cancellations during the year.
Tatts Lotteries meanwhile successfully integrated the NSW Lotteries operations, with much achieved ahead of schedule. Concurrently, we continue to progressively roll out our in-house developed lottery operating system, offering improved customer interface, significant cost reductions, and a flexible platform for Tatts Lotteries to adapt its product offerings and expand its jurisdictional reach wherever appropriate.
With the Tatts Pokies operations moving towards cessation in August 2012, management remains focused on extracting maximum returns from this run-off phase. Capital expenditure has been significantly pared back and cash generation from the business improved. Importantly, the forward sale of gaming machines for an amount in excess of $60 million has secured a seamless and efficient exit from venues in August 2012, while at the same time empowering the venues themselves to accelerate their investment in their future.
While the political debate continues surrounding the implementation of pre-commitment technology to gaming machines throughout Australia, Maxgaming has invested in upgrading its technology platforms to provide the flexibility to meet future demands in whatever guise they take. During the year Maxgaming’s monitoring service was slightly impacted by the severe Queensland floods and cyclones, with more than 1,380 gaming machines being affected, over 400 for a sustained period.
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Chairman’s report continued
Meanwhile, Maxgaming has applied for the licence to extend its monitoring operations in Victoria in 2012. This process was not finalised at the date of printing this report.
Bytecraft has achieved strong growth supported with highly automated job management systems to maintain its high standards of service delivery. Revenue has more than doubled from $42 million in 2006 to $91 million this year, with EBIT up from $0.9 million to $6.7 million over the same period.
Meanwhile, despite the temporary disruption from recent rioting some rays of sunshine are beginning to emanate from the United Kingdom (UK). Regulatory changes now underway will enable Talarius to install additional higher performing gaming machines with improved stakes to better compete in the UK marketplace in the future.
Our balance sheetTatts has maintained a strong balance sheet and a disciplined approach in ensuring strong credit metrics with further capacity for expansion. Long term debt has been secured, providing a staggered maturity profile ranging from 2013 through to 2020 with an average duration of four years. Interest cover of 6.1 times and a net debt to EBITDA ratio of 2.0 times at 30 June 2011 are considered appropriately positioned for future company and industry developments.
Our peopleAn important component of any successful business is the people it employs, and Tatts has over 1,500 full time employees as well as providing part time and casual employment to approximately 1,600 people in many and varied roles across Australia and in the
UK. These groups of employees have demonstrated an ability to collectively pull together to deliver improved outcomes for our customers, our business and ultimately our shareholders. The actions taken and the support demonstrated by our staff during the devastating summer floods and cyclones in Queensland are but one example of this strength of character. On behalf of the Board, I sincerely thank each and every one of our people for their significant and enthusiastic contributions.
Our futureTatts has a demonstrated track record of successfully navigating any challenges and opportunities presented, and we expect the future to be no different. We will maintain our pursuit of opportunities in the best interests of shareholders, and will work tirelessly to harness technology to deliver improved products and services to our customers across all jurisdictions, and to provide operational leverage to improve returns for our shareholders.
Our existing businesses are strong with long term licences, backed by our continuing investment in technology solutions to improve the delivery to customers. As a significant wagering services provider in Australia, Tatts is well positioned to be a major player in helping shape the industry’s future. Meanwhile, the recent announcement by the South Australian government of its intention to license SA Lotteries to a private operator is of interest and will be closely monitored.
Harry BoonChairman
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Compound average growth rate (CAGR)
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Compound average growth rate (CAGR)
CAGR 22.7%
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Total drawn debt (A$ Millions)
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Total facility (A$ Millions)USPP debt (A$ Millions)
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Compound average growth rate (CAGR)
CAGR 22.7%
CAGR 14.6%
Total drawn debt (A$ Millions)
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Total facility (A$ Millions)USPP debt (A$ Millions)
Revenue EBITDA
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30 June 30 June 30 June 30 June 30 June 2011 2010 2009 2008 2007 A$m A$m*
1 A$m*
6 A$m6 A$m*
2, 6
Revenue 3669.3 3298.0 3252.5 3094.2 2412.6
Statutory charges- Government 1768.3 1531.4 1479.7 1439.5 1119.7- Other3 869.1 804.8 811.9 774.2 634.5
Operating costs3 415.6 398.7 401.5 364.7 266.1
EBITDA 616.3 563.1 559.4 515.8 392.3
NPBT 398.9 404.0 400.5 370.6 330.4NPAT 275.4 282.4 277.4 257.6 231.2
Cents Cents Cents Cents CentsEarnings per share4 21.2 22.1 21.9 20.4 20.9
Dividend per share5 21.5 21.0 21.0 20.0 18.0
% % % % %Dividend payout ratio 102.3 95.1 96.0 98.2 98.5
Notes:
1. The 2010 underlying results in the table above differ from the reported results as a result of the following one-off and non-continuing adjustments at a NPAT level: Reported NPAT 119.4
Talarius – impairment ($140 million), hedging ($2.1 million) and venue restructure costs ($15.1 million) 157.2 Maxgaming – effective life adjustment to software 17.7 NSW Lotteries – restructure costs 2.1 South Africa – trading profit and profit on sale -14.0 Underlying NPAT 282.4
2. The 30 June 2007 reported result has been adjusted to exclude the impact of the settlement of the Trustee Commission Claim and the resulting special dividend of 4 cents per share.
3. Product and program fees have been reclassified as ‘statutory charges – other’ in each year.
4. EPS is calculated using the weighted average number of shares on issue throughout the year.
5. 2010 includes the special dividend paid on 1 October 2010, effectively substituting for the final dividend both in quantum and timing.
6. Includes the results from the South African business, which was sold during the 2010 year.
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Compound average growth rate (CAGR)
CAGR 22.7%
CAGR 14.6%
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Compound average growth rate (CAGR)
CAGR 22.7%
CAGR 14.6%
Total drawn debt (A$ Millions)
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Total facility (A$ Millions)USPP debt (A$ Millions)
Debt maturity profile Total shareholder return – 1 July 2008 to 30 June 2011
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delivering through new technologies6
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TattsBet continues to transform its business operations and invest in the future. The introduction of self-service terminals will supplement our existing retail network, and an enhanced online offering, headlined by the new business portal, Tatts.com and iPhone application, will extend our offer and reach to existing and prospective customers.
The launch of Tatts.com will for the first time enable customers to access all wagering and lottery products from one website, utilising a single account.
The expanded fixed price betting service has seen fixed price sales achieve more than 80% growth above last year. Approximately one in every six win/place bets is now fixed price. Fixed price sports betting revenue was up 23% to $26.5 million for the financial year. All fixed price betting revenue increased by 91% to more than $100 million.
Importantly, the expanded fixed price service has complemented our existing products to enable TattsBet to provide an extensive suite of products to customers without compromising the quality of earnings.
The east coast of Australia contributed significantly to over 1,650 weather related race cancellations during the year, more than double that of the previous year. This and reduced revenue from services provided to overseas operators, along with generally subdued economic conditions in South East Queensland, had an adverse impact on sales and profit for the year from which TattsBet will rebound in the 2012 financial year.
Business profile• Approximately22%oftheAustraliantotalisator
market.
• Over500milliontransactionsprocessedduringtheyear.
• Over1,200retailandon-courseoutletsdelivering 74% of sales.
• Internet(15.9%)andphone(10.1%)bettingnowaccounting for 26% of sales.
• Over100,000activeaccountholders.
• Totalisatorbettingrepresenting82%ofwageringrevenue, with fixed price betting making up 18%.
• Ongoingindustrysupport,withalmost$300millionpaid in racing industry fees and government taxes.
• Proprietarytechnologysolutionsdeveloped, maintained and supported in-house.
Licences• Queensland–wageringto2098,sportsbetting
to 2014.
• SouthAustralia–wageringandsportsbettingto2100.
• NorthernTerritory–wageringandsportsbetting to 2015.
Results table 30 June 30 June Reported 2011 2010 Results A$m A$mRevenue 593.0 594.5Total expenses 449.7 447.6EBITDA 143.3 146.9Depreciation and amortisation 19.7 18.9EBIT 123.6 128.0
TattsBet
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Tatts Lotteries
Tatts Lotteries has benefited from the full 12 months’ contribution from NSW Lotteries in this financial year compared with three months’ contribution in the previous year.
Importantly, the integration of the NSW Lotteries business is substantially complete, resulting in Tatts Lotteries remaining on track to deliver $240 million EBITDA by 2014 as previously foreshadowed. This will be expedited by Tatts Lotteries’ own in-house lottery system that is expected to be rolled out in New South Wales in April 2012, following its successful roll out in the Australian Capital Territory, Northern Territory, Tasmania and Victoria during the financial year. The roll out in Queensland is planned to follow the NSW implementation.
A further opportunity to extend the proven Tatts Lotteries operating model is on the horizon with the South Australian government flagging its intention to grant a private operating licence for the lottery in that State.
Saturday Lotto was successfully relaunched in January 2011 with the introduction of an additional prize level, contributing to revenue growth of 30.7% for the year. Excluding NSW Lotteries, like-for-like revenue was up 5.7%, reflecting the continuation of good player retention and participation rates.
With their heavier reliance on jackpots, Powerball and Oz Lotto did not fare so well. Customers enjoyed great success in selecting the winning numbers this year which in turn reduced the frequency and size of jackpot offers. The combined value of advertised jackpots of $15 million or above for these products was $485 million this year compared to $800 million in the previous year. Only three jackpots exceeded $20 million, with none exceeding $30 million. As a result, like-for-like revenue was down 14.4% and 14.7% respectively, but up 17.4% and 13.1% with the inclusion of a full 12 months’ contribution from NSW Lotteries. Meanwhile, the tightening retail environment impacting more discretionary purchases was reflected in instant lottery ticket revenue for Queensland, Tasmania and Northern Territory being down 4.7%, but up 38.6% with the inclusion of NSW Lotteries.
Overall like-for-like revenue for the year was down 3.4%, with the benefit of the inclusion of a full 12 months’ contribution from NSW Lotteries seeing reported revenue increase 31.2%.
Business profile• Operatinginjurisdictionswithapopulation
of 14 million adults.
• Playerparticipationrateofapproximately 46% of adults.
• Morethan250milliontransactionsprocessed during the year.
• 3,781retailoutletsdelivering94.4%ofsales.
• 5.6%ofsalesthroughtheinternetchannel.
• Averageticketspendapproximately$10to$12 per transaction.
• Productsalesmix–SaturdayLotto41%,Powerball18%, Oz Lotto 18%, Instants 10%, and other games 13%.
• Inexcessoftwomillionplayercardmembers.
• Over$1.0billionpaidingovernmentdutiesandtaxesin FY2011.
• Progressiverolloutofproprietarytechnologysolutionsdeveloped, maintained and supported in-house.
Licences• Queenslandto2072.
• NewSouthWalesto2050.
• Victoriato2018.
• Tasmaniato2015.
• NorthernTerritoryto2011.
• ACTongoing.
Results table 30 June 30 June Reported 2011 2010 Results A$m A$mRevenue 1605.0 1223.7Total expenses 1408.6 1078.9EBITDA 196.4 144.8Depreciation and amortisation 21.4 13.1EBIT 175.0 131.7
Note: 2010 excludes NSW Lotteries restructuring costs of $1.5 million.
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Tatts Pokies
Tatts Pokies management maintained the focus during the year on improving the cash flow from operations and positioning the business in preparation for the end of its operating licence in August 2012.
With revenue increasing 0.3% for the year, strong cost management and reduced depreciation charges following the forward sale of gaming machines resulted in EBIT improving 3.7%. Revenue growth was achieved in the second half of the year, with the first half impacted by delayed investment in gaming floors pending the regulatory approval of new gaming machines for Tatts Pokies.
The forward sale of gaming machines to venue operators is an important step in the seamless exit of Tatts Pokies from the gaming business in 2012. Not only do the sale proceeds of more than $60 million exceed the book value, importantly it enables the venue operators to commence investing in upgrading gaming machines or games now to drive revenue. Gaming machines and games have already been upgraded by venue operators under this program. Tatts Pokies should see some benefit to revenue from these actions over the remaining period of the licence.
The 2011 financial year saw Tatts Pokies benefit from a reduction of $6.5 million in depreciation from the forward sale of gaming machines. Further depreciation reductions of around $2.0 million per month will flow into the 2012 financial year and to the end of the licence in the 2013 financial year, along with greatly reduced make good costs that may arise at the end of the licence.
Business profile• Operating13,208gamingmachinesin247hotels
and clubs.
• Averagenetrevenuepergamingmachineper day of $254.
• 47.1%ofgamingmachinesoperatingunderjackpotlinks.
• Optimisingoperatingmarginsandcashflow.
• $620millionpaidingovernmentdutiesand taxes in FY2011.
• Gamingmachinespre-soldforinexcessof$60millioneffective August 2012.
• Ownerandlandlordfullyand/orjointlyofthreestronglyperforming venues in growth areas, with one further venue under construction.
Licences• VictoriangaminglicenceexpiringAugust2012.
Results table 30 June 30 June Reported 2011 2010 Results A$m A$mRevenue 1226.7 1,223.4 Total expenses 999.6 1,001.1 EBITDA 227.1 222.3Depreciation and amortisation 28.1 30.4EBIT 199.0 191.9
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delivering superior service support
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Maxgaming
Maxgaming has continued to invest in its future, leading the way in delivering superior service support and advanced technologies, such as Maxreports gaming analysis tools and smart phone app, and the Maxchange downloadable gaming capability.
These ongoing technology developments have underpinned Maxgaming’s ability to maintain Queensland market share above 80%, secure longer term monitoring contracts with major hotel groups, and extend for a further five years the only monitoring licence in the Northern Territory. Maxgaming encountered a challenging year. The ongoing political and public debate surrounding the push for mandatory pre-commitment has led to venue managers adopting a cautious stance with respect to investing in new value add services and gaming room upgrades. This has flowed into demand for linked jackpots, which has also been impacted by the delayed new proprietary linked product development which relies on gaming machine manufacturers. Severe flooding and cyclones in Queensland in early 2011 impacted the venues monitored by Maxgaming, with 21 venues destroyed and 25 venues severely damaged, resulting in 1,386 gaming machines being affected, over 400 of which were off line through to April/May 2011. Maxgaming has applied for the licence to extend its monitoring operations into Victoria in 2012. This process had not been finalised at the date of printing this report.
Business profile• Monitoring132,091gamingmachines:
- 100% in New South Wales and Northern Territory clubs and hotels; and
- 81% market share in Queensland.
• Monitoring3,961venues.
• Revenuederivedfrom:
- monitoring services: 49%;
- value add services: 31%; and
- maintenance services: 20%.
• Technologysolutionsdeveloped,maintained and supported in-house.
Licences• NewSouthWalesmonitoringto2016,clubjackpotlink
to 2017, hotel jackpot link to 2019.
• Queenslandmonitoringto2017.
• NorthernTerritorymonitoringto2016. Results table 30 June 30 June Reported 2011 2010 Results A$m A$mRevenue 116.8 121.9Total expenses 51.1 54.0EBITDA 65.7 67.9Depreciation and amortisation 26.1 25.3EBIT 39.6 42.6
Note: 2010 excludes $25.4 million from changes to useful life with the early replacement of NSW software.
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Bytecraft
The ongoing program of technological enhancements to Bytecraft’s proprietary service management system (BSuite™) continues to pave the way for Bytecraft to expand its business operations into the future, sustaining the achievement of heightened standards of service delivery through channels such as client system integration.
Bytecraft revenue has consistently grown over a long period to reach $91.4 million in 2011, more than doubling its $41.9 million result in 2006, and exceeding this growth rate in EBIT results. Over this period, Bytecraft has progressively assumed all field services work for the complete portfolio of Tatts businesses. Despite this internally generated revenue growth (on which no margin is charged) the growth in revenue from external sources has outstripped it to now represent an approximate monthly run-rate in excess of 60% of revenue.
The market trend to outsourcing technical maintenance services has not abated. Bytecraft has continued its success in securing new business contracts across numerous business sectors and with major corporations and government agencies. The provision of the support services for the hardware used in the Victorian Myki public transport system, the Victorian Department of Education contract to support the school networks, and further point-of-sale equipment support services for major retailers, have all been welcome additions. This business mix provides important diversification and adds to the visibility and reputation needed to facilitate future growth.
Business profile• Externalcustomersrepresentover60%ofrevenue.
• Revenuestreamsfromdiverseindustrysectors:
- 61% gaming, wagering, lotteries;
- 17% retail and fast food outlets; and
- 22% IT, telecommunications, transport, education and finance sectors.
• NomarginchargedonTattsGroupinternalservices.
• Inexcessof620,000servicecallsreceivedperannum.
• Exceeding95%servicelevelagreementsatisfactionrate.
• Employingover670staff.
• OperatingineveryStateandTerritoryofAustralia as well as in New Zealand.
LicencesVarious gaming regulators’ approvals to operate in every State and Territory of Australia.
Results table 30 June 30 June Reported 2011 2010 Results A$m A$mRevenue 91.4 78.8Total expenses 83.5 72.4EBITDA 7.9 6.4Depreciation and amortisation 1.2 1.6EBIT 6.7 4.8
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delivering service excellence
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delivering customer convenience
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Talarius
Talarius has continued to extract steadily improving results despite what is a deep and protracted recession in the United Kingdom (UK).
Some factors are starting to turn in favour of Talarius. Sales in Talarius’ estate have in the latter part of the year grown above the level of Gross Domestic Product (GDP) growth in the UK, the first time this has occurred since 2005. Average spend per gaming machine per day increased from £17.92 last year to £18.58.
The performance of Talarius is being helped by the continued installation of the Maxgaming monitoring system across the venues, providing improved information for venues and management to identify trends and optimise performance.
Meanwhile, regulatory change effective from 13 July 2011 now enables Talarius to install additional B3 category gaming machines in each venue to be able to compete more strongly in the market. These gaming machines are higher performing, and with the welcomed increase in stakes, provide scope for Talarius to better meet customer demand and claw back market share from competitor market segments.
Like-for-like gross gaming machine revenue for the year was up 0.6%. Following the rationalisation costs incurred last year, underlying EBIT has improved from a loss of £2.2 million to break even for the 2011 financial year. Offsetting this improved operational performance, the strong Australian dollar has adversely affected Talarius’ contribution to Tatts’ reported results this year.
Business profile• Approximately11%marketshareoftheAdultGaming
Centre (AGC) market segment.
• Operating7,383gamingmachinesin170venues.
• £18.58averagespendpergamingmachineperday.
• UtilisingMaxgamingmonitoringsystemtoimprovevenue performance.
• Employingover900staffacrosstheUK.
• Operatingtheonlinegamblingsite www.quicksilvergames.co.uk
Licences• NationalOperator’slicencetooperateAGCsintheUK.
• Malteselicencetooperateaninternetplatformandprovide gaming to players.
Results table 30 June 30 June Reported 2011 2010 Results A$m A$mRevenue 72.3 89.3Total expenses 63.1 82.6EBITDA 9.2 6.7Depreciation and amortisation 9.2 10.7EBIT 0.0 (4.0)
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Responsible gamblingTatts promotes the responsible use of its gaming, wagering and lottery services in all its trading jurisdictions. This is achieved through ongoing collaboration with relevant stakeholders, including representatives of the community, counselling and welfare agencies, gambling industry associations, local government, State government policy makers and regulators. Tatts’ representatives sit on their respective State government’s responsible gambling advisory bodies.
Responsible Gambling Codes of Conduct exist in each of Tatts’ trading jurisdictions. These codes contain a variety of measures that respond to community expectations in regard to player protection and harm minimisation. These measures include responsible gambling information, pre-commitment strategies, game rules, advertising restrictions, customer complaint mechanisms and self-exclusion programs. During 2010-11, Tatts Lotteries developed an integrated Responsible Play Program that is effective in all States and Territories in which it operates. This multi-jurisdictional program merges the various requirements of each State’s Responsible Gambling Code of Conduct into a single document.
Community supportTatts has for a sustained period supported the communities in which it operates. This support includes:
• ThemajorpartneroftheVerySpecialKidsPiggyBankAppeal. Tatts provides access to the Victorian lottery network and gaming venues to sell merchandise and raise funds, with many venues supplementing this by conducting fundraising activities.
• Anannualallocationof$1.5milliontochildhealth and wellbeing. The main recipients of these funds were the Royal Children’s Hospital Foundation and the Mater Children’s Hospital in Brisbane, with the remainder distributed by Queensland Health to children’s health projects across Queensland.
• TheGoldenCasketVarietySpecialChildren’sChristmasParties. Approximately 3,000 seriously ill or special needs children and their families attended the six parties held throughout Queensland in the 2010 calendar year.
EnvironmentTatts is a portfolio of neighbourhood based businesses reaching its customers through advanced wide-area network technology. As such, Tatts has a relatively low CO2 emissions profile. Despite this, Tatts is cognisant of its environmental responsibilities and is committed to ongoing improvements in the way in which it operates to contribute to the sustainability of its products and services. As part of this, Tatts has participated in reporting environmental impacts to the Carbon Disclosure Project (CDP) which is run worldwide on behalf of investors.
Tatts continues to develop and adapt its services in response to changes in customer demand, and to take advantage of new and more efficient electronic service delivery systems. TattsBet maintains a fully electronic information display across its retail network, and has improved its internet offering and reach, including the new iPhone Application. Likewise, the Tatts Lotteries, Tatts Pokies and Maxgaming businesses have an extensive reliance on electronic technology delivery, while Bytecraft continues to review options to improve the efficiency and environmental impact of its fleet of around 325 trade vehicles.
As a result of Tatts’ reliance on electronic technology, virtual server platforms have been increasingly deployed to reduce the power usage of our database centres, with cold-aisle containment strategies being introduced to reduce air-conditioning requirements. Tatts’ building footprint is also continually under review as we rationalise functions within Tatts.
Environmental management reports are periodically provided to the Board’s Audit, Risk and Compliance Committee.
EmployeesTatts recognises that a high performing workforce is essential to achieving business success. Tatts’ work practices are geared to attract and retain talented employees, and high performance receives strong recognition through its remuneration structures. A work environment where everyone can contribute to their potential is crucial for success, and Tatts has a range of activities that foster workplaces that are safe, and free from harassment and discrimination.
Learning and development for employees is well supported at Tatts. Learning is delivered through a combination of internal programs tailored to the needs of Tatts’ businesses and external programs including certificate and diploma courses. Several courses are delivered online to make learning more accessible, particularly for employees working in remote locations. Employees who undertake tertiary studies are supported through subsidy of course costs and paid leave.
Performance targets for Occupational Health and Safety (OH&S) are set and regularly reviewed, based on comparisons with similar occupations and industries. The key measure is lost time injury frequency rate, where Tatts’ performance overall, and for the strategic business units where work involves the greatest health and safety risks, is consistently below external industry benchmarks. The Board reviews reports of all injuries, near misses and workers compensation claims each meeting. Tatts’ approach to management of OH&S for employees includes active local OH&S committees, regular audits to eliminate hazards and education for all employees and managers on safe work practices.
Community, environment and employees
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20 Corporate governance statement
26 Directors’ report (incorporating the Remuneration report)
52 Auditor’s independence declaration
Financial statements
53 Consolidated income statement
54 Consolidated statement of comprehensive income
55 Consolidated balance sheet
56 Consolidated statement of changes in equity
57 Consolidated statement of cash flows
58 Notes to the consolidated financial statements
123 Directors’ declaration
124 Independent auditor’s report
126 Shareholder information
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Corporate governance statement
The Board recognises the importance of good corporate governance and establishing accountability of the Board and management. The Board reports on its compliance with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX Recommendations). Tatts Group Limited (the Company or Tatts) and its subsidiaries’ (Group) corporate governance policies centre around the Board, the Board committees and the principles that govern their interaction with, and oversight of, management. The Board is satisfied with the Group’s application of the principles in the ASX Recommendations and that Tatts’ corporate governance framework, policies and practices will ensure the continued effective management and operation of the Group.
Tatts’ corporate governance framework, policies and practices remain under regular review as expectations and requirements develop to ensure that Tatts continues to comply with industry practice.
The role of the BoardThe Board is committed to act in the best interests of Tatts to ensure that the Group is properly managed and consistently improved.
The principal role of the Board is to:
• protectandenhancetheinterestsofshareholders;
• influenceandmonitorstrategy;
• overseethemanagementofTattsandevaluatetheperformance of the Managing Director/Chief Executive and other executives;
• provideguardianshipofTatts’corporatevalues;
• monitortheintegrityoffinancialreporting;
• overseeriskmanagementandlegalcompliance;and
• overseeshareholdercommunications.
Board compositionThe Board considers it important to maintain an appropriate mix of skills, experience, expertise and diversity in its membership to ensure that it is able to meet the present and future needs of the Group. The skills and diversity which the Board looks to achieve and maintain includes business and commercial experience, including gambling industry experience, strategy development and financial and corporate management expertise.
The minimum number of Tatts Directors is three and the maximum number is nine unless the shareholders resolve to vary that number. Tatts Directors are elected at Annual General Meetings of Tatts. The Board resolved in 2008 that it be comprised of seven members. The Board currently comprises six Non-executive Directors
and the Managing Director/Chief Executive. All Directors have entered into appointment agreements and deeds of indemnity, insurance and access.
The Managing Director/Chief Executive will not retire by rotation. Provided that Tatts has three or more Directors, one third of the Directors (rounded down to the nearest whole number) will retire at each Annual General Meeting. In any case, no Director may retain office for more than three years or after the third Annual General Meeting following the Director’s appointment, whichever is the longer period. In each case, the retiring Director may then seek re-election.
Board charterThe Board has developed a charter to provide a framework for the effective operation of the Board. The charter addresses the following matters:
• responsibilitiesoftheBoard;
• relationshipbetweentheBoardandmanagement;
• appointmentandroleoftheChairman;
• compositionoftheBoard;
• performanceoftheBoard;
• Boardcommittees;
• Boardmeetings;and
• accessbyDirectorstoindependentadvice.
The Company has established the functions reserved to the Board and these are contained in its charter. The Chief Executive and senior executive group, who are accountable to the Board, are responsible for matters which are not specifically reserved to the Board, which can be summarised as the day-to-day operation and management of the Group.
The Board Charter can be found at:
www.tattsgroup.com/investors
Independence of DirectorsEach member of the Board is required to apply independent judgement to decision making in their capacity as a Director. A Non-executive Director will be considered independent by the Board if no relationship exists between the Director and Tatts that may interfere with the exercise of their independent judgement. The Board considers the factors outlined below when assessing the independence of each Non-executive Director, being whether:
• theDirectorisorhasbeenasubstantialshareholderofthe Company or an officer of, or otherwise associated directly with, a substantial shareholder of the Company;
• theDirectorisorhasbeenemployedinanexecutivecapacity by the Group and there has not been a period of at least three years between ceasing such employment and serving on the Board;
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DiversityTatts recognises that to be a relevant, adaptive and innovative organisation it must create and maintain a culture that embraces individual difference, including diversity of thought. This commitment involves creating a diverse workplace made up of employees with skills, qualifications, attributes and experience that best match the requirements of Tatts.
The Company emphasises the accountability of its most influential leaders to create a work environment and company culture where individual difference, including gender, is understood, respected and fully valued.
The Board will maintain a framework for achieving and measuring the continuing realisation of these ambitions and objectives.
Director induction and professional developmentTatts has an induction program to facilitate immediate involvement in Board activities by any new Director.Tatts also recognises that Board members must be provided with a range of opportunities for professional development. The Board encourages Directors to identify areas for professional development, including education about key developments in the Group’s businesses and in the industries within which they operate, and Tatts will provide the Directors with sufficient access to appropriate resources.
Board committeesThe Board has established appropriate committees to assist it in the discharge of its responsibilities. However, the Board has not delegated any of its decision making authority to those committees except as expressly specified in the Committee charters.
Composition of Board committees Audit, Risk and ComplianceChairmanBrian Jamieson
MembersLyndsey CattermoleJulien PlayoustKevin Seymour
• theDirectorisorhasbeenamaterialprofessionaladviser or consultant to the Group or an employee materially associated with the service provided in the previous three years;
• theDirectorisamaterialsupplierorcustomeroftheGroup or an officer of, or otherwise associated directly or indirectly with, a material supplier or customer; and
• theDirectorhasamaterialcontractualrelationship with the Group other than as a Director.
Family ties and cross directorships may also be relevant in considering interests and relationships which may compromise a Non-executive Director’s independence. The test of whether a relationship is material is based on the nature of the relationship and the circumstances of the Director. Materiality is considered from the perspective of the Group, the Director and the person or entity with which the Director has a relationship.
The Board considers the factors relevant to assessing independence and determines the independence of its Non-executive Directors, and the Board as a whole, each year. This review has been carried out for the 2011 financial year in respect of members of the Board. All Non-executive Directors were considered to be independent with the exception of Mr Bob Bentley, who is Chairman of Racing Queensland Limited which controls a material supplier to TattsBet Limited. The Board acknowledges that, in accordance with the ASX Recommendations, it has a majority of Directors (including the Chairman) who are considered to be independent.
Independent professional adviceExternal advice may be sought by a Director in accordance with the terms of the Director’s appointment agreement.
Each Non-executive Director’s appointment agreement provides that:
• professionaladvicegenerallyinrelationtothedischarge of the Director’s responsibilities to the Company may be sought;
• theChairmanmustbenotifiedbeforeadviceissought;
• anyadviceobtainedmaybegiventotheBoard,ifappropriate as determined by the Chairman; and
• theCompanywillreimbursereasonableexpenseswhere the above procedures have been followed.
Senior executive performance evaluationThe process for evaluating the performance of senior executives is detailed in the Remuneration report. A performance evaluation for senior executives, which accords with the process described, has taken place in the 2011 financial year.
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Corporate governance statement continued
Governance and Nomination ChairmanHarry Boon
MembersBob BentleyJulien PlayoustKevin Seymour
RemunerationChairmanJulien Playoust
MembersBob BentleyHarry BoonBrian Jamieson
Other committees may be established by the Board as and when required. Membership of Board committees will be based on the needs of Tatts, relevant legislative and other requirements and the skills and experience of individual Directors.
A review of the performance of each committee was undertaken by the Board during the 2011 financial year. Evaluation questionnaires were completed by the Board and committee members, and results were compiled on a confidential basis and circulated to Board and committee members and discussed as relevant. The results confirmed that the committees continue to function in an appropriate manner.
The charter of each Board committee is available on the Company’s website at www.tattsgroup.com/investors
Audit, Risk and Compliance Committee(i) CompositionThe Chairman and members of the Audit, Risk and Compliance Committee are shown on page 21. The Board will ensure that an independent Director, who is not Chairman of the Board, remains Chairman of the Committee and that the Committee will have between three and six members, the majority of whom are independent Directors.
(ii) ResponsibilitiesThe Audit, Risk and Compliance Committee will assist the Board in its oversight responsibilities by monitoring and advising on:
• thetruthandfairnessoftheviewgivenbythefinancialstatements of the Group;
• theintegrityoftheGroup’saccountingandfinancialreporting;
• theGroup’saccountingpoliciesandpracticesandconsistency with accounting standards;
• thescopeofwork,independenceandperformance of the internal and external auditors;
• compliancewithlegalandregulatoryrequirements;
• compliancewiththeGroup’sriskpolicyframework;
• theGroup’scontrolenvironment;
• relatedpartytransactions;and
• theGroup’soverallriskmanagementprogram.
(iii) External auditorIt is the responsibility of the Audit, Risk and Compliance Committee to review and approve the external auditor’s arrangement for the rotation and succession of audit and review partners, including their approach to managing the transition. The procedure for the selection and appointment of the external auditor and the Committee’s policy for the rotation of external audit engagement partners are outlined in the Audit, Risk and Compliance Committee’s charter and described on the Company’s website at www.tattsgroup.com/investors
The external auditor must attend the Company’s Annual General Meetings, and be available to answer shareholders’ questions regarding:
• theconductoftheaudit;
• thepreparationandthecontentoftheauditreport;
• accountingpoliciesadoptedbytheCompanyinrelationto the preparation of the financial statements; and
• theindependenceoftheauditorinrelationtotheconduct of the audit.
Governance and Nomination Committee(i) CompositionThe Chairman and members of the Governance and Nomination Committee are shown above. The Board will ensure that the Chairman of the Committee is the Chairman of the Board or an independent Director and that the Committee will have between three and six members, the majority of whom are independent Directors.
(ii) ResponsibilitiesThe Governance and Nomination Committee will assist the Board in its oversight responsibilities by monitoring and advising on:
• Boardcompositionandsuccessionplanning;
• theidentificationofpersonsforappointment to the Board;
• theappointmentoftheManagingDirector/ChiefExecutive;
• theprocessofreviewingtheindependence of Directors;
• Boardperformanceevaluation;
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• aproceduretoaddresstheinductionandeducationneeds of Directors;
• aprocedureforsettingmeasurableobjectivesforachieving diversity and assessing the effectiveness of the diversity policy;
• corporategovernancedevelopments;and
• thedevelopmentandimplementationoftheGroup’scode of conduct.
(iii) Board Performance EvaluationThe Committee has responsibility for organising Board performance evaluation. A Board evaluation process (Board performance evaluation) and an evaluation process of individual Non-executive Directors (individual evaluation) occurs every two years, with the next review to occur in the 2012 financial year.
The evaluation processes occur by questionnaire to Non-executive Directors. The results are then compiled on a confidential basis. The results of the Board performance evaluation are discussed by the Governance and Nomination Committee and reported to the Board. The results of the individual evaluation are also provided to the relevant Director and the Chairman (and for the Chairman to the Chairman of the Audit, Risk and Compliance Committee). The results of the individual evaluation undertaken in 2010 for those Directors standing for re-election at the 2011 Annual General Meeting were considered by the Governance and Nomination Committee this year, as were each Director’s external commitments, when determining whether to recommend those Directors for re-election.
(iv) Appointment of new Directors and re-election of incumbent DirectorsThe Company has developed a skills matrix which it uses to identify any gaps in the skills and experience of Directors on the Board.
Potential Directors will be nominated for appointment to the Board on the basis of a number of criteria including their identified skills and experience. This information will be communicated to shareholders to assist them in their decision whether to elect the nominee at the relevant Annual General Meeting.
Any person invited to join the Board will enter into an appointment agreement setting out the Director’s duties, rights, responsibilities and the terms and conditions associated with that appointment. All new Directors appointed to the Board will undertake an induction program co-ordinated by the Company Secretary.
The process for re-election of incumbent Directors can be found on the Company’s website at www.tattsgroup.com/investors
Remuneration Committee(i) CompositionThe Chairman and members of the Remuneration Committee are shown on page 22. The Board will ensure that an independent Director, who is not the Chairman of the Board, remains Chairman of the Committee. The Managing Director/Chief Executive is invited to attend meetings at the request of the Committee members. The Board will ensure that the Committee will have a minimum of three Non-executive Director members and have no more than six members, the majority of whom are independent Directors.
(ii) ResponsibilitiesThe Remuneration Committee will assist the Board in its oversight responsibilities by monitoring and advising on:
• Non-executiveDirectorremuneration;
• ManagingDirector/ChiefExecutiveperformancereview and fixed and variable at-risk incentive remuneration;
• executiveremunerationandallocationsofvariableat-risk incentive remuneration to executives;
• incentiveremunerationstructuresthatlinkincentivesto performance measures and targets that will drive shareholder value;
• employeeequityplans;
• executiverecruitment,retention,terminationpoliciesand succession planning;
• remunerationdisclosure;and
• riskmanagementandcontrolsregardingremuneration.
Risk management Tatts operates a risk management framework that provides the Board with a communication process to continually assure them that risks inherent in the operations and activities of the Group have been prudently managed. The Board has delegated the review of risk management practices to the Audit, Risk and Compliance Committee. As part of this role, the Committee regularly reviews the effectiveness of the risk management system and reports to the Board on the risk management framework throughout the year. As part of this process, the Board adopted a formal policy to provide a system for managing risks and informing stakeholders.
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Corporate governance statement continued
Tatts’ management team is responsible for identifying risks to the business, developing and implementing risk mitigation strategies and reporting the effectiveness of managing these risks to the Board. Internal Audit provides assurance to management, the Committee and the Board on the adequacy of the risk management and internal control systems. Management reports to the Committee on the material business risks and the extent to which they believe these risks are being managed, at least annually.
Management have identified risks in four core areas: strategic risk, operational risk, financial risk and compliance risk. By way of illustration, management identified a series of operational risks which include:
• narrowmarketsandrelianceonlicences;
• partnersandothers(e.g.racingindustry,agents and lottery bloc);
• relianceontechnology;and
• reputation/socialresponsibility.
Management have also identified particular internal controls to mitigate these risks which include:
• corporateplanningandkeystrategicproject implementation;
• thefinancialpracticesundertakenpursuantto the policies and procedures such as delegations of authority, budget monitoring and project performance reports;
• theoperationandreportingstructuresofTatts’compliance programs in relation to regulatory requirements of Tatts’ businesses and industry practice which deal with specific areas of risk such as licensing requirements, contractual obligations, OH&S and Treasury risk (further information on Tatts’ approach regarding responsible gambling, the environment and OH&S is contained on page 18);
• technologyfocuseddisasterrecoveryplansandsecurity policy processes and practices and other technology related management structures; and
• anannualreviewoftheinsuranceprogramto ensure adequate coverage of insurable risks.
Internal Audit develops an annual audit program in consultation with management and the Audit, Risk and Compliance Committee which focuses on testing the efficacy of operational, financial and compliance risks. Regular reports are provided to the Board.
For the 2011 financial year, management have reported to the Board, in accordance with ASX Recommendation 7.2, as to the effectiveness of the Company’s management of the Group’s material business risks. The Managing Director/Chief Executive and the Chief Financial Officer
have provided assurance to the Board, in accordance with ASX Recommendation 7.3, that the declaration provided in accordance with Section 295A of the Corporations Act 2001 is founded on a sound system of risk management and internal control and the system is operating effectively in all material respects in relation to financial reporting risks. The Board notes that assurance from the Managing Director/Chief Executive and Chief Financial Officer can only be reasonable assurance rather than absolute. This is because of such factors as the need for judgement and limitations on internal controls.
Tatts will provide updates to its risk management framework on the Company’s website at www.tattsgroup.com/investors
Key policiesContinuous disclosure policyTatts is committed to complying with its continuous disclosure obligations under the Corporations Act 2001 and the ASX Listing Rules and releasing relevant information to the market and shareholders in a timely and direct manner.
The Board has adopted a policy which is designed to ensure that information which is not generally available and which may have a material effect on the price or value of the Company’s securities (price sensitive information) is identified and appropriately considered by the Board where relevant and senior executives for disclosure to the market. The policy is also designed to ensure accountability at a senior executive level for that compliance. The policy also sets out procedures which must be followed in relation to releasing announcements to the market and discussion with analysts, the media or shareholders.
A summary of the continuous disclosure policy is available on the Company’s website at: www.tattsgroup.com/investors. Tatts’ market announcements are also available on the Company’s website after they are released to ASX.
Whistleblower policyThe Board has adopted a policy which outlines the steps which Directors and employees should take if they have a genuine suspicion of improper conduct (as described in the policy) regarding Group activities.
A summary of the whistleblower policy is available on the Company’s website at www.tattsgroup.com/investors
Securities trading policy and remuneration hedging policyThe Board has adopted a policy which sets out the circumstances in which Directors and employees of the Group may deal in Company securities and enter
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into transactions in products which operate to limit the economic risk of holding the Company’s securities.
An overriding principle of the policy is that Directors and employees who possess price sensitive information must not deal in Company securities or enter into any transactions in risk limiting products. The policy specifies ‘blackout periods’ during which Directors and employees must not deal in Company securities or enter into transactions in risk limiting products, regardless of whether or not they are in possession of price sensitive information. The policy has limited exceptions (e.g. acquisitions under employee equity plans).
The Company has adopted a policy prohibiting key management personnel, their closely related parties and all other participants in any equity based incentive plan from entering into transactions which limit that individual’s economic exposure to risk relating to an element of remuneration that has not vested or which has vested but remains the subject of a holding lock or other disposal restriction.
Both these policies have been reviewed and changes made to ensure compliance with the revised ASX Listing Rules issued during the 2011 financial year and the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011.
A summary of each of the securities trading policy and the remuneration hedging policy is available on the Company’s website at www.tattsgroup.com/investors
Shareholder communication policyThe Board has adopted shareholder communication practices to promote effective communication, ready access to information and ease of participation in general meetings. The Company’s website (www.tattsgroup.com/investors) contains all relevant material (including its policy) and the Company will provide a simultaneous web cast of the Annual General Meeting.
Diversity policyThe Board is committed to managing and promoting a culture of diversity in the workplace and has adopted a diversity policy which can be found on the Company’s website at www.tattsgroup.com/investors
Code of ConductTatts is committed to promoting ethical and compliant behaviour among Directors and employees. To this end the Board has adopted a Code of Conduct applying to all Directors and employees. The Code promotes:
• actingwithhonesty,integrityandfairness;
• actinginaccordancewiththelaw;and
• usingtheGroup’spropertyandresourcesappropriatelywhich includes:
- promotion of confidentiality;
- avoidance of conflict of interest; and
- seeking effective and efficient outcomes for the Group.
The code of conduct can be found on the Company’s website at www.tattsgroup.com/investors
Chairman and Managing Director/ Chief ExecutiveThe Chairman is responsible for leading the Board, ensuring Directors are properly briefed on all matters relevant to their role and responsibilities, facilitating Board discussions and managing the Board’s relationship with the Group’s senior executives.
The Chief Executive (CE) is responsible for implementing Group strategies and policies.
The Board charter specifies that there must be clear division of roles between the Chairman and CE.
CommitmentThe Board held nine Board meetings during the year. The number of Board and Committee meetings held during each Director’s period of appointment and attended by each Director is disclosed on page 33.
The commitments of Non-executive Directors are considered by the Governance and Nomination Committee prior to a Director’s re-appointment to the Board and reviewed as part of performance assessment.
This Corporate governance statement should be read in conjunction with the Directors’ report and the Remuneration report (contained in the Directors’ report) as those reports also contain information required to be included by the ASX Recommendations.
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Directors’ report
Your Directors present their report on the consolidated entity consisting of Tatts Group Limited (the Company or Tatts) and the entities it controls (the Group) at the end of, or during, the year ended 30 June 2011.
DirectorsThe following persons were Directors of the Company during the whole of the financial year and up to the date of this Directors’ report:
Harry BoonDick McIlwainRobert BentleyLyndsey Cattermole AMBrian JamiesonJulien PlayoustKevin Seymour AM
Harry BoonChairmanNon-executive Director
Member of the Board since 31 May 2005.
Harry retired in 2004 as Chief Executive Officer and Managing Director of ASX listed company Ansell Limited, a position which capped a career spanning some 28 years with the Ansell Group. Harry has lived, and worked in senior positions, in Australia, Europe, the US and Canada, and has broad based experience in global marketing and sales, manufacturing, and product development. He is multi lingual and has a strong track record in delivering business results through setting ambitious goals, building the appropriate organisation and relationships and relentlessly pursuing objectives.
Harry holds a Bachelor of Laws (Honours) and a Bachelor of Commerce from the University of Melbourne.
Other current directorshipsHarry is a Non-executive Director of Toll Holdings Limited (Director since November 2006), PaperlinX Limited (Director since May 2008) and Hastie Group Limited (Director since February 2005), all ASX listed companies.
Special responsibilitiesChairman of the Governance and Nomination Committee.Member of the Remuneration Committee.
Former listed public company directorships in last three yearsGale Pacific Limited (August 2005 to November 2009).F
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Dick McIlwainManaging Director and Chief Executive
Member of the Board since 12 October 2006.
Dick is the Managing Director and Chief Executive of Tatts, previously having joined TattsBet Limited (TattsBet) (formerly UNiTAB Limited) as Chief Executive in 1989. He was appointed as a Director of TattsBet in September 1999.
Dick is a Fellow of the Australian Institute of Company Directors and holds a Bachelor of Arts from the University of Queensland.
Other current directorshipsDick is the Non-executive Chairman of Wotif.com Holdings Limited (Director since April 2006), an ASX listed company.
Former listed public company directorships in last three yearsSuper Cheap Auto Group Limited (May 2004 to October 2009).
Robert BentleyNon-executive Director
Member of the Board since 12 October 2006, previously having been appointed to the TattsBet Board in July 1999.
Bob has extensive business experience in the racing, pastoral and timber related industries and property development.
Bob was previously Chairman and Managing Director of Austral Plywoods Pty Limited and Chairman of the Plywoods Manufacturers Association of Australia, Chairman of the Three Codes Racing Industry Coordinating Committee and Chairman of the Statutory Thoroughbred Control Board (from 1992 to 1996).
Other current directorshipsBob is Chairman of Racing Queensland Limited, the Australian Racing Board and Sunshine Coast Racing Pty Ltd. He is an Executive Member of Harness Racing Australia and Vice President of the Asian Racing Federation.
Special responsibilitiesMember of the Governance and Nomination Committee.Member of the Remuneration Committee.
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Directors’ report continued
Lyndsey Cattermole AMNon-executive Director
Member of the Board since 31 May 2005.
Lyndsey was the founder and Managing Director of Aspect Computing Pty Limited from 1974 to 2003, and a Director of Kaz Group Limited from 2001 to 2004. Lyndsey has also held many board and other membership positions on a range of government, advisory, association and not for profit committees including the Committee for Melbourne, the Australian Information Industries Association and the Victorian Premier’s Round Table and as Chairman of the Women’s and Children’s Health Care Network.
Lyndsey holds a Bachelor of Science from the University of Melbourne and is a Fellow of the Australian Computer Society.
Other current directorshipsLyndsey is a Non-executive Director of Treasury Wine Estates Limited (Director since May 2011), which was demerged from Foster’s Group Limited, and PaperlinX Limited (Director since December 2010), both ASX listed companies. She also holds directorships with the Melbourne Theatre Company, the Victorian Major Events Company, JadeLynx Pty Limited, Madowla Park Holdings Pty Limited, MPH Agriculture Pty Limited, Catinvest Pty Limited and Melbourne Rebels Rugby Union Ltd. Lyndsey is also on the Advisory Board of PACT Group Pty Limited.
Special responsibilitiesMember of the Audit, Risk and Compliance Committee.
Former listed public company directorships in last three yearsFoster’s Group Limited (October 1999 to May 2011).
Brian JamiesonNon-executive Director
Member of the Board since 31 May 2005.
Brian Jamieson was Chief Executive of Minter Ellison Melbourne from 2002 to 2005. Brian retired as Chief Executive of Minter Ellison Melbourne on 31 December 2005. Prior to joining Minter Ellison, he was the Chief Executive Officer at KPMG Australia from 1998 to 2000; Managing Partner of KPMG Melbourne and Southern Regions from 1993 to 1998 and Chairman of KPMG Melbourne from 2001 to 2002. He was also a KPMG Board member in Australia, and a member of the USA Management Committee.
Brian has over 30 years of experience in providing advice and audit services to a diverse range of public and large private companies.
Brian is a Fellow of the Institute of Chartered Accountants in Australia. Other current directorshipsBrian is Chairman of Mesoblast Limited (Director since November 2007) and Sigma Pharmaceuticals Limited (Director since December 2005), and a Non-executive Director of Oz Minerals Limited (Director since August 2004), all ASX listed companies. Further, he is a Director and Treasurer of the Bionic Ear Institute and a Director of The Sir Robert Menzies Foundation.
Special responsibilitiesChairman of the Audit, Risk and Compliance Committee.Member of the Remuneration Committee.F
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Julien PlayoustNon-executive Director
Member of the Board since 21 November 2005.
Julien is Managing Director of AEH Group, a private investment company. His professional career includes Andersen Consulting and Accenture and he works across various sectors in capital structuring, mergers and acquisitions, strategy, change, technology and supply-chain programs.
Julien is a member of the Australian Institute of Company Directors, Australian Institute of Management, Royal Australian Institute of Architects and The Executive Connection.
Julien holds a Masters of Business Administration from AGSM, Bachelor of Architecture, First Class Honours and Bachelor of Science from Sydney University, and a Company Director Course Diploma from Australian Institute of Company Directors.
Other current directorshipsJulien is Chairman of MCM Entertainment Group Limited (Director since May 2010) and a Non-executive Director of Australian Renewable Fuels Limited (Director since April 2009), both ASX listed companies. He is a Director of private equity company MGB Equity Growth Pty Limited. He is also Trustee of the Art Gallery NSW Foundation, Director of the National Gallery of Australia Foundation and on the Advisory Board of The Nature Conservancy.
Special responsibilitiesChairman of the Remuneration Committee.Member of the Audit, Risk and Compliance Committee.Member of the Governance and Nomination Committee.
Kevin Seymour AMNon-executive Director
Member of the Board since 12 October 2006, previously having been appointed to TattsBet’s Board in September 2000.
Kevin is Executive Chairman of Seymour Group, which is one of the largest private property development and investment companies in Queensland. He has substantial experience in the equities market in Australia. Kevin also has extensive management and business experience including company restructuring.
Kevin was previously the independent Chairman of the Queensland Government and Brisbane City Council’s Brisbane Housing Company Limited and Chairman of QCTV (formerly Briz31 Community TV) and has served on the Lord Mayor’s Drugs Taskforce and is an Honorary Ambassador for the City of Brisbane.
Other current directorshipsKevin is Chairman of Watpac Limited (Director since May 1996) and Deputy Chairman of Ariadne Australia Limited (Director since December 1992), both ASX listed companies. He also holds board positions with several private companies in Australia.
Special responsibilitiesMember of the Audit, Risk and Compliance Committee.Member of the Governance and Nomination Committee.
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Directors’ report continued
DividendsThe Board continues its previously indicated commitment to maintaining a high dividend payout ratio. The total dividend paid or payable in respect of this year is 21.5 cents per share, reflecting 102.3% of net profit after tax (NPAT) being paid as a dividend to shareholders. The final dividend of 11.0 cents per ordinary share has been determined since the end of the financial year, and is payable on 5 October 2011. The following dividends have been paid, determined, declared or recommended by the Company since the end of the preceding financial year:
Dividends $000
Final dividend 2011Fully franked final dividend for 2011 of 11.0 cents per ordinary share as determined by the Directors on 25 August 2011 with a record date of 7 September 2011 and payable on 5 October 2011 145,056
Interim dividend 2011Fully franked interim dividend for 2011 of 10.5 cents per ordinary share as determined by the Directors on 24 February 2011 with a record date of 8 March 2011 and paid on 6 April 2011 136,615
Special dividend 2010Fully franked special dividend for 2010 of 11.0 cents per ordinary share as determined by the Directors on 26 August 2010 with a record date of 7 September 2010 and paid on 1 October 2010 141,024
All dividends are fully franked.
Dividend Reinvestment PlanThe Company has a Dividend Reinvestment Plan (DRP) in operation. The last date for receipt of a DRP Notice of Election to enable participation for the final dividend is 7 September 2011. A 1.5% discount is applicable to shares acquired under the DRP for this dividend. Shares acquired by a participant under the DRP will be provided via a share issue.
Further information in relation to dividends can be found in Note 27 to the financial statements.
Principal activitiesThe principal activities of the Group during the financial year consisted of:
• theoperationofregulatedlotteriesinVictoria,Queensland,NewSouthWales,Tasmania,AustralianCapitalTerritoryand the Northern Territory;
• theconductofwageringandsportsbettingbasedinQueensland,SouthAustraliaandtheNorthernTerritory;
• theoperationoflicensedgamingmachinesinVictoria;
• theconductofgamingmachinemonitoringandsupplyofjackpotandothervalueaddservicesinQueensland,NewSouth Wales and the Northern Territory. In New South Wales this includes exclusive licences to operate inter-venue linked jackpots;
• theprovisionofthirdpartyinstallation,repairandmaintenanceservicesforgaming,wagering,lottery,banking,pointof sale and other transactional equipment and systems throughout Australia; and
• theoperationoflicensedgamingvenuesthroughouttheUnitedKingdom.
Financial positionReported Group revenue for the year ended 30 June 2011of $3,669.3 million was up 11.3% on the previous year. The reported growth incorporates the inclusion of 12 months revenue from NSW Lotteries in the 2011 results compared to three months revenue in the 2010 results following the acquisition of NSW Lotteries on 31 March 2010. Reported Group NPAT for the year ended 30 June 2011 of $275.4 million was up 130.8% on the previous year.
Reported NPAT for the previous year was impacted by the non-cash adjustment to the carrying value of the investment in Talarius and additional amortisation for Maxgaming software, along with other one-off business restructuring costs, which included the costs associated with NSW Lotteries integration, venue closure costs in Talarius and the sale of the South African gaming business.
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Reported NPAT for the current year was impacted by accelerated amortisation for redundant software following the rollout of the new lottery system in Victoria, further restructuring costs associated with the NSW Lotteries integration, and changes in the UK tax rate.
After adjusting for these one-off items in the current and previous years, underlying NPAT for the current year of $279.5 million was 1% down on the previous year.
During the year, the bank debt facility that was due to expire in June 2011 was refinanced through a combination of refinancing with the existing bank debt syndicate in March 2011 and a US Private Placement debt raising in December 2010, taking total committed facilities for the Group to $1,691.4 million. The Group’s bank debt maturities now occur in March 2013, June 2013, March 2014, March 2015 and March 2016, with the US Private Placement Notes set to mature in December 2017 and December 2020.
At 30 June 2011, $1,280.3 million of these total debt facilities were drawn down. When netted against the Group’s cash holdings (excluding prize reserves), Group net debt at 30 June 2011 of $1,189.8 million represents a readily serviceable net debt burden relative to its annual business profitability and cash flows. These business cash flows not only fully fund the high dividend payout ratio the Group maintains, but together with the cash to be received from the sale of our second hand Victorian gaming machines of in excess of $60 million at licence expiry, will ensure the Group stays comfortably within appropriate credit metrics as the Tatts Pokies business shuts down in August 2012. These strong cash flows also underpin the Group’s significant levels of intangible assets that are a characteristic of the low tangible assets, high value networked gambling businesses comprising the Group.
Review of operationsThe Group is a diversified portfolio of neighbourhood businesses relying on wide area network technology to deliver services to its customers in wagering, lotteries, gaming, gaming services, technical maintenance and support services. The Group typically achieves consistent and reliable revenue through utilising technology solutions to deliver high volumes of low average value transactions through a widely dispersed distribution network. The Group has operations across every State and Territory in Australia, and in the United Kingdom.
Tatts Lotteries benefited from a full 12 months contribution from NSW Lotteries to deliver revenue growth for the year of 31.2% to $1,605.0 million. Saturday Lotto, which represented 41% of sales revenue for the year, was up 30.7%, whilst growth for Powerball and Oz Lotto was restricted to 17.4% and 13.1% respectively following the abnormally lower jackpot activity experienced during the year. With the ongoing successful integration of the NSW Lotteries business, earnings before interest and tax (EBIT) for Tatts Lotteries was up 34.4% to $175.0 million for the year.
The sustained success of TattsBet’s fixed price betting offering has seen the continuance of the product mix shift. Fixed price betting revenue was up 138.1% on racing for the year, which was correspondingly the major contributor to the totalisator revenue decline of 8.8% as customers shifted their betting preferences. Fixed price sports betting revenue was up 23.4% for the year to $26.5 million. TattsBet’s sales revenue was up 0.7% for the year, with total revenue declining 0.2% to $593.0 million and EBIT down 3.5% to $123.6 million for the year. The result was impacted by significant adverse weather conditions resulting in race cancellations and diminished race field quality, along with reduced revenue from overseas operators following a decision to increase the fee structures on these operations.
Tatts Pokies revenue was up 0.3% to $1,226.7 million for the year to 30 June 2011. This was a solid result in an industry feeling the impacts of industry structural change and continued regulatory debate. Delayed investment in gaming floors from the longer than anticipated sale process of gaming machines added to this. EBIT of $199.0 million was up 3.7% on the previous year, benefiting from further cost management, and from reduced depreciation following the forward sale of essentially the entire network of gaming machines as the business approaches the end of its operating licence in August 2012.
Maxgaming’s continued investment in value add services has seen it maintain Queensland market share above 80%, extend its Northern Territory monitoring licence for a further five years, and secure longer term monitoring agreements with major hotel groups. However, in the 2011 financial year revenue was down 4.2% to $116.8 million as Maxgaming experienced a challenging operating environment, with the uncertainty over pre-commitment slowing sales of Maxgaming’s Simplay player tracking system and impacting on the demand for other value adds, (including State-wide linked jackpots), and from the Queensland floods and cyclones. EBIT was up 129.3% to $39.6 million, with underlying EBIT (after adjusting for the one-off amortisation charge in the previous year) down 7.2%.
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Directors’ report continued
Bytecraft Systems has again continued its recent success in expanding its pipeline of externally generated revenue, which today represents over 60% of Bytecraft’s total revenue, along with ongoing support services provided to the Group. As a result, revenue was up 16.0% to $91.4 million, with EBIT of $6.7 million up 40.3% on the previous year, again including the impact of the absence of margins on internal Group services.
Talarius’ operations in the United Kingdom (UK), consisting of 170 venues with 7,383 gaming machines at 30 June 2011, are beginning to see some benefit from last year’s restructuring. Despite the continued soft economic conditions in the UK, Talarius has delivered revenue of £45.4 million, with gross machine income up 0.6% on a like for like basis. The contribution of Talarius to the Group results has however been significantly impacted by the strong Australian Dollar, resulting in reported revenue of A$72.3 million down 19.0% and a zero EBIT outcome. This EBIT result was nevertheless a significant improvement on the A$22.0 million reported loss (underlying loss of A$4.0 million) in the previous year. Significant changes in the state of affairsThere were no significant changes in the state of affairs of the Group during the year.
Matters subsequent to the end of the financial yearOn 19 July 2011, the Victorian Minister for Gaming announced that the Group had not been successful in its bid to be awarded the Victorian Wagering and Betting Licence. Other than as stated elsewhere in this Directors’ report, no matters or circumstances have arisen since 30 June 2011 which have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in future financial years.
Likely developments and expected results of operationsIn June 2011 the South Australian government announced its intention to award a licence to third parties to operate the lottery in South Australia, on its behalf. This process has not been finalised at the date of this Directors’ report, and it is likely that further information will be made available during the 2012 financial year.
Maxgaming has applied for the licence to extend its monitoring operations into Victoria in 2012. This process has not been finalised at the date of this Directors’ report, and it is likely that further information will be made available during the 2012 financial year.
Whilst the Tatts Pokies business will conclude on 15 August 2012, in the periods up to that date Tatts Pokies’ profitability is to be enhanced by venue based investment in revenue growth and no gaming machine depreciation being charged which arises from the forward sale of electronic gaming machines. Any return to normal jackpot levels and technology integration at NSW Lotteries can be expected to contribute to margin improvement from Tatts Lotteries. TattsBet’s investment in online and retail distribution technologies, an extended range of fixed price betting options and a recovery in service fees from overseas operations are designed to grow revenue and profitability.
Maxgaming and Bytecraft are expected to continue to generate their good profit margins, with Bytecraft expected to continue to grow its external contract business, whilst the improvements at Talarius, combined with favourable regulatory changes, are expected to grow its contribution to the Group.
In the Directors’ opinion, any further disclosure of information would be likely to result in unreasonable prejudice to the Group.
Business strategies and future developmentsBusiness strategies aimed at achieving the Group’s goals will include:
• optimisingourexistinglicencesandunderlyingbusinessestoachievecontinuedgrowthandoperationalefficiencies;
• involvementtotheextentappropriateinthesaleprocessesofStategovernmentorprivatelyownedgamblingassets;
• continuingtomanagetheGroup’sportfolioofgambling,entertainmentandservicesbusinessessoastomaximiseshareholder value; and
• maintainingaflexiblebalancesheettosupportbusinessopportunitiesthatfitwiththeGroup’scorecompetencies.
In the Directors’ opinion, any further disclosure of information would be likely to result in unreasonable prejudice to the Group.
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Environmental regulationThe operations of the Group are not subject to any particular and significant environmental regulation under any law of the Commonwealth of Australia or any of its States or Territories.
Directors’ interests in sharesThe relevant interest of each Director in the share capital of the Company at the date of this Directors’ report is as follows:
Relevant Interest in Options Over Rights Over Director Ordinary Shares Ordinary Shares Ordinary Shares
Harry Boon 150,000 Nil NilDick McIlwain 1,947,500 2,000,000 500,000Robert Bentley 160,000 Nil NilLyndsey Cattermole 182,663 Nil NilBrian Jamieson 80,943 Nil NilJulien Playoust 176,000 Nil NilKevin Seymour 14,000,000 Nil Nil
Executive Directors are the only Directors entitled to participate in the Group’s incentive plans. Details of these interests are disclosed in the Remuneration report which appears on pages 33 to 49 of this report.
Company SecretaryPenny Grau was appointed to the position of Company Secretary on 3 April 2007. Prior to this appointment, Penny practised as a corporate lawyer for 18 years, the last eight years as a partner with national law firm Clayton Utz. Penny holds Bachelors of Laws and Commerce, a Master of Laws and a Graduate Diploma in Applied Finance and Investment.
Meetings of DirectorsThe number of scheduled Board meetings and meetings of Board Committees, and the number of meetings attended by each of the Directors of the Company during the year were:
Board of Directors Meetings
Audit, Risk and Compliance
Governance and Nomination Remuneration
A B A B A B A BHarry Boon 9 9 nm nm 3 3 5 4Dick McIlwain(a) 9 9 nm nm nm nm 5(b) 4(b)
Robert Bentley 9 8 nm nm 3 3 5 5Lyndsey Cattermole 9 9 4 4 nm nm nm nmBrian Jamieson 9 9 4 4 nm nm 5 5Julien Playoust 9 9 4 4 3 3 5 5Kevin Seymour 9 8 4 3 3 2 nm nm
Column A – Number of meetings during the year.
Column B – Number of meetings attended by the Director as a member during the year.
nm – Not a member of the relevant committee.
(a) Managing Director, not a Non-executive Director.
(b) Not a member of this committee but can be invited by the committee.
Remuneration reportSection A – Remuneration overviewThis Remuneration report describes the Group’s framework and policy for remuneration, and discloses remuneration arrangements and payments in the form of cash and equity for key employees. The Group recognises that employees who are highly motivated and aligned with shareholders’ interests are critical to the success of the business. The Group’s remuneration structure is designed to recruit, retain and fairly reward high calibre employees while ensuring an appropriate balance and alignment between employees’ and shareholders’ interests. The remuneration framework is regularly reviewed and refined to seek the best balance for a company which operates multiple businesses within a variety of employment markets.
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Directors’ report continued
The key remuneration outcomes for the reporting period are as follows:
• Fixedannualremuneration(FAR)willincreaseinSeptember2011byanaverageof3.8%acrosstheGroupconsistent with maintaining a market benchmark position.
• Incentivesforemployeeswererefocusedtobemoreflexibleandrelevant.Thepreviouslongtermincentive and short term incentive schemes were discontinued and replaced by a benchmarked incentive that can be paid as cash and, for certain senior executives, a mixture of cash and restricted equity.
• Incentivepaymentstotalling$2.9millionwillbemadetoemployees(excludingtheManagingDirector/ChiefExecutive) based on the achievement of Group-wide targets for year-on-year revenue growth, management of costs and capital, and the achievement of key performance indicators (KPIs) relating to successful performance in each Strategic Business Unit (SBU) and Shared Services Division (Division). $2.5 million of this will be cash payments, and $0.4 million in rights.
• Duringtheyear65.44%ofthe2007financialyeartrancheofoptionsandrightsvested,being23,935rights,and361,445 options at an exercise price of $3.65. 72.06% of the 2008 financial year tranche of options also vested, with an exercise price of $3.99. In both cases the exercise prices of the options are significantly above the current share price and so none have been exercised.
• TotalremunerationfortheManagingDirector/ChiefExecutivewas$2,891,313.Thisamountincludesashorttermincentive plan (STIP) bonus of $550,000 and an amortised cost for his unvested options and rights of $236,111. No change has occurred in his contractual remuneration arrangements.
The information provided in this Remuneration report has been audited as required by section 308 (3C) of the Corporations Act 2001.
Section B – Remuneration policyThe Board’s objective is to deliver rewards consistent with the responsibilities and performance of executives and link remuneration to financial performance and shareholder value. The Group’s remuneration structure achieves relevance for employees by balancing incentives between corporate, SBU/Division and individual performance whilst ensuring alignment with shareholders through corporate measures and KPIs that drive business value. FAR or base salary (including superannuation) is set for each position around the mid-point of the market for similar positions around Australia, although there remains the flexibility to remunerate at other market points if necessary to attract suitably talented employees and/or to accommodate specific industry requirements.
This year, the fixed target STIP and long term incentive plan (LTIP) structures have been replaced by incentives that are externally benchmarked annually to ensure that target incentives remain competitive and appropriate. The Group’s policy for incentive target levels is similar to that for FAR in that it is to generally set target incentive levels around the mid-point of the market as externally benchmarked, with the amount of actual incentives paid depending on business and individual performance. Some additional bonuses may be paid for achievement of significant outcomes. The Board has instituted an incentive scheme that better links the business value drivers for the Group of revenue growth, cost and capital management (the business drivers that generate total return to shareholders), and strategically significant initiatives, to the incentives payable to employees. This alignment between management incentives and business value drivers is further enhanced by paying incentives for certain senior managers and executives as a combination of cash and rights that can be exercised into shares after 12 months, with a further two years of locked equity, thereby providing direct alignment with shareholder interests over a three year period.
This approach provides shareholders and employees with a very transparent, simple and relevant remuneration methodology and reporting framework. The Remuneration report will disclose the amount actually paid to employees annually with no complex leveraged equity components, and employees have a basis for remuneration which is more readily understood and relevant to their work outputs.
These arrangements apply to domestically based employees and the Chief Executive of the UK business. The Group’s other UK employees operate under FAR and annual bonus structures that are similarly benchmarked to mid-market levels in that jurisdiction.
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Section C – Remuneration CommitteeThe Remuneration Committee aims to ensure the Group has appropriate remuneration policies and procedures that fairly and responsibly reward executives. The Committee operates under the delegated authority of the Board and comprises four Non-executive Directors (one of whom is the Committee Chair). The Managing Director/Chief Executive is invited to attend at the request of the Committee, but does not take part in the Committee’s decisions, and nor is he present when his remuneration is discussed.
Remuneration Committee
Name Position Member from
Julien Playoust Chairman March 2006Brian Jamieson Member August 2005Robert Bentley Member November 2006Harry Boon Member November 2009
The Board will ensure a Non-executive Director continues to chair this Committee. The areas of responsibility of the Remuneration Committee include advising on the following:
• Non-executiveDirectorremuneration;
• ManagingDirector/ChiefExecutiveperformancereview,fixedandvariableat-riskincentiveremuneration;
• executiveremunerationandallocationsofincentives/variableat-riskremuneration;
• employeeequityplans;
• remunerationdisclosure;
• executiverecruitment,terminationpolicies,andarrangementsforsuperannuationandsuccession;and
• riskmanagementandcontrolsregardingremuneration.
Section D – Non-executive DirectorsFees to Non-executive Directors are set at levels that fairly reflect the size and complexity of the Group’s operations and the demands which are made on, and the responsibilities of, the Directors. Fees are reviewed annually by the Board to ensure they are appropriate and consistent with market practice. Non-executive Directors’ fees are determined within an aggregate fee pool limit, any increase to which requires shareholder approval. The current maximum total Non-executive Directors’ fee pool is $1.5 million per annum.
Fees are paid as follows and comprise cash and statutory superannuation.
Chairman of Board $370,000 (2010: $319,560)
Non-executive Directors $150,000 (2010: $144,000)
Membership of Audit, Risk and Compliance Committee and Remuneration Committee Additional $7,500 per committee membership (2010: $Nil)
Chairman of Audit, Risk and Compliance Committee Additional $25,000 (2010: $20,900)
Chairman of Remuneration Committee Additional $20,000 (2010: $13,062)
Non-executive Directors are expected to hold shares in the Company at a level determined by the Board from time to time. Any person invited to join the Board will enter into an Appointment Agreement setting out the Director’s duties, rights, responsibilities and the terms and conditions associated with that appointment.
Non-executive Directors receive no non-monetary benefits nor are there any retirement benefit schemes other than statutory superannuation contributions. Section E – Executive remuneration structureThe aim of the Group’s executive remuneration structure is to ensure that the overall remuneration of executives reflects their responsibilities and experience, and importantly, to align their incentives with the Group’s performance goals and business drivers that increase shareholder value.
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Directors’ report continued
The Group is committed to adhering to appropriate corporate governance standards for executive remuneration, having regard to the ASX Corporate Governance Council’s Recommendations and relevant stakeholder bodies.
For financial year 2011 the following components comprised the total annual reward (TAR) framework for executive and employee remuneration:
• FARcomprisingbasepayandsuperannuation;and
• performance-basedincentivesbenchmarkedexternallywiththepaymentofsuchincentivesbasedonbusiness and individual performance.
Prior to this year, incentives consisted of a fixed target STIP and LTIP which have now been replaced by a market benchmarked, flexible and effective incentive structure. Details of grants made in previous years under the LTIP and ongoing testing and vesting arrangements are provided later in this report.
(i) Fixed annual remunerationFixed annual remuneration (FAR) for salaried employees is determined by the scope and size of the role and the level of skill and experience of the individual, in conjunction with a performance rating framework that assesses an individual’s performance over the preceding 12 month period. The Group aligns executive FAR at or above the 50th percentile of the executive employment market. FAR is reviewed annually and adjusted subject to market movements, Group profitability, and individual performance.
The Group uses the nationally recognised Aon Hewitt (Hewitt) job evaluation system to assess the scope and size of roles against which industry benchmarking is carried out and internal relativities maintained. The Hewitt survey base for these purposes is an Australia-wide all industries database of businesses to provide relevant job point relativities to roles within the Group. Individual performance is assessed by reference to a set of key performance areas which include financial and non-financial measures. The weighting attributed to these performance areas will vary depending on the individual’s role.
Salary adjustments are made after assessment of an employee’s positioning relative to the market range for the type of position held, and an individual’s performance rating.
The performance rating for all employees including each executive is determined through an annual performance review conducted by the manager to whom the employee reports. In the case of the named executives in this report, the review is conducted by the Managing Director/Chief Executive and tabled before the Remuneration Committee, and the Chairman of the Committee, on behalf of the Committee, reviews the Managing Director/Chief Executive’s performance. Reviews are conducted against individual KPIs and accountabilities and goals specific to each executive’s responsibilities. Performance is then rated according to an achievement scale and weighted in line with the relative importance of the respective performance areas. Scores are aggregated to arrive at an overall individual performance rating.
There are no guaranteed base pay increases in any executive contracts of employment.
(ii) Performance-based incentivesThe Board has recognised that the incentive structure that operated previously had limited effectiveness in generating remuneration outcomes to appropriately motivate employees for higher performance to improve business results and therefore shareholder value. The Group operates in a highly regulated industry, and government decisions that adversely impacted shareholders and employees alike have shown the previous incentive structure to lack appropriate flexibility to adapt to such events. The incentive structure adopted for the 2011 financial year and onwards is a better reflection of the nature and business model of the Group and its industry. It has stronger links to the drivers of successful company performance and greater flexibility to offer incentive targets and outcomes that remain comparable with the market.
The amount of the potential incentive for each position in the Group will be determined annually with reference to benchmark surveys across Australian businesses and industries provided by Hewitt. Target incentives for each role will be set at or above the 50th percentile of the market, consistent with the policy position for FAR. This establishes the maximum potential incentive pool available each year. Target incentives will be reviewed annually in line with data from the Hewitt surveys.
Permanent employees will participate in an annual incentive scheme which recognises their capacity to influence the annual operating and financial results and their contribution to other special achievements as appropriate. This scheme is an important part of a remuneration package designed to attract and motivate employees.
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(a) Setting the incentive amountThe actual quantum of incentive paid to an individual will be based on:
• Group-wideperformance;
• SBU/Divisionperformance;
• specialprojects/responsibilities;and
• individualperformance.
The key value driving components of the Group, and therefore the criteria for consideration of an incentive amount, are:
• revenuegrowth;
• EBITmargingrowth–tocalibraterevenuegrowthbycostcontrol;and
• EPSgrowth–toreflectthecapitalmanagementoftheGroup.
The nature and level of the annual Group revenue, as the key value determinant, is influenced by a number of variables that are largely outside management control, such as regulatory and macro-economic factors, as well as the vagaries of the occurrence of lottery jackpots. Therefore, to focus employees on a revenue based incentive structure that reflects this specific industry feature whilst ensuring that it drives shareholder value creation, the Board has determined that an appropriate incentive range for revenue is one that starts at 96.5% of the level achieved by the same business portfolio of the Group in the previous year and with the maximum incentive amount potentially available when annual revenue reaches 105% of the previous year’s revenue.
However, whilst an incentive pool begins to be calculated at the 96.5% level, the Board has determined that no incentive pool will form and no incentive payments will actually be made (subject to Board discretion as outlined below), where revenue falls below the qualification requirement of 98% of the revenue achieved in the previous year, reflecting the Board’s assessment of the appropriate point of both shareholder and employee value generation. The annual revenue growth will be suitably adjusted for acquisitions, divestments, and major business changes to ensure the appropriate revenue outcomes form the incentive pool.
The incentive pool available when the revenue hurdles are applied is then adjusted up or down for the percentage changes in the Group EBIT margins and in the earnings per share. This determines the total available for distribution to qualifying employees.
Group-wide performanceApproximately 40% of the total incentive pool is used to reward all qualifying employees for their collective contribution to Group-wide performance measured in accordance with the criteria noted above. The allocation of this amount among staff is determined on a pro-rata basis according to FAR, adjusted as appropriate by the individual’s performance review.
SBU/Division performanceThe remaining 60% is split amongst the Group’s SBUs and Divisions. This process adds a number of more qualitative principles to the financial hurdles described above when determining the respective allocations to employees in the SBUs/Divisions. It also considers those personnel, if any, that qualify under the special projects/responsibilities incentive component (see below). If an incentive pool does not form due to the Group’s financial performance not achieving the levels outlined above, the Board may exercise discretion to determine incentive(s) for specific SBUs/Divisions that individually perform strongly against their KPIs.
This incentive component may be granted depending on achievement of KPIs that are set annually for each SBU/Division, with performance assessed by the Managing Director/Chief Executive against the targets and weightings applied to these KPIs. The KPIs will vary for each SBU/Division depending on the critical factors for that business or function. These will include both financial and non-financial matters, such as:
• revenuegrowthagainstbudgetandpreviousyear;
• costcontrolandimprovement,includingcostperformanceagainstbudgetandpreviousyear;
• marginimprovement(EBITDAmargintorevenue)achievedbytheSBU;
• developmentandintroductionofsuccessfulnewproducts;
• structuralchangethataddstoprofitability;
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• efficientcapitalexpenditureoutcomesandassetsalesactivity;
• servicedeliveryassessmentbyinternalcustomersofsharedserviceactivities;and
• deliveryofsignificantSBU/Divisionprojectswithincostandtimeexpectations. Special projects/responsibilitiesThe third component of the incentive relates to the level of performance by certain individuals in the achievement of special projects, and of individuals within the Group whose activities more directly influence the share price, investor perspectives, and longer term value of the Group.
Special projects would encompass major technology, business specific, or Group-wide projects designed to add value through substantial revenue enhancement, improved cost efficiency, or business sustainability/competitiveness. These initiatives may relate to delivery of projects on time and in a cost effective manner, or to the successful implementation above originally expected outcomes.
Such incentives, if any, will be incorporated within the 60% SBU/Division allocation, and will be determined by the Remuneration Committee.
Individual performanceIndividual performance ratings will influence the extent of participation of each employee in the total incentive to be paid annually by the Group. As described under FAR above, performance reviews are conducted and performance ratings are assigned annually. The amount of incentive payment for any individual, if any, will be determined by the Remuneration Committee at year end, based on Group-wide and SBU/Division performance outcomes and special projects/responsibilities as appropriate, and impacted by individual performance ratings.
(b) Determining performance incentivesWhilst FAR and individual performance ratings will influence the overall incentive allocations to individuals, these allocations are reviewed to ensure that equity, relativity and any outstanding achievement is recognised where needed to better reflect relative contributions of individuals.
Incentives are paid in cash except in circumstances where the Remuneration Committee forms the view that a qualifying executive occupies a role which has the capacity to influence long term value and the share price. This group currently represents less than 1.5% of the full time equivalent employee workforce, or fewer than 30 employees.
This group is required to take up to half of their incentive in restricted equity. These equity incentives cannot be traded for three years in accordance with the details outlined in the next section of this report. The purpose of the restriction is to further align influential employee interests with those of our shareholders.
(c) Equity-based incentivesExecutives and senior managers who have greater potential impact on share price and long term value generation will receive part of any incentive awarded as cash and part as rights to restricted shares. The rights will be able to be exercised into restricted shares 12 months after grant provided the executive remains employed with the Group, otherwise they will be forfeited (subject to Board discretion). Once the shares are acquired, they will be placed in a restricted class and employees will be required to retain them for a further two years. This achieves the aim of directly aligning employee and shareholder interests in that any movement of the Group’s share price or any change in dividends during this time is equally felt by the relevant executives and the shareholders. Rights granted under this plan will be priced at the Volume Weighted Average Price (VWAP) of the 10 trading days prior to the day the Remuneration Committee decides to recommend to the Board that it award them. This approach puts shares in the hands of executives at current values reflecting current performance, with the ultimate value depending on executives’ performance in driving capital and income growth for the Group in the subsequent three years. The result is direct alignment with the interests of the Group’s shareholders.
This approach also provides to shareholders a much more transparent disclosure regime of the Group’s remuneration in that:
• itutilisesaveryclearandpubliclyverifiablepricingstructureforequity-basedremuneration,beingthe10dayVWAP,compared to the opaqueness of option-based pricing models under the previous approach;
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• flowingfromthis,theannualremunerationtablesintheRemunerationreportwillreflecttheamountsactuallypaidinrespect of the financial year, not an amortised cost amount for equity-based awards (once the previous remuneration system’s awards have fully transitioned out); and
• shareholderscanmorereadilyunderstandthelevelsofequityexposureofemployeeswhichisnotnecessarilythecase with options and rights with their differing vesting and exercise criteria.
(d) Transitional arrangements for new incentive approachThe transition to this new remuneration structure, including both the newly benchmarked FAR and the new incentive component based on benchmarked market data, will be managed over a number of years. A specific transitional feature will be a temporary provision under which the Remuneration Committee may generally determine that a Group-wide incentive allocation will not be paid unless the net profit after tax (pre any incentive allocation) increases on the previous year’s net profit after tax on the same basis.
In this transition, existing LTIP grants will remain until each tranche expires. In addition, the Managing Director/Chief Executive’s contractual remuneration arrangements will not be affected by these new remuneration structures.
Particularly in transition, but also on an ongoing basis, the Board retains the discretion, at the advice of the Remuneration Committee, to pay incentives at levels and in compositions appropriate to outcomes, even where these are outside market related benchmarks.
(e) Special circumstances incentiveThe Board has reserved the right to consider special achievements when determining the amount payable in incentives. Refinancing packages and substantive acquisitions are examples where bonuses were previously paid for special achievements. This amount can be sourced from within or outside the normal incentive pool.
Special circumstances incentives will only be paid, at the discretion of the Board, where very significant Group changing and/or Group defining events occur. Special circumstances might relate to a major business acquisition, an accelerated integration of an acquisition, a well-structured and profitable/cost minimising asset/business disposal, or an extraordinary Group profit outcome. Any payments of this nature will be in the form of cash. If no such qualifying events occur, there will be no such payments.
Special circumstances incentives may be paid along with other incentives at year end, or may occur at the completion of a specific project. In this financial year there were and/or will be a total of $0.16 million paid of such incentives outside the normal incentive pool in relation to the successful forward sale of the Group’s electronic gaming machines.
(iii) Long term incentive plan pre 2011 financial yearAnnual grants under the Group’s long term incentive plan (LTIP) were made from 2005 to 2009. With the exception of grants to the Managing Director/Chief Executive as approved by shareholders, no grants were made to executives in 2010 and no further grants will be made as this plan has been replaced by the incentive scheme described above. The LTIP, whilst closed to any further grants other than those approved by shareholders to the Managing Director/Chief Executive, will continue until all grants are exercised or they lapse by 2016. No changes have been made to the vesting or exercise conditions of such grants as outlined in previous Remuneration reports.
Vesting conditions for performance options and/or performance rights granted in 2005, 2006 and 2007 were based on performance against relative total shareholder return (TSR) targets. For the grants of 2008 and 2009, vesting was based on relative TSR performance and on achievement of earnings per share (EPS) improvement targets to be achieved over three years.
The relative TSR condition requires the Group’s performance to exceed the performance of the median company in its peer group for any vesting to occur. If this is achieved, 50% of instruments vest, if the Group’s performance reaches the fourth quartile of its peer group, 100% of instruments vest, and a proportion of instruments vest for performance between these points.
The vesting targets for EPS improvement that were set at the time of grant were 25% for the three years from 2008, and 16% for the three years from 2009. The EPS measure for the 2009 grant excludes the Tatts Pokies segment net profit after tax, due to the run-off of this business by 2012. If the EPS target for a grant is met, then all rights and/or options tied to the EPS condition will vest. No vesting occurs if the target is not met.
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Directors’ report continued
To date 192,054 performance rights and 2,803,548 performance options have vested with 84.72% of the 2005 grant (for which there is no further retesting), with 65.44% of the 2006 grant and 72.06% of the 2007 grant vesting. Shares issued after options and rights vest and are exercised are placed in a restricted class under the LTIP until the employee requests to sell them.
Options, rights, and shares held in a restricted class may be subject to forfeiture if a participant commits any act of fraud, defalcation or gross misconduct in relation to the Group.
Since the options vested, the share price has remained below the exercise prices set at time of the grant, and so no options have been exercised. Section F – Managing Director/Chief Executive’s remuneration structureUnder the terms of the Managing Director/Chief Executive’s contract, the remuneration structure to apply for the three years from 12 October 2009 to 12 October 2012 is:
• FARcurrentlyof$2.09millionperannumtobereviewedannuallybytheBoardinaccordancewithnormalremunerationpractices.
• STIPentitlementofuptoamaximumof70%ofFAR,subjecttoachievementofkeyperformanceindicatorssetannually and as approved by the Board.
• LTIPof250,000performancerightsissuedeachyearofthethreeyearcontractinOctoberof2009,2010and2011.The issue of each tranche of performance rights received shareholder approval under ASX Listing Rule 10.14.
The incentive structures for the Managing Director/Chief Executive remain unchanged from those set out in the contract that commenced in 2009.
The STIP entitlement is based on KPIs of financial performance (measured as for the incentive structure for all employees in the Group described earlier), and other specific performance requirements for the position (which include strategic value-adding initiatives, leadership development and succession, Board communication and efficiency facilitation, and stakeholder management). For the LTIP entitlement, 50% of the performance rights are subject to an EPS performance condition, and 50% to a TSR performance condition. The TSR performance condition is as described earlier for the Group’s LTIP. The EPS performance condition for the 2009 and 2010 grants is that EPS improve by 16% (excluding Tatts Pokies) over the three years from the start of the respective financial year in which the grant is made. TSR performance conditions are tested for vesting after three years and retested twice more at six month intervals. The EPS performance condition is tested once at the end of three years. The Managing Director/Chief Executive has 90 days after the last date for vesting to exercise vested performance rights.
Section G – HedgingEmployees who receive incentives in the form of rights, options or shares (and closely related parties of key management personnel) may not enter into any contract, arrangement or transaction which is designed or intended to hedge or otherwise limit economic exposure to the risk relating to the Group’s shares which are subject to an unvested award or a vested award subject to a holding lock or other disposal restriction under any employee incentive plan. Any person who is proven to have contravened the hedging policy may face disciplinary action which, depending on the seriousness of the breach, could include termination of employment.
Section H – Employee share planThe general share acquisition plan was an employee share plan by which offers were made to eligible employees to acquire restricted shares. The plan was discontinued as at 1 July 2007. These shares have been placed in a restricted class, to ensure they cannot be disposed of whilst subject to a disposal restriction and/or forfeiture condition.
Section I – Service agreementsThe employment conditions of the Managing Director/Chief Executive, Dick McIlwain, and specified executives are formalised in contracts of employment. Other than the Managing Director/Chief Executive, all other executives are employed under contracts of no fixed duration.
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Termination Payment Benefits (Other than Termination for Gross Misconduct or Retrenchment)
Name Term of Contract Period of Notice Amount of Payment1
D McIlwain Three year term contract – commenced on 12 October 2009
Written notice for the lesser of 12 months or the period remaining until 12 October 2012
No notice or severance payment required upon expiry of contractual term. Where terminated early entitled to no more than that allowed per Part 2 Division 2 of Chapter 2D of the Corporations Act 2001.
M Carr No fixed duration 12 months written notice A combination of notice and payment in lieu of notice totalling no less than 12 months.
B Fletton No fixed duration 12 months written notice A combination of notice and payment in lieu of notice totalling no less than 12 month.
P Grau No fixed duration 12 months written notice A combination of notice and payment in lieu of notice totalling no less than 12 months.
R Gunston No fixed duration 12 months written notice A combination of notice and payment in lieu of notice totalling no less than 12 months.
B Houston No fixed duration 12 months written notice A combination of notice and payment in lieu of notice totalling no less than 12 months.
S Lawrie No fixed duration 12 months written notice A combination of notice and payment in lieu of notice totalling no less than 12 months.
F Makryllos2 No fixed duration 12 months written notice A combination of notice and payment in lieu of notice totalling no less than 12 months.
B Thorburn No fixed duration 12 months written notice A combination of notice and payment in lieu of notice totalling no less than 12 months.
1. These termination payment benefits are unchanged from last year.
2. A retention incentive has been negotiated with Frank Makryllos to continue as Chief Executive of Tatts Pokies as a result of the Victorian government’s announcement of 10 April 2008 on the gambling licensing arrangements that will apply after 2012. The incentive will be paid if he continues employment until 31 December 2012. The incentive is 25% of his FAR for each completed year of service from 1 June 2008 to 31 December 2012, and pro-rata for completed months.
The Group may terminate an employment contract without cause by providing written notice, in accordance with the specified period or making payment in lieu of notice, based on the individual’s fixed annual remuneration component.
Termination payments are not payable on resignation or dismissal for serious misconduct. In the instance of serious misconduct, the Group may terminate employment at any time. Any options or rights not exercised before or on the date of termination may lapse.
Section J – Details of remuneration for key employeesDetails of the remuneration of the Directors of the Company and other key management personnel of the Group for the year ended 30 June 2011 are set out in the following tables.
The key management personnel of the Group include the Directors and the following executive officers:
• RayGunston–ChiefFinancialOfficer • StephenLawrie–ChiefInformationOfficer
The key management personnel of the Group are those executives with responsibility for the planning, controlling and directing of the Group and therefore excludes those executives who lead individual SBUs. The comparative figures in the following tables represent Directors’ fees and executive remuneration for the key management personnel of the reporting period 1 July 2010 to 30 June 2011.
In addition, the following persons must be disclosed under the Corporations Act 2001 as they are among the five highest remunerated Group and/or Company executives:
• BarrieFletton–ChiefExecutive,TattsBet
• PennyGrau–GeneralCounselandCompanySecretary
• BruceHouston–ExecutiveGeneralManager,Media,GovernmentandCommunityRelations
• FrankMakryllos–ChiefExecutive,TattsPokies
• BrendanRedmond–ExecutiveGeneralManager,BusinessDevelopmentandInternationalInvestments (to 30 September 2010)
• BillThorburn–ChiefExecutive,TattsLotteries
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Key management personnel of the Group and other executives of the Company and Group
2011 Short Term Benefits1
Post- Employment
Benefits
Long Term
BenefitsShare-Based
Payment
Name
Cash Salary
and Fees $
Cash Bonus
$
2
Other $
3
Super- annuation
$
Long Service
Leave $
Perfor- mance
Options $
Perfor- mance Rights
$
8 Total
$Non-executive Directors
Harry Boon 367,843 N/A - - - N/A N/A 367,843
Robert Bentley 142,431 N/A - 12,819 - N/A N/A 155,250
Lyndsey Cattermole 155,250 N/A - - - N/A N/A 155,250
Brian Jamieson 164,740 N/A - 14,827 - N/A N/A 179,567
Julien Playoust 159,719 N/A - 14,375 - N/A N/A 174,094
Kevin Seymour 142,431 N/A - 12,819 - N/A N/A 155,250Sub-total Non-executive Directors 1,132,414 N/A - 54,840 - N/A N/A 1,187,254
Executive DirectorDick McIlwain4 (Managing Director/Chief Executive) 2,055,450 550,000 - 15,199 34,553 - 236,111 2,891,313Other key management personnel5
Ray Gunston6,7 778,968 87,500 - 15,199 13,069 103,300 166,431 1,164,467
Stephen Lawrie6,7 507,717 27,500 - 15,199 8,531 67,268 81,119 707,334Sub-total key management personnel 1,286,685 115,000 - 30,398 21,600 170,568 247,550 1,871,801
Other executives
Barrie Fletton7 467,378 25,000 - 15,199 8,235 65,941 75,461 657,214
Penny Grau6 456,468 33,350 - 15,199 7,657 27,070 37,199 576,943
Bruce Houston6 362,300 26,680 - 15,199 6,075 22,204 29,806 462,264
Frank Makryllos7 484,502 50,000 150,000 15,199 7,740 60,700 - 768,141
Brendan Redmond6 172,928 - 465,000 3,800 - - - 641,728
Bill Thorburn7 423,148 50,000 - 52,545 7,298 60,279 96,564 689,834Sub-total other executives 2,366,724 185,030 615,000 117,141 37,005 236,194 239,030 3,796,124
Totals 6,841,273 850,030 615,000 217,578 93,158 406,762 722,691 9,746,492
1. Short term benefits may include amounts paid to superannuation at the discretion of the individual.
2. These cash bonuses represent 100% of the cash component paid to each executive for the financial year, which in the case of other key management personnel and other executives are each individual’s respective cash component of their annual incentive. The remaining proportion of their total incentive paid for the year is in the rights they will be awarded as included in the column headed performance rights. The following executives have received the following percentages of their total target incentive for the year, with each of their respective splits into cash and performance rights then outlined: Ray Gunston (19.2% of target split 50% cash and 50% rights), Stephen Lawrie (9.6% of target split 50% cash and 50% rights), Barrie Fletton (11.7% of target split 50% cash and 50% rights), Penny Grau (15.3% of target split 66.7% cash and 33.3% rights), Bruce Houston (21.3% of target split 66.7% cash and 33.3% rights), Frank Makryllos (11.7% of target paid 100% in cash), Bill Thorburn (23.5% of target split 50% cash and 50% rights).
3. Other payments as follows:
• FrankMakryllosreceivedaspecialcircumstanceincentiveinrelationtothesuccessfulforwardsaleoftheGroup’selectronicgaming machines.
• BrendanRedmond–includesthevalueofexpatriateandlivingawayfromhomebenefitsinrespectofhisroleasExecutiveGeneralManager, Business Development and International Investments up to 30 September 2010 and a termination payment as at that date.
4. The Managing Director/Chief Executive has 48% of his total remuneration related to the performance of the Group, and 52% which is not directly linked to the Group’s performance. He received 37.6% of his target STI in his cash bonus.
5. As required to be disclosed under the Corporations Act 2001, the following proportions of the total remuneration of key management personnel and other executives are those respectively related and not related to the Group’s performance: Ray Gunston (47%, 53%), Stephen Lawrie (48%, 52%), Barrie Fletton (53%, 47%), Penny Grau (59%, 41%), Bruce Houston (67%, 33%), Frank Makryllos (53%, 47%), Bill Thorburn (53%, 47%).
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6. Denotes one of the five highest paid executives of the Company, as required to be disclosed under the Corporations Act 2001.
7. Denotes one of the five highest paid executives of the Group, as required to be disclosed under the Corporations Act 2001.
8. These amounts (other than the Managing Director/Chief Executive) represent the value of rights to be granted in respect of the 2011 financial year performance and the current year accounting expense of rights granted under the previous LTIP as follows: Ray Gunston (2011 rights $81,517; previous LTIP $84,914), Stephen Lawrie (2011 rights $25,619; previous LTIP $55,500), Barrie Fletton (2011 rights $23,291; previous LTIP $52,170), Penny Grau (2011 rights $15,511; previous LTIP $21,688), Bruce Houston (2011 rights $12,408; previous LTIP $17,398). Frank Makryllos (2011 rights $0; previous LTIP $0), Bill Thorburn (2011 rights $46,582; previous LTIP $49,982).
Key management personnel of the Group and other executives of the Company and Group
2010 Short Term Benefits1
Post- Employment
Benefits
Long Term
BenefitsShare-Based
Payment
Name
Cash Salary
and Fees $
Cash Bonus (STIP)
$
2
Other $
3
Super- annuation
$
Long Service
Leave $
Perfor- mance
Options (LTIP)
$
Perfor- mance Rights (LTIP)
$Total
$Non-executive Directors
Harry Boon 317,540 N/A - - - N/A N/A 317,540
Robert Bentley 135,211 N/A - 6,769 - N/A N/A 141,980
Lyndsey Cattermole 141,980 N/A - - - N/A N/A 141,980
Brian Jamieson 149,431 N/A - 13,449 - N/A N/A 162,880
Julien Playoust 142,241 N/A - 12,801 - N/A N/A 155,042
Kevin Seymour 130,257 N/A - 11,723 - N/A N/A 141,980Sub-total Non-executive Directors 1,016,660 N/A - 44,742 - N/A N/A 1,061,402Executive DirectorDick McIlwain4 (Managing Director/Chief Executive) 1,935,173 600,000 - 14,461 33,308 277,778 93,889 2,954,609Other key management personnel5
Ray Gunston6,7 743,872 - 150,000 14,461 12,499 147,082 57,967 1,125,881
Stephen Lawrie6,7 481,372 - - 14,461 8,086 94,904 37,565 636,388Sub-total key management personnel 1,225,244 - 150,000 28,922 20,585 241,986 95,532 1,762,269
Other executives
Michael Carr7 461,755 - - 14,461 8,117 96,573 36,562 617,468
Barrie Fletton7 453,961 - - 14,461 7,986 94,594 36,012 607,014
Penny Grau6 438,038 - - 14,461 7,337 35,599 12,652 508,087
Bruce Houston6 347,205 - - 14,461 5,838 30,407 12,740 410,651
Brendan Redmond6,7 478,183 - 557,208 14,461 7,503 91,376 5,346 1,154,077Sub-total other executives 2,179,142 - 557,208 72,305 36,781 348,549 103,312 3,297,297
Totals 6,356,219 600,000 707,208 160,430 90,674 868,313 292,733 9,075,577
1. Short term benefits may include amounts paid to superannuation at the discretion of the individual.
2. These cash bonuses represent 100% of the cash bonus paid to each executive in respect of STIP for the financial year. Where the individuals’ STIP target has been exceeded, the Board has exercised its right to adjust upwards the total STIP payments (cash bonuses) in line with over-achievement against target performance levels. The following executives have received the following percentage of their target STIP cash bonus: Dick McIlwain (43%), Ray Gunston (0%), Stephen Lawrie (0%), Michael Carr (0%), Barrie Fletton (0%), Penny Grau (0%), Bruce Houston (0%), Brendan Redmond (0%).
3. Other payments as follows:
• Brendan Redmond – Includes the value of expatriate and living away from home benefits in respect of his role as Executive General Manager, Business Development and International Investments.
• Ray Gunston – Non-STIP cash bonus for specific value-adding activities, including the acquisition and funding of NSW Lotteries, and the sale of the South African gaming business.
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4. The Managing Director/Chief Executive has 52% of his total remuneration related to the performance of the Group, and 48% which is not directly linked to the Group’s performance.
5. As required to be disclosed under the Corporations Act 2001, except for Penny Grau and Bruce Houston, 60% of the total remuneration of key management personnel and other executives is not related to the performance of the Group, and 40% is related to the Group’s performance (20% STIP, 20% LTIP). For Penny Grau and Bruce Houston, these percentages are 70% and 30% respectively (20% STIP, 10% LTIP).
6. Denotes one of the five highest paid executives of the Company, as required to be disclosed under the Corporations Act 2001.
7. Denotes one of the five highest paid executives of the Group, as required to be disclosed under the Corporations Act 2001.
Section K – Share based compensation options and rightsThe new equity based incentive scheme has been outlined earlier in Section E. Prior to 2011, eligible employees who participated in the LTIP were those of senior management level and above, including the Managing Director/Chief Executive, whose performance is of strategic and operational importance to the Group.
Options and/or rights were granted annually to eligible participants but do not vest unless both performance and time-based hurdles are met. These conditions ensured that eligible employees were rewarded only when percentage EPS growth and/or TSR growth targets are met as set out in Section E(iii) of this Remuneration report.
Options and rights granted in 2005 were finally retested on 7 July 2010, and such retesting did not result in any further vesting of the options and rights that remained unvested in this tranche of grants. These remaining unvested options and rights have now lapsed.
Options and rights granted in 2006 were tested for the first time on their third anniversary on 30 November 2009 and retested on 30 May 2010, 30 November 2010 and 30 May 2011. At 30 November 2010, given the Company’s TSR performance at the 57.72 percentile of the peer group (which exceeded the previous 50.59 percentile achieved in May 2011), 65.44% of these options and rights vested to participants, representing an additional 362,440 options vested and an additional 23,935 rights vested resulting in a total of 1,703,818 options and 121,269 rights. No further vesting of options or rights occurred at the testing of 30 May 2011. Testing of the remaining options and rights yet to vest will continue at six monthly intervals until 30 November 2011.
Options granted in 2007 were tested for the first time on their third anniversary on 30 November 2010 and retested on 30 May 2011. At 30 November 2010, 72.06% of these options vested to participants, representing 866,805 options, given the Company’s TSR performance at the 61.03 percentile of the peer group. No further vesting of options occurred at the testing of 30 May 2011. Testing of the remaining options and rights yet to vest will continue at six monthly intervals until 30 November 2012.
The terms and conditions of each grant of options and rights affecting remuneration in respect of the previous and current reporting periods are as follows:
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Award Type Grant Date Expiry DateExercise
Price
Value Per Option/Right at Grant Date Date Exercisable
Performance option 16 December 2005 07 July 2012 $3.10 $0.67 07 July 200830 November 2006 30 November 2013 $3.65 $0.80 30 November 200930 November 2007 30 November 2014 $3.99 $1.02 30 November 201030 November 20081 30 November 2015 $2.56 $0.31 30 November 201130 November 20082 30 November 2015 $2.56 $0.33 30 November 2011
Performance option (Chief Executive)
30 November 2006 30 November 2013 $3.13 $1.00 30 November 2009
Performance right 16 December 2005 07 July 2012 N/A $1.80 07 July 200830 November 2006 30 November 2013 N/A $2.56 30 November 200930 November 20093 30 November 2016 N/A $1.36 30 November 201230 November 20094 30 November 2016 N/A $1.87 30 November 2012
Performance right (Chief Executive)
30 October 20093 10 January 2014 N/A $1.45 12 October 2012
30 October 20094 10 January 2013 N/A $1.93 12 October 201229 October 20103 10 January 2015 N/A $1.47 12 October 201329 October 20104 10 January 2014 N/A $1.96 12 October 2013
Performance right5 September 2011 October 2012 N/A $2.18 September 2012
1. Options granted with TSR market based vesting conditions.
2. Options granted with EPS non-market based vesting conditions.
3. Rights granted with TSR market based vesting conditions.
4. Rights granted with EPS non-market based vesting conditions.
5. Rights to be granted under new incentive structure.
Options and rights granted under the LTIP, and rights granted under the new incentive structure, carry no dividend or voting rights. Options and rights do not entitle option or right holders to participate in issues of shares except in respect of pro-rata bonus issues and rights issues in the manner specified by the ASX Listing Rules.
The exercise price of options awarded is based on the weighted average price at which the Company’s shares traded on the ASX in the 30 days up to and including the determination date.
Details of performance options and rights over ordinary shares in the Company granted during and/or in respect of the reporting period as remuneration to the only Executive Director of the Company and each of the key management personnel and selected other executives of the Group who remained employed within the Group at the date of this Remuneration report are set out below. Upon exercise of each option or right, the holder receives one fully paid ordinary share in the Company. Further information on the options and rights is set out in Notes 28 and 40 of the audited Financial report.
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Directors’ report continued
Number of Rights Granted During and in
Respect of the YearNumber of Options
Vested During the YearNumber of Rights
Vested During The Year2011 2010 2011 2010 2011 2010
Executive Director of Tatts Group LimitedDick McIlwain (Managing Director/Chief Executive) 250,000 250,000 284,800 1,024,000 - -Other key management personnel of GroupRay Gunston 37,393 - 130,895 54,652 3,378 12,145Stephen Lawrie 11,752 - 83,056 33,632 2,078 7,474Key executive options/rights 49,145 - 213,951 88,284 5,456 19,619Other executives
Barrie Fletton 10,684 - 85,471 36,154 2,235 8,034Penny Grau 7,115 - 30,914 - - -Bruce Houston 5,692 - 25,996 7,462 1,038 3,731Frank Makryllos - - 75,575 25,224 1,559 5,605Bill Thorburn 21,368 - 72,060 - - -Total options/rights 344,004 250,000 788,767 1,181,124 10,288 36,989 No performance options were granted or exercised during the period covered by this Remuneration report.
The table below shows the shares issued during the reporting period as a result of vesting of performance rights. Issues of shares under the Group’s incentive schemes are subject to a cap of 5% of equity. This is inclusive of shares that may be issued in respect of each outstanding offer or grant of shares and options or rights to acquire unissued shares if accepted or exercised under other equity plans of the Company for employees but disregarding offers made outside Australia, made under a disclosure document or which do not require a disclosure document.
Details of the ordinary shares provided as a result of the exercise of vested rights are as follows:
Date of Share Issue on Exercise of Rights
Number of Ordinary Shares Issued on
Exercise of Rights During the Year
2011 2010Other key management personnel of GroupRay Gunston 02/09/2010 and 03/03/2011 15,523 -Stephen Lawrie 02/09/2010 7,474 -Barrie Fletton 02/09/2010 and 03/03/2011 10,269 -Penny Grau - - -Bruce Houston 02/09/2010 and 03/03/2011 4,769 -Frank Makryllos 02/09/2010 and 03/03/2011 7,164 -Brendan Redmond 06/09/2010 7,698 -Bill Thorburn - - -Total rights 52,897 -
No consideration is paid on the exercising of rights. Section L – Additional information (i) Performance of the GroupIn considering the Group’s performance and its implications for shareholders’ wealth in the context of appropriate remuneration levels and structures, the Remuneration Committee has regard to a variety of measures such as revenue, EBIT margin, net profit, dividends paid, earnings per share, TSR, and changes in the share price in the current and previous years.
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Over the last five years, there have been a number of events, including mergers, acquisitions, licence renewal and award outcomes, and impairments which have created substantial volatility in the accounting measures outlined above. This is reflected in the following table:
2011 2010 2009 2008 2007(a)
Revenue from continuing operations ($’000) 3,669,265 3,297,933 3,211,878 3,085,565 2,404,058EBIT margin (%) 13.5 8.1 13.9 13.4 15.2Net profit attributable to equity holders of the Company ($’000)
275,428 119,355 277,441 257,586 288,581
Dividends paid/payable ($’000) 281,671 268,588 266,250 253,071 278,377Dividend payout ratio (%) 102.3 95.1(b) 96.0 98.2 96.5EPS (¢) 21.2 8.2 21.9 20.4 26.1Total incentives as percentage of net profit (%) 1.8 1.5(c) 2.5 2.2 2.1
(a) The net profit in 2007 includes the gain from the provision reversal on the Trustee Commission Claim settlement. As a result, a special dividend of 4 cents per share was paid.
(b) The 2010 dividend payout ratio was calculated using the underlying net profit after tax of $282.4 million after adjusting reported NPAT for a number of one-off items, and the special dividend paid on 1 October 2010.
(c) The total incentives calculated for 2010 is based on the underlying NPAT before one-off adjustments of $282.4 million.
As outlined earlier, the new incentive structure of the Group in the 2011 financial year is based around revenue, EBIT margin and EPS growth. For the 2011 financial year, the revenue level compared to that in the 2010 financial year (adjusted to reflect like-for-like comparisons for NSW Lotteries and Talarius venues), achieved a level of 98%. In accordance with the policy a pool was formed. After adjustments for the EBIT margin improvement but lower EPS (both measures based on pre-incentive underlying figures) this level of performance resulted in total incentives of $2.9 million being payable (excluding the Managing Director/Chief Executive incentives). On the same pre-incentive underlying net profit after tax measure, the Remuneration Committee has exercised its discretion to pay the incentive amount given the closeness of the results and the ongoing profit maintenance achieved by the Group’s employees.
In the context of the LTIP options and rights granted under the previous incentive structure in 2006 and 2007 both are in the two year vesting window for testing and retesting. The 2006 grant was retested at November 2010 at which time the Group’s TSR reached the 57.72 percentile of the peer group, hence exceeding the 50.59 percentile level reached in the previous financial year, and resulted in an increase to 65.44% from 51.2% of the options and rights vesting in participants. The retest in May 2011 did not exceed the 57.72 percentile level and hence no further vesting has occurred. The graph below reflects this result.
The 2007 grant reached the three year vesting test timeline in November 2010 with a retest in May 2011. In the initial November 2010 test the Group’s TSR outcome reached the 61.03 percentile of the peer group, hence exceeding the 50th percentile level TSR ASX Peer Group, and resulted in 72.06% of the granted options in this tranche vesting at that date. The retest in May 2011 did not exceed this 61.03 percentile level and hence no further vesting has occurred. TSR 50th Percentile Index – Tatts Group Limited vs ASX Peer Group (30 November 2006 Index = 100)
Index TSR 50th Percentile ASX Peer Group
Nov 2006
Ind
ex
May 2007 Nov 2007 May 2008 Nov 2008 May 2009 Nov 2009 May 2010 Nov 2010 May 2011
Index Tatts Group TSR
60
90
120
150
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Directors’ report continued
(ii) Details of remuneration – performance options and rightsFor each grant of options and rights as set out below, the percentage of the maximum grant that was paid, or that vested, in the financial year is provided.
Performance Options/Rights
Name
Financial Year Granted or in Respect of
Vested %
Forfeited %
Financial Years in which
Options/Rights May Vest
Minimum Total Value of Grant
Yet to Vest $
Maximum Total Value of Grant
Yet to Vest $
Dick McIlwain 2011 - - 30/06/2014 nil 333,4722010 - - 30/06/2013 nil 187,7782007 65.44% - - - -
Barrie Fletton 2011 - - 30/06/2013 nil 23,2912010 - - 30/06/2013 nil 73,9082009 - - 30/06/2012 nil 21,2982008 72.06% - 30/06/2011 nil -2007 65.44% - - - -
Penny Grau 2011 - - 30/06/2013 nil 15,5112010 - - 30/06/2013 nil 30,7252009 - - 30/06/2012 nil 8,7472008 72.06% - 30/06/2011 nil -
Ray Gunston 2011 - - 30/06/2013 nil 81,5172010 - - 30/06/2013 nil 120,2952009 - - 30/06/2012 nil 33,5642008 72.06% - 30/06/2011 nil -2007 65.44% - - - -2006 84.72% - - - -
Bruce Houston 2011 - - 30/06/2013 nil 12,4092010 - - 30/06/2013 nil 24,6472009 - - 30/06/2012 nil 7,2922008 72.06% - 30/06/2011 nil -2007 65.44% - - - -
Stephen Lawrie 2011 - - 30/06/2013 nil 25,6192010 - - 30/06/2013 nil 78,6252009 - - 30/06/2012 nil 21,9912008 72.06% - 30/06/2011 nil -2007 65.44% - - - -
Frank Makryllos 2010 - - 30/06/2013 nil -2009 - - 30/06/2012 nil 19,6762008 72.06% - 30/06/2011 nil -2007 65.44% - - - -
Brendan Redmond 2010 - 100% 30/06/2013 nil -2009 - 100% 30/06/2012 nil -2008 72.06% 100% 30/06/2011 nil -2007 65.44% * - - -
Bill Thorburn 2011 - - 30/06/2013 nil 46,5822010 - - 30/06/2013 nil 70,8082009 - - 30/06/2012 nil 19,2132008 72.06% - 30/06/2011 nil -2007 65.44% - - - -
* Brendan Redmond forfeited 100% of his 2007 options and 48.8% of his 2007 rights.
No options were exercised during the year and therefore no shares were issued. 52,897 rights that vested were exercised during the year – refer to Section K of the Remuneration report for further details.
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(iii) Share based compensation: options and rights
Name
A Remuneration Consisting of
Options and Rights %
BValue at Grant Date
$
CValue at Exercise
Date$
DValue at Lapse Date
$Dick McIlwain 8 428,750 - -Barrie Fletton 22 23,291 26,289 -Penny Grau 11 15,511 - -Ray Gunston 23 81,517 39,739 18,989Bruce Houston 11 12,409 12,208 -Stephen Lawrie 21 25,619 19,133 -Frank Makryllos 8 - 18,340 3,283Brendan Redmond - - 19,707 -Bill Thorburn 23 46,582 - -
A The percentage of the value of remuneration consisting of options and rights, based on the value of options and rights expensed during the current year.
B The value at grant date calculated in accordance with AASB 2 Share-based Payment of options and rights granted during or in respect of the year as part of remuneration.
C The value at exercise date of options and rights that were granted as part of remuneration and were exercised during the year, being the intrinsic value of the options and rights at that date.
D The value at lapse date of options and rights that were granted as part of remuneration and that lapsed during the year because a vesting condition was not satisfied. The value is determined at the time of lapsing, but assuming the condition was satisfied.
Loans to Directors and executivesThere were no loans to Directors and executives during the financial year.
Shares under options and rightsUnissued ordinary shares of the Company under options or rights at the date of this report are as follows:
Award Type Grant Date Expiry Date Exercise PriceNumber Under Options/Rights
Performance option 16 December 2005 07 July 2012 $3.10 194,454Performance right 16 December 2005 07 July 2012 N/A -Performance option 30 November 2006 30 November 2013 $3.13 2,000,000Performance option 30 November 2006 30 November 2013 $3.65 538,249Performance right 30 November 2006 30 November 2013 N/A 62,429Performance option 30 November 2007 30 November 2014 $3.99 1,170,208Performance option 30 November 2008 30 November 2015 $2.56 6,223,600Performance right 30 October 2009 10 January 2013 N/A 125,000Performance right 30 October 2009 10 January 2014 N/A 125,000Performance right 30 November 2009 30 November 2016 N/A 1,163,803Performance right 29 October 2010 10 January 2014 N/A 125,000Performance right 29 October 2010 10 January 2015 N/A 125,000Performance right September 2011 October 2012 N/A 158,227Total 12,010,970
Shares issued on the exercise of rightsDuring the year ended 30 June 2011, 52,897 rights that vested were exercised – refer to Section K of the Remuneration report for further details.
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Directors’ report continued
Indemnities and insuranceArticle 7.3 of the Company’s Constitution provides that every person who is or has been a Director or Secretary of the Company or of a subsidiary of the Company may be indemnified by the Company, to the extent permitted by law, against liabilities:
• incurredbythepersonasanofficer(asdefinedintheCorporations Act 2001) of the Company or a subsidiary of the Company; and
• forlegalcostsincurredbythepersonindefendinganactionforaliabilityincurredbythatpersonasanofficeroftheCompany or a subsidiary of the Company.
The Company has executed Deeds of Indemnity, Insurance and Access, consistent with this Article, in favour of all current and former Directors of the Company, certain current and former Directors of related bodies corporate of the Company, and the current and certain former Secretaries of the Company. Each Deed indemnifies those persons for the full amount of all such liabilities including costs and expenses.
For the year ended 30 June 2011, no amounts have been paid pursuant to indemnities (2010: $Nil).
The Company’s Constitution also allows the Company to pay insurance premiums for contracts insuring the officers of the Company in relation to any such liabilities and legal costs.
During or since the end of the financial year, consistent with the Company’s Constitution, the Company has paid the premium in respect of a contract insuring each of the Directors and the Secretary named in this Directors’ report, the former Directors, and the officers of the Company and its subsidiaries as permitted by the Corporations Act 2001. The class of officers insured by the policy includes all officers involved in the management of the Group. The terms of the contract of insurance prohibit the disclosure of the nature of the liabilities insured against and the amount of the premium.
Pursuant to the terms of the Company’s standard engagement letter with PricewaterhouseCoopers (PwC), it indemnifies PwC against any liabilities, including legal costs, that PwC incurs, in connection with any claim by a third party arising out of or in relation to the provision of services or the use of any work performed under, or a breach of, the engagement letter. The indemnity is for the full amount of all such liabilities including costs and expenses. The indemnity does not apply if prohibited by the Corporations Act 2001.
Proceedings on behalf of the CompanyNo person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings.
No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001.
Non-audit servicesThe Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Group is important.
Details of the amounts paid or payable to the auditor (PwC) for non-audit services provided in respect of the Group during the year are set out below.
The Board of Directors has considered the position and, in accordance with the advice received from the Audit, Risk and Compliance Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, given the amounts paid and the type of work undertaken, did not compromise the auditor independence requirement of the Corporations Act 2001 for the following reasons:
• allnon-auditserviceshavebeenreviewedbytheAudit,RiskandComplianceCommitteetoensuretheydonotimpact the impartiality and objectivity of the auditor; and
• noneoftheservicesunderminethegeneralprinciplesrelatingtoauditorindependenceassetoutinAPES110Code of Ethics for Professional Accountants, including reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Group, acting as advocate for the Group or jointly sharing economic risk and rewards.
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During the year the following fees were paid or payable to PricewaterhouseCoopers for the provision of non-audit services:
Consolidated
2011 2010 $ $
Non-audit services (a) Other assurance services Fees paid to PricewaterhouseCoopers Australian firm: Audit of regulatory returns 69,000 57,470 Due diligence services - -Fees paid to related practices of PricewaterhouseCoopers Australian firm Due diligence services - 20,938
Total remuneration for other assurance services 69,000 78,408
(b) Taxation services Fees paid to PricewaterhouseCoopers Australian firm: Provision of tax training materials 4,178 3,295
Total remuneration for taxation services 4,178 3,295
Total remuneration for non-audit services 73,178 81,703
Subject to maintaining their independence, it is the Group’s policy to employ the services of PwC on assignments additional to their statutory audit duties where PwC’s expertise and experience with the Group is important.
Auditor’s independenceA copy of the Auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 52, and forms part of the Directors’ report for the financial year ended 30 June 2011.
Rounding of amountsThe Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the Directors’ report. Amounts in the Directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar.
Directors’ resolutionThis Directors’ report is made in accordance with a resolution of the Directors.
Harry Boon Dick McIlwainChairman Managing Director/Chief Executive
Melbourne25 August 2011F
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Auditor’s independence declaration
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Consolidated income statementFor the year ended 30 June 2011
Consolidated
2011 2010 Notes $’000 $’000
Revenue from continuing operations 5 3,669,265 3,297,933 Statutory outgoings Government share (1,768,319) (1,531,394)Venue share/commission (680,878) (617,716)Product/program fees (188,269) (186,988) Other income 6 30 90 Other expenses from ordinary activities 7 Employee expenses (176,279) (160,840)Operating fees and direct costs (69,578) (70,772)Telecommunications and technology (39,014) (33,044)Marketing and promotions (34,773) (34,847)Information services (13,841) (13,176)Property expenses (44,334) (51,052)Restructuring costs 7 (5,251) (25,039)Other expenses (32,630) (31,007)Share of net profit/(loss) of associates and joint ventures accounted for using the equity method 36(b) 127 (44)
Profit before interest, income tax, depreciation, amortisation and impairment 616,256 542,104 Impairment of assets 7 - (140,000)Depreciation and amortisation 7 (119,415) (136,283)Interest income 4,642 9,251Finance costs 7 (102,565) (60,434)
Profit before income tax 398,918 214,638 Income tax expense 8 (123,490) (109,248)
Profit from continuing operations 275,428 105,390 Profit from discontinued operations 9 - 14,910
Profit for the year 275,428 120,300
Profit is attributable to: Owners of Tatts Group Limited 26(b) 275,428 119,355 Non-controlling interests - 945
275,428 120,300
Earnings per share for profit from continuing operations attributable to the ordinary equity owners of the Company: Cents Cents
Basic earnings per share 39 21.2 8.2Diluted earnings per share 39 21.2 8.2 Earnings per share for profit attributable to the ordinary equity owners of the Company: Cents Cents
Basic earnings per share 39 21.2 9.4Diluted earnings per share 39 21.2 9.4
The above Consolidated income statement should be read in conjunction with the accompanying notes.
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Consolidated statement of comprehensive incomeFor the year ended 30 June 2011
Consolidated
2011 2010 Notes $’000 $’000
Profit for the year 275,428 120,300
Other comprehensive income Changes in the fair value of available-for-sale financial assets, net of tax 26(a) 705 908Changes in the value of net investment hedges 26(a) 12,914 29,444Changes in the value of cross currency interest rate swaps, net of tax 26(a) (6,180) -Actuarial gain on retirement benefit obligation, net of tax 26(b) 1,014 -Changes in the value of interest rate swaps, net of tax 26(a) 6,715 (12,498)Changes in the value of forward foreign exchange contracts, net of tax 26(a) 392 (580)Exchange differences on translation of foreign operations 26(a) (10,324) (29,079)
Other comprehensive income for the year, net of tax 5,236 (11,805)
Total comprehensive income for the year 280,664 108,495
Total comprehensive income for the year is attributable to: Owners of Tatts Group Limited 280,664 107,550 Non-controlling interests - 945
280,664 108,495
The above Consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.
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Consolidated balance sheetAs at 30 June 2011
Consolidated
2011 2010 Notes $’000 $’000
Assets Current assets Cash and cash equivalents 10 262,148 393,267Trade and other receivables 11 130,168 130,885Inventories 12 7,859 7,251
Total current assets 400,175 531,403
Non-current assets Trade and other receivables 11 96 226Investments accounted for using the equity method 36 2,312 2,185Available-for-sale financial assets 13 33,824 31,085Property, plant and equipment 15 236,683 257,903Investment properties 16 47,134 31,007Intangible assets 17 4,013,121 4,075,830Deferred tax assets 18 33,746 28,752Other non-current assets 19 1,403 2,165
Total non-current assets 4,368,319 4,429,153
Total assets 4,768,494 4,960,556
Liabilities Current liabilities Trade and other payables 20 549,915 517,346Interest bearing liabilities 21 - 796,253Derivative financial instruments 14 1,117 1,174Tax liabilities 19,331 36,588Provisions 22 19,229 22,104
Total current liabilities 589,592 1,373,465
Non-current liabilities Trade and other payables 20 70,293 66,230Interest bearing liabilities 21 1,271,087 785,171Derivative financial instruments 14 50,962 25,353Deferred tax liabilities 23 219,392 227,738Provisions 22 5,068 6,458Retirement benefit obligations 24 7,961 8,337
Total non-current liabilities 1,624,763 1,119,287
Total liabilities 2,214,355 2,492,752
Net assets 2,554,139 2,467,804
Equity Contributed equity 25 2,444,886 2,362,593Reserves 26(a) (7,377) (12,616)Retained earnings 26(b) 116,630 117,827
Capital and reserves attributable to owners of Tatts Group Limited 2,554,139 2,467,804
Total equity 2,554,139 2,467,804
The above Consolidated balance sheet should be read in conjunction with the accompanying notes.
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Consolidated statement of changes in equityFor the year ended 30 June 2011
Attributable to Owners of Tatts Group Limited
Non- Contributed Retained Controlling Total Equity Reserves Earnings Total Interest Equity $’000 $’000 $’000 $’000 $’000 $’000
Balance at 1 July 2009 2,333,193 (2,829) 265,744 2,596,108 (682) 2,595,426Profit for the year - - 119,355 119,355 945 120,300Other comprehensive income - (11,805) - (11,805) - (11,805)
Total comprehensive income for the year - (11,805) 119,355 107,550 945 108,495
Transactions with owners in their capacity as owners Dividend Reinvestment Plan issues 29,400 - - 29,400 - 29,400Dividends provided or paid - - (267,272) (267,272) - (267,272)Disposal of non-controlling interest’s equity - - - - (263) (263)Share based payments - 2,018 - 2,018 - 2,018
29,400 (9,787) (147,917) (128,304) 682 (127,622)
Balance at 30 June 2010 2,362,593 (12,616) 117,827 2,467,804 - 2,467,804
Profit for the year - - 275,428 275,428 - 275,428Other comprehensive income - 4,222 1,014 5,236 - 5,236
Total comprehensive income for the year - 4,222 276,442 280,664 - 280,664
Transactions with owners in their capacity as owners Dividend Reinvestment Plan issues 81,993 - - 81,993 - 81,993Dividends provided or paid - - (277,639) (277,639) - (277,639)Performance rights issues 300 (300) - - - -Share based payments - 1,317 - 1,317 - 1,317
82,293 1,017 (277,639) (194,329) - (194,329)
Balance at 30 June 2011 2,444,886 (7,377) 116,630 2,554,139 - 2,554,139
The above Consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
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Consolidated statement of cash flowsFor the year ended 30 June 2011
Consolidated
2011 2010 Notes $’000 $’000
Cash flows from operating activities Receipts from customers (inclusive of GST) net of prizes paid/cash returns to customers 3,722,516 3,300,496Payments to suppliers and employees (inclusive of GST) (427,367) (402,818)Payments to government (1,775,952) (1,567,682)Payments to venues/commissions (680,878) (629,206)Payments for product and program fees (193,715) (186,718)
644,604 514,072Dividends received 655 -Interest received 4,277 13,851Interest paid (102,169) (44,479)Income taxes paid (155,513) (114,204)
Net cash inflow from operating activities 37 391,854 369,240
Cash flows from investing activities Payments for purchase of subsidiaries, net of cash acquired - (761,986)Payments for interests in and loans (to)/repaid from joint venture entities (3,586) (11,113)Payments for property, plant and equipment (59,181) (48,227)Payments for Investment properties (16,919) -Payments for intangibles (2,666) (16,597)Payments for deferred expenditure - (1,071)Proceeds from sale of other assets - 346Proceeds from sale of property, plant and equipment 518 1,049Proceeds from sale of property, plant and equipment – discontinued operations - 24Proceeds from disposal of subsidiary, net of cash disposed 18,076 2,344
Net cash outflow from investing activities (63,758) (835,231)
Cash flows from financing activities Dividends paid (195,660) (237,867)Proceeds from borrowings 390,208 766,063Repayment of borrowings (648,560) (44,814)
Net cash (outflow)/inflow from financing activities (454,012) 483,382
Net (decrease)/increase in cash and cash equivalents (125,916) 17,391Cash and cash equivalents at beginning of the financial year 392,664 373,010Effect of exchange rate movements on cash and cash equivalents (4,600) 2,263
Cash and cash equivalents at end of the financial year 10 262,148 392,664
The above Consolidated statement of cash flows should be read in conjunction with the accompanying notes. F
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Notes to the consolidated financial statementsFor the year ended 30 June 2011
Note 1. Summary of significant accounting policiesThe principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of Tatts Group Limited and its subsidiaries. Tatts Group Limited (the Company or the parent entity) and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity.
(a) New accounting policies and changes in presentationThe accounting policies adopted are consistent with those of the previous financial year, unless otherwise stated. Where appropriate, comparative amounts have been reclassified to ensure consistency with the current reporting year.
(b) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001.
Compliance with IFRSThe consolidated financial statements of the Group comply with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
Historical cost conventionThese financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit and loss.
Critical accounting estimatesThe preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3.
(c) Principles of consolidation(i) SubsidiariesThe consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Tatts Group Limited as at 30 June 2011 and the results of all subsidiaries for the year then ended.
Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for the business combinations by the Group (refer Note 1(i)).
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
Non-controlling interests in the results and equity of subsidiaries are shown separately in the Consolidated income statement, statement of comprehensive income, statement of changes in equity and balance sheet respectively.
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Note 1. Summary of significant accounting policies (continued)European Gaming Group The investment in the European Gaming Group, which has been denominated as a net investment hedge, has been partially financed by a loan denominated in GBP within the consolidated financial statements.
In the Company, the investment is designated as a fair value hedge of the foreign currency risk associated with the loan. The investment that is hedged has been revalued based on the closing GBP/AUD exchange rate with the gain/loss on revaluation being recognised in the statement of comprehensive income in line with the corresponding gain/loss arising on the revaluation of the GBP loan. (ii) AssociatesAssociates are all entities over which the Group has significant influence but not control or joint control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. The Group’s investments in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.
The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition other comprehensive income is recognised in the statement of comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates are recognised as a reduction in the carrying amount of the investment.
When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
(iii) Joint venturesInterests in joint venture entities and partnerships are accounted for in the consolidated financial statements using the equity method after initially being recognised at cost. Under the equity method, the share of the profits or losses of the joint venture is recognised in the income statement, and the share of post-acquisition movements in reserves is recognised in the statement of comprehensive income (refer Note 36).
Profits or losses on transactions establishing joint venture entities and partnerships and transactions with the joint venture entities and partnerships are eliminated to the extent of the Group’s ownership interest until such time as they are realised by the joint venture entity/partnership on consumption or sale. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets, or an impairment loss.
(iv) Changes in ownership interestsThe Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of the Company.
When the Group ceases to have control, joint control or significant influence, any remaining interest in the entity is remeasured to its fair value and any subsequent gain or loss is to be recognised in the income statement. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset.
(d) Segment reportingOperating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 1. Summary of significant accounting policies (continued)(e) Foreign currency translation(i) Functional and presentation currencyItems included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian Dollars, which is the Company’s functional and presentation currency.
(ii) Transactions and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.
Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are recognised in the statement of comprehensive income.
(iii) Group companiesThe results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
• assetsandliabilitiesforeachbalancesheetpresentedaretranslatedattheclosingrateatthedateofthatbalancesheet;
• incomeandexpensesforeachincomestatementandstatementofcomprehensiveincomearetranslatedataverageexchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
• allresultingexchangedifferencesarerecognisedasaseparatecomponentinthestatementofcomprehensiveincome.
On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are recognised in the statement of comprehensive income. When a foreign operation is sold or borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences is recognised in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.
(f) Revenue recognitionRevenue is measured at the fair value of the consideration received or receivable. Revenue is recognised for the major business activities as follows:
Gaming revenueGaming gross turnover less prizes returned to the player is recorded as revenue at the point when the game has been completed in relation to Victorian and International gaming operations.
Gaming monitoring revenueGaming revenue in relation to monitoring activities/services provided by Maxgaming in Queensland, New South Wales and Northern Territory is recognised when goods and/or services are provided.
Lotteries revenueGross subscriptions received for lotteries less prizes payable are recognised as revenue when the official draw for each game is completed. Subscriptions received during the year which will be drawn in the next financial period, are deferred and recognised as revenue in the next financial period.
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Note 1. Summary of significant accounting policies (continued)Revenue from lottery card subscriptions is recognised over the life of the subscription.
Revenue for Club Keno is recognised when the official draw for each game is completed.
Wagering revenueWagering revenue is the residual value after deducting the statutory returns to customers from wagering turnover. Revenue is recognised at the point when the event on which the wagering investment is made is officially completed.
Fixed odds betting revenue is the residual value after deducting fixed odds returns to customers from fixed odds bets placed on specific events. The amounts bet on an event are recognised as an advance sale liability until the outcome of the event is determined, at which time the revenue is recognised in the income statement.
Rendering of servicesRevenue from the sale of goods or the rendering of a service is recognised upon the delivery of the goods or service to customers.
Interest revenueInterest revenue is recognised on a time proportion basis using the effective interest method.
Interest revenue earned on prize reserves and unpaid prizes are included in revenue from continuing operations with the exception of interest earned on prize reserves by New South Wales Lotteries Corporation Pty Limited. Interest revenue from all other interest generating balances is included in interest income.
Other revenueDividend revenue is recognised when the right to receive a dividend has been established. (g) Income taxThe income tax expense or revenue for the year is the tax payable on the current year’s taxable income based on the income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects either accounting or taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.
Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the Company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities may be offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where an entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 1. Summary of significant accounting policies (continued)Current and deferred tax is recognised in the income statement, except to the extent that it relates to items recognised in the statement of comprehensive income or directly in equity. In this case, the tax is also recognised in the statement of comprehensive income or directly in equity, respectively.
(h) LeasesLeases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased asset or, if lower, the present value of the minimum lease payments, including any guaranteed residual values. The corresponding rental obligations, net of finance charges, are included in interest bearing liabilities. Each lease payment is allocated between the liability and finance cost. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated on a straight-line basis over their estimated useful lives where it is likely that the Company will obtain ownership of the asset, and otherwise over the term of the lease.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases (refer Note 31). Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line basis over the lease term (refer Note 16).
(i) Business combinationsThe acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in the Income statement as a bargain purchase.
(j) Impairment of assetsGoodwill and Intangible assets that have an indefinite useful life are not subject to amortisation and are tested six monthly for impairment or more frequently if events or changes in circumstances indicate that they may be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.
(k) Cash and cash equivalentsCash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within interest bearing liabilities in current liabilities in the balance sheet.
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Note 1. Summary of significant accounting policies (continued)(l) Trade receivablesTrade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. Trade receivables are generally due for settlement, unless through prior arrangement, between no more than two to 30 days from the date of recognition.
Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for the impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the impairment provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate.
The amount of the impairment is recognised in the income statement within other expenses. Subsequent recoveries of amounts previously written off are credited against other expenses in the income statement.
(m) InventoriesRaw materials and stores, work in progress and finished goods are stated at the lower of cost and net realisable value. Inventories of spare parts are measured at cost, less accumulated depreciation. Depreciation of spare parts is based upon their estimated useful life. Costs are assigned on a first-in first-out basis and comprise direct materials. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
(n) Non-current assets held for sale and discontinued operations Non-current assets are classified as held for sale and stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use.
An impairment loss is recognised for any initial or subsequent write down of the asset to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset, but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset is recognised at the date of derecognition.
Non-current assets are not depreciated or amortised while they are classified as held for sale. Non-current assets classified as held for sale are presented separately from the other assets in the balance sheet.
A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the income statement.
(o) Investments and other financial assetsClassificationThe Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at the end of each reporting period.
(i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are expected to be settled within 12 months; otherwise they are classified as non-current.
(ii) Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are included in receivables in the balance sheet (refer to Note 11).
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 1. Summary of significant accounting policies (continued)(iii) Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Assets in this category are classified as non-current assets, except for those with maturities less than 12 months from the end of each reporting period, which are classified as current assets.
(iv) Available-for-sale financial assetsAvailable-for-sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Investments are designated as available-for-sale if they do not have fixed maturities and fixed or determinable payments and management intends to hold them for the medium to long term.
Recognition and derecognitionPurchases and sales of investments and other financial assets are recognised on trade date, being the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.
When securities classified as available-for-sale are sold, the accumulated fair value adjustments recognised in the statement of comprehensive income are reclassified to the income statement as gains and losses from investment securities.
Subsequent measurementAvailable-for-sale financial assets and financial assets at fair value through profit and loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Realised and unrealised gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit and loss’ category are included in the income statement in the period in which they arise. Unrealised gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised in the statement of comprehensive income in the available-for-sale financial assets revaluation reserve. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in the statement of comprehensive income are reclassified to the income statement as gains and losses from investment securities.
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active, and for unlisted securities, the Group establishes fair value by using valuation techniques. These include reference to the fair values of recent arm’s length transactions, involving the same instruments or other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect the issuer’s specific circumstances.
ImpairmentThe Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit and loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement.
(p) Derivatives and hedging activitiesDerivatives and hedging activities are initially recognised at fair value on the date the derivative contract is entered into and are subsequently remeasured to their fair value at each reporting period. The accounting for subsequent changes in the fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as either:
• hedgesofthefairvalueofrecognisedassetsorliabilitiesorafirmcommitment(fairvaluehedges);
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Note 1. Summary of significant accounting policies (continued)• hedgesofaparticularriskassociatedwiththecashflowsofrecognisedassetsandliabilitiesandhighlyprobable
forecast transactions (cash flow hedges); or
• hedgesofanetinvestmentinaforeignoperation(netinvestmenthedges).
The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items.
The fair values of various derivative financial instruments used for hedging purposes are disclosed in Note 14, while movements in the hedge reserve are shown in Note 26. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged items is more than 12 months. It is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months.
(i) Fair value hedgeChanges in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the statement of comprehensive income, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement over the period to maturity using a recalculated effective interest rate.
(ii) Cash flow hedgeThe effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the statement of comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.
Amounts accumulated in equity are reclassified to the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). The gain or loss relating to the ineffective portion of the interest rate swaps hedging variable rate borrowings and forward contracts hedging foreign currency operating and interest payments is recognised in the income statement within ‘Finance costs’. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or fixed assets) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability.
When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.
(iii) Net investment hedgeHedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a similar way to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised in the statement of comprehensive income and accumulated reserves in equity while any gains or losses relating to the ineffective portion are recognised immediately in the income statement within other income or finance expenses. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to the income statement.
(iv) Derivatives that do not qualify for hedge accountingCertain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement and are included in other income or finance expenses.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 1. Summary of significant accounting policies (continued)(q) Property, plant and equipmentProperty, plant and equipment (including Investment properties, refer Note 1(r)) is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their useful lives, as follows:
Buildings 25-50 yearsFreehold improvements 25-40 yearsPlant and equipment1 0-10 yearsLeasehold improvements 7 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (refer to Note 1(j)).
Plant and equipment under development is not depreciated. Depreciation will commence on completion of the development when the assets are available for use.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement.
1. The Group has entered into agreements with third parties to sell its gaming machines classified as plant and equipment with the effective date of sale of these machines being the date when the Gaming Operator Licence expires on 15 August 2012 (unless extended). As a result of the sale agreements, the Group has decided to change the depreciation estimate of the gaming machines to a zero depreciation rate from 31 March 2011 as the sale value of the gaming machines exceeds their written down book value. The remainder of the gaming assets classified under plant and equipment relating to the Gaming Operator Licence will continue to be depreciated at existing rates up to the expiry of the licence on 15 August 2012 (unless extended).
Refer to Note 3 for the effects on the change in accounting estimate on the gaming machines.
(r) Investment propertiesInvestment properties, principally comprising land and buildings of gaming venues and freehold commercial buildings, are held for long term rental yields and are not occupied by the Group. Investment properties are carried at cost less subsequent depreciation.
Depreciation is calculated using the straight-line method in accordance with the accounting policy for property, plant and equipment (refer to Note 1(q)).
A property’s carrying amount is written down immediately to its recoverable amount if the property’s carrying amount is greater than its estimated recoverable amount (refer to Note 1(j)).
(s) Intangible assets(i) GoodwillGoodwill is measured as described in Note 1(i). Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is not amortised. Instead, goodwill is tested for impairment six monthly or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
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Note 1. Summary of significant accounting policies (continued)Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segments (Note 4).
(ii) LicencesLicences that have a finite useful life are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of licences over their estimated useful lives. The expected useful lives used for licences are as follows:
Race wagering licence – Queensland 92 years Expires 2098Sports wagering licence – Queensland 8 years Expires 2014Totalisator licence – Northern Territory 9 years Expires 2015Sports bookmaker licence – Northern Territory 9 years Expires 2015Major betting operations licence – South Australia 94 years Expires 2100Gaming machine monitoring operator’s licence – Queensland 10 years Expires 2017Monitoring provider’s licence – Northern Territory 5 years Expires 2016Centralised monitoring system licence – New South Wales 10 years Expires 2016Inter-club linked gaming system licence – New South Wales 11 years Expires 2017Inter-hotel linked gaming system licence – New South Wales 13 years Expires 2019Radio licences 11 years Expires 2014Victorian lotteries licence 10 years Expires 2018New South Wales lotteries licence 40 years Expires 2050
The Victorian gaming licence was not amortised as the licence expiry payment which may be paid to the Company at the end of the licence period was expected to be not less than the carrying value of the asset. The licence has now been fully impaired.
The carrying value of licences is reviewed annually and any balance representing future benefits for which realisation is considered to be no longer probable is written off.
(iii) BrandThe Tattersall’s brand was carried at cost by the Company. Due to AASB 3 Business Combinations requirements the balance was eliminated on consolidation. The Tattersall’s brand has now been fully impaired.
The TAB brand is an indefinite life asset carried at cost being the fair value on acquisition of TattsBet Limited (formerly UNiTAB Limited). It is reviewed annually by reference to future cash flows to ensure it is not carried in excess of recoverable amount.
Brands with a finite useful life are carried at cost less accumulated depreciation and impaired losses. Amortisation is calculated using the straight-line method to allocate the cost of the brands over their estimated useful lives.
The expected useful lives used for brands are as follows:
Brand name – South Australia 16 years Expires 2022Golden Casket Brands – Queensland 65 years Expires 2072
(iv) Research and developmentExpenditure on research activities, undertaken with the prospect of obtaining new technical knowledge and understanding, is recognised in the income statement as an expense when it is incurred.
(v) IT development and softwareCosts incurred in developing products or systems that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software. Costs capitalised include external direct costs of materials and service, direct payroll and payroll related costs of employees’ time spent on the project.
Capitalised software is carried at cost less accumulated amortisation and impaired losses. Amortisation is calculated using the straight-line method to allocate the cost of the software over its estimated useful life of two to 14 years.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 1. Summary of significant accounting policies (continued)(vi) OtherThe cost associated with the Golden Casket Lottery Operator Agreement is carried at cost less accumulated depreciation and impaired losses. Amortisation is calculated using the straight-line method to allocate the cost of the agreement over the term of 65 years, expiring in 2072.
(t) Trade and other payablesThese amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition.
Prizes payable to ‘Set for Life’, ‘Made for Life’ and ‘Win for Life’ major prize winners are payable over periods exceeding 12 months and are valued at the net present value of the future expected cash flows. The portion of this liability which is payable more than 12 months post balance date is reported as a non-current liability.
(u) Interest bearing liabilitiesInterest bearing liabilities, such as loans, are initially recognised at fair value, net of transaction costs incurred and subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method.
Interest bearing liabilities are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
(v) Finance costs Finance costs incurred for the acquisition, construction or production of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other finance costs are expensed.
(w) ProvisionsProvisions are recognised when:
• theGrouphasapresentlegalorconstructiveobligationasaresultofpastevents;
• itisprobablethatanoutflowofresourceswillberequiredtosettletheobligation;and
• theamounthasbeenreliablyestimated.
Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the best estimate of the expenditure required to settle the present obligation.
(x) Employee benefits(i) Wages and salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the end of each reporting period, are recognised in other payables in respect of employees’ services up to the end of each reporting period and are measured at the amounts expected to be paid when the liabilities are settled.
(ii) Long service leaveThe liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of each reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of each reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
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Note 1. Summary of significant accounting policies (continued)(iii) Retirement benefit obligationsAll Group employees are entitled to become members of the Group’s accumulation (defined contribution) plan, whilst some employees employed by Golden Casket Lottery Corporation Limited have previously elected into the plans as outlined below. The accumulation plan receives superannuation guarantee contributions from Group companies and the Group’s legal or constructive obligation is limited to these contributions.
Golden Casket Lottery Corporation Limited contribute to the Queensland State Public Sector Superannuation Scheme (Q-Super), with all contributions recognised as an expense when incurred. Benefits are provided to employees on either a defined benefit basis or through an accumulation fund. Both funds are administered by the Queensland government Superannuation Office. No liability is recognised for superannuation benefits in respect of defined benefit and accumulation plans to which Golden Casket Lottery Corporation Limited contributes as this liability is held on a Whole of Government basis and reported in the Whole of Government financial statements.
New South Wales Lotteries Corporation Pty Limited (‘NSW Lotteries’) was acquired on 31 March 2010. Remaining employees were transferred into Tatts Employment Co (NSW) Pty Limited, a subsidiary of Tatts Group Limited.
In respect of defined contributions superannuation funds, Tatts Employment Co (NSW) Pty Limited’s obligations are determined by the amounts to be contributed for that reporting period so no actuarial assumptions are required to measure the obligation or the expense and there is no possibility of any actuarial gain or loss.
Tatts Employment Co (NSW) Pty Limited also contributes to three defined benefit superannuation funds. Sub funds have been created in relation to the transferred employees who are members of the following New South Wales public sector superannuation schemes:
• StateAuthoritiesSuperannuationScheme(SASS)
• StateSuperannuationScheme(SSS)
• StateAuthoritiesNon-contributorySuperannuationScheme(SANCS).
Its net obligations to these funds are calculated separately for each fund by estimating the amount of future benefit that employees have accrued in return for their services in the current and prior reporting periods, discounted to present value based on the long term Commonwealth government bond rate less the fair value of any assets of the funds. All three funds are closed to new members. To the extent that a surplus or deficit is generated due to variations in actuarial valuations, these variances will be reflected in the balance sheet as an asset or liability and recognised in the statement of comprehensive income as income or expense and associated income tax effect. A surplus resulting in a superannuation asset may allow Tatts Employment Co (NSW) Pty Limited to have a reduction in its contributions. A deficit resulting in a superannuation liability may require Tatts Employment Co (NSW) Pty Limited to increase the level of its contributions.
A liability or asset in respect of defined benefit superannuation plans is recognised in the balance sheet, and is measured as the present value of the defined benefit obligation at the end of each reporting period less the fair value of the superannuation fund’s assets at that date and any unrecognised past service cost. The present value of the defined benefit obligation is based on expected future payments which arise from membership of the fund to the end of each reporting period, calculated annually by independent actuaries using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service.
Expected future payments are discounted using market yields at the end of each reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the period in which they occur, directly in the statement of changes in equity.
Past service costs are recognised immediately in the income statement, unless the changes to the superannuation fund are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period.
Future taxes that are funded by the entity as part of the provision of the existing benefit obligation (e.g. taxes on investment income and employer contributions) are taken into account in measuring the net liability or asset.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 1. Summary of significant accounting policies (continued)Contributions to defined contribution funds are recognised as an expense as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
(iv) Performance-based incentivesPermanent employees of the Group participate in an annual incentive scheme under which employees receive cash, and for certain executives a combination of cash and share-based compensation benefits. The total incentive amount paid annually is determined by a calculation based on revenue growth, EBIT margin growth, and EPS growth, applied to market benchmarked target incentives of the Group’s permanent employees.
For the amount payable in cash, the Group recognises a liability and an expense for such cash incentives arising from these calculations, and for any Special Circumstance incentive amounts paid or payable outside of the incentive pool arising from the calculations. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. Share-based payments under this annual incentive scheme are outlined in the next section.
(v) Share-based paymentsShare-based compensation benefits are provided to certain executives who have greater potential impact on share price and long term value generation as part of any annual incentive awarded to them in the form of rights exercisable in 12 months from grant date into restricted shares, provided the executive remains employed with the Group.
The fair value of the rights granted under this incentive scheme is recognised as an employee benefit expense with the corresponding increase in the share based equity reserve. The fair value is measured based on the Volume Weighted Average Price (VWAP) of the ten trading days prior to the day the Remuneration Committee decides to award the rights (determination date) recognising the 12 month exercise date, and fully charged to the period to which the performance incentive applies.
Fair values at determination date were determined using a Binomial Valuation methodology that takes into account the term of the right, the impact of dilution, the share price at determination date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the right. The market value of shares provided to employees for no cash consideration under this incentive scheme is charged to the share-based equity reserve when the employee exercises the right and becomes entitled to the restricted shares.
Share-based compensation benefits prior to the 2011 financial year were provided to employees via the long term incentive plan (LTIP), an equity settled plan.
The fair value of performance options and rights granted under the LTIP was recognised as an employee benefit expense with a corresponding increase in equity. The fair value was measured at determination date and is recognised over the period during which the employees become unconditionally entitled to the options and rights.
The assessed fair value at determination date of options and rights granted to the individuals is allocated equally over a three year period from determination date. Fair values at determination date were determined using a Monte-Carlo Simulation Valuation methodology that takes into account the exercise price, the term of the option and right, the impact of dilution, the share price at determination date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option and right.
The fair value of the options and rights granted under the LTIP excludes the impact of any non-market vesting conditions (for example, profitability and sales and growth targets). Non-market vesting conditions are included in assumptions about the number of options and rights that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of options and rights that are expected to become exercisable.
Upon the exercise of options or rights under the LTIP, the balance of the share-based payments reserve relating to those options and rights is transferred to share capital.
The market value of shares issued to employees for no cash consideration under the LTIP is recognised as an employee benefits expense with a corresponding increase amortised over the vesting period in equity when the employees become entitled to the shares.
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Note 1. Summary of significant accounting policies (continued)(vi) Termination benefitsTermination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
(y) Contributed equityOrdinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options/rights are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options/rights, for the acquisition of a business, are not included in the cost of the acquisition as part of the purchase consideration.
(z) DividendsProvision is made for the amount of any dividend determined, being appropriately authorised on or before the end of the financial year but not distributed at balance sheet date.
(aa) Earnings per share(i) Basic earnings per shareBasic earnings per share is calculated by dividing the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year.
(ii) Diluted earnings per shareDiluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financial costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.
(ab) Goods and services tax (GST)Revenues, expenses and assets are recognised net of the amount of the associated GST unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense.
Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet.
Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority, are presented as operating cash flows.
(ac) Rounding of amountsThe Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar.
(ad) New accounting standards and AASB interpretationsCertain new accounting standards and interpretations have been published that are not mandatory for 30 June 2011 reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set out below.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 1. Summary of significant accounting policies (continued)(i) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2013) AASB 9 Financial Instruments Addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2013 but is available for early adoption. When adopted, the standard will affect in particular the accounting for available-for-sale financial assets, since AASB 9 only permits the recognition of fair value gains and losses in the statement of comprehensive income if they relate to equity investments that are not held for trading. The Group only holds available-for-sale financial assets that are deemed not to be held for trading, and therefore the amendment is not expected to have any impact on the Group’s financial statements.
There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The derecognition rules have been transferred from AASB 139 Financial Instruments: Recognition and Measurement and have not been changed. The Group has not yet decided when to adopt AASB 9.
(ii) Revised AASB 124 Related Party Disclosures and AASB 2009-12 Amendments to Australian Accounting Standards (effective from 1 January 2011)In December 2009 the AASB issued a revised AASB 124 Related Party Disclosures. It is effective for accounting periods beginning on or after 1 January 2011 and must be applied retrospectively. The amendment clarifies and simplifies the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities. The Group will apply the amended standard from 1 July 2011. When the amendments are applied, the Group will need to disclose any transactions between its subsidiaries and its associates. However, there will be no impact on any of the amounts recognised in the financial statements.
(iii) AASB 2009-14 Amendments to Australian Interpretation – Prepayments of a Minimum Funding Requirement (effective from 1 January 2011)In December 2009, the AASB made an amendment to Interpretation 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The amendment removes an unintended consequence of the interpretation related to voluntary prepayments when there is a minimum funding requirement in regard to the Group’s defined benefit scheme. It permits entities to recognise an asset for a prepayment of contributions made to cover minimum funding requirements. The Group does not make any such prepayments. The amendment is therefore not expected to have any impact on the Group’s financial statements. The Group intends to apply the amendment from 1 July 2011.
(iv) AASB 2010-6 Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets (effective for annual reporting periods beginning on or after 1 July 2011)Amendments made to AASB 7 Financial Instruments: Disclosures in November 2010 introduce additional disclosures in respect of risk exposures arising from transferred financial assets. The amendments will affect particularly entities that sell, factor, securitise, lend or otherwise transfer financial assets to other parties. They are not expected to have any significant impact on the Group’s disclosures. The Group intends to apply the amendment from 1 July 2011.
(v) AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets (effective from 1 January 2012)In December 2010, the AASB amended AASB 112 Income Taxes to provide a practical approach for measuring deferred tax liabilities and deferred tax assets when investment property is measured using the fair value model. AASB 112 requires the measurement of deferred tax assets or liabilities to reflect the tax consequences that would follow from the way management expects to recover or settle the carrying amount of the relevant assets or liabilities, that is through use or through sale. The amendment introduces a rebuttable presumption that Investment properties which are measured at fair value are recovered entirely by sale. The Group measures its Investment properties at cost, and the amendment is therefore not expected to have any impact on the Group’s financial statements.
(vi) IAS 19 (AASB 119) – Amendments to Australian Accounting Standards – Employee BenefitsThe revised standard requires the recognition of all re-measurements of defined benefit liabilities/assets immediately in other comprehensive income and the calculation of a net interest expense or income by applying the discount rate to the net defined benefit liability or asset. The standard is effective from 1 January 2013, and the Group intends to apply the amendment from 1 July 2013.
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Note 1. Summary of significant accounting policies (continued)(vii) IAS 1 (AASB 101) – Amendments to Australian Accounting Standards – Presentation of Financial StatementsThe amendment requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. It will not affect the measurement of any of the items recognised in the balance sheet or the profit or loss in the current period. The Group intends to adopt the new standard from 1 July 2012.
(viii) AASB 2011- 4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure RequirementsThe amendments apply from 1 July 2013 and cannot be adopted early. The Corporations Act requirements in relation to remuneration reports will remain unchanged for now, but these requirements are currently subject to review and may also be revised in the near future.
(ae) Parent entity financial informationThe financial information for the parent entity, disclosed in Note 38 has been prepared on the same basis as the consolidated financial statements, except as set out below.
(i) Investments in subsidiaries, associates and joint venture entitiesInvestments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of parent entity. Dividends received from associates are recognised in the parent entity’s profit and loss, rather than being deducted from the carrying amount of these investments.
(ii) Tax consolidation legislation The parent entity and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Tatts Group Limited.
The head entity and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right.
In addition to its own current and deferred tax amounts, head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from the unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group.
The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate the head entity for any current tax payable assumed and are compensated by the head entity for any current tax receivable and deferred tax assets relating to the unused tax losses or unused tax credits that are transferred to the head entity under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements.
The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligation to pay tax instalments.
Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable as a contribution to (or distribution from) wholly-owned tax consolidated entities.
(iii) Financial guarantees Where the parent entity has provided financial guarantees in relation to loans and payables of subsidiaries for no compensation, the fair values of these guarantees are accounted for as contributions and recognised as part of the cost of the investment.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 2. Financial risk managementFinancial risk management is carried out by a central treasury function (Group Treasury) under policies approved by the Board of Directors. Group Treasury identifies, monitors and manages financial risks in co-operation with the Group’s operating units. The Treasury and Investment Committee internally co-ordinates this process, and the Audit, Risk and Compliance Committee oversees the management and implementation of the risk management framework and policies.
The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and price risk), credit risk, liquidity risk and fair value interest rate risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses various risk management approaches, including where appropriate derivative financial instruments such as foreign exchange contracts and interest rate swaps, to hedge certain risk exposures. Derivatives, when utilised, are exclusively for hedging purposes, i.e. not for trading or other speculative purposes. The Group uses a variety of methods to measure the extent of different types of risk to which it is exposed, including market or fair value or face value as appropriate.
The operation of this treasury activity is managed through segregation of duties, reporting requirements and structured authority levels, and is subject to ongoing internal and external audit review.
(a) Market risk(i) Foreign exchange riskThe Group operates internationally and is exposed to foreign exchange risk arising predominately from currency exposures to the British Pound, United States Dollar, Swedish Kroner, and various other currencies from time to time.
Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency, and from net investments in foreign operations. Management of foreign exchange risk is focused on minimising the volatility of Group financial results to adverse exchange rate movements by protecting the cash flows of the business and reducing large investment exposures to such exchange rate movements. This is achieved through a combination of risk management approaches including forward foreign exchange contracts, cross currency interest rate swaps, holding foreign currency cash balances against exposures, and minimising offshore net asset holdings through foreign currency denominated debt.
The Group’s material exposure to foreign currency risk at the end of the reporting period was as follows:
30 June 2011 30 June 2010 30 June 2011 30 June 2010 GBP GBP USD USD ’000 ’000 ’000 ’000
Interest bearing liabilities 46,070 111,170 - -Derivative financial liability 5,068 6,548 - -Cross-currency Interest rate swap – receivable - - (225,000) -Loan notes (US Private Placement) - - 225,000 -Forward exchange contracts - buy foreign currency (cash flow hedge) 2,650 6,400 - -
53,788 124,118 - -
The following relevant exchange rates applied during the year:
Average Rate Spot Rate – 30 June
Currency 2011 2010 2011 2010
British Pound (GBP) 0.62697 0.56031 0.66788 0.56256United States Dollar (USD) 1.00108 - 1.07220 -South African Rand (ZAR) 6.94649 6.68629 7.25120 6.44940Swedish Kroner (SEK) 6.59936 6.39603 6.78490 6.55330
Sensitivity analysisBased on the financial instruments held at 30 June 2011, had the Australian Dollar weakened/strengthened by 10% (2010: 10%) against the British Pound with all other variables held constant, the Group’s post-tax profit for the year would have been the same as that reported in the income statement, while equity would have been $7,321,000 higher/$8,948,000 lower (2010: $22,063,000 higher/$24,515,000 lower) than that reported in the balance sheet.
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Note 2. Financial risk management (continued)The Group’s exposure to other foreign exchange movements is not material.
(ii) Price riskThe Group is exposed to equity securities and managed fund securities price risk. This arises from investments held by the Group and classified in the balance sheet as available-for-sale financial assets (refer Note 13 for further information). The Group is not directly exposed to commodity price risk.
Such equity and managed fund investments are not part of the usual business operations or strategies of the Group and do not represent a material exposure to the Group. As at 30 June 2011, the amount held is $33,824,000 (2010: $31,085,000).
Based on the equity securities and managed fund securities held at 30 June 2011, had the price increased/decreased by 10% (2010: 10%) with all other variables held constant, the Group’s post-tax profit for the year would have been unaffected while equity would have been $3,382,000 higher/lower (2010: $3,109,000 higher/lower).
(iii) Cash flow and fair value interest rate riskRefer to (d) below.
(b) Credit riskCredit risk is the risk that the Group will suffer a financial loss due to the inability of a counter party to meet its financial and/or contractual obligations. In relation to treasury activities, credit risk arises primarily from investments, and from the use of risk management derivative instruments. Business and trade related credit risk is managed through procurement policies in place for the Group. Treasury related credit risk is managed by ensuring all counterparties satisfy credit rating level requirements of a minimum investment grade of BBB+ or greater. As at 30 June 2011, all current counterparties have an investment grade that exceeds this requirement. Through spreading transactions across a range of such counterparties to limit the amount of credit exposure to any one financial institution, the Group thereby avoids any significant concentration of credit risk.
(c) Liquidity riskLiquidity risk is the risk that monies needed to fund the Group may not be available in sufficient quantities at some future date. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities, and the ability to close-out market positions. Group Treasury manages liquidity risk by continuously monitoring forecast and actual cash flows, matching the maturity profiles of financial assets and liabilities, and maintaining appropriate committed funding lines in anticipation of future requirements. The Group has a policy that ensures any surplus cash is invested using approved investment instruments with approved financial institutions on maturities that ensure short term liquidity availability. Due to the dynamic nature of the underlying businesses, Group Treasury aims at maintaining flexibility in funding by keeping committed credit lines available and ensuring compliance with borrowing facility covenants and undertakings. This approach is supported through the maintenance of good banking relationships with the Group’s core banks.
Maturity of financial assetsThe financial assets of the Group, with the exception of available-for-sale financial assets disclosed in Note 13, have maturity periods ranging from two to 120 days. Weekly agents and venue sweeps receivables are generally on a two to seven day cash cycle.
Maturities of financial liabilitiesThe table below analyses the financial liabilities into relevant maturity groupings based on the remaining period at end of each reporting date to the contractual maturity date. The amounts disclosed are undiscounted cash flows.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 2. Financial risk management (continued) Total Less than 6 to 1 to 2 to More than Contractual Carrying 6 Months 12 Months 2 Years 5 Years 5 Years Cash Flows Value $’000 $’000 $’000 $’000 $’000 $’000 $’000
2011 Non-derivativesTrade and other Non-interest payables bearing 424,220 125,695 41,933 18,234 19,667 629,749 620,208Bank overdraft Floating - - - - - - -Bank loans Floating 33,081 33,474 68,443 1,296,432 - 1,431,430 1,068,702Loan notes (USPP) Fixed 5,196 5,196 10,391 31,174 249,885 301,842 202,385
Total non- derivatives 462,497 164,365 120,767 1,345,840 269,552 2,363,021 1,891,295
Derivatives Net settled (interest rate swaps) - - 2,860 14,637 - 17,497 17,497
Net settled (cross currency interest rate swaps) - - - - 33,465 33,465 33,465
Gross settled (forward foreign exchange contracts – cash flow hedges) - (inflow) (4,019) - - - - (4,019) - outflow 5,136 - - - - 5,136 1,117
1,117 - - - - 1,117 1,117
2010 Non-derivatives Trade and other Non-interest payables bearing 379,458 146,225 17,796 20,944 22,204 586,627 583,576Bank overdraft Floating 603 - - - - 603 603Bank loans Floating 45,537 844,090 102,320 1,088,450 - 2,080,397 1,580,821
Total non- derivatives 425,598 990,315 120,116 1,109,394 22,204 2,667,627 2,165,000
Derivatives Net settled (interest rate swaps) - - - 25,353 - 25,353 25,353
Gross settled (forward foreign exchange contracts – cash flow hedges) - (inflow) (11,734) - - - - (11,734) - - outflow 12,908 - - - - 12,908 1,174
1,174 - - - - 1,174 1,174
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Note 2. Financial risk management (continued)Financing arrangementsOn 5 June 2008, a syndicated multi-currency revolving facility of Tatts Group Limited together with Tattersall’s Holdings Pty Ltd, Tattersall’s Gaming Pty Ltd, Tattersall’s Sweeps Pty Ltd, TattsBet Limited (formerly UNiTAB Limited), Maxgaming NSW Pty Ltd, Maxgaming QLD Pty Ltd, Golden Casket Lottery Corporation Limited, European Gaming Ltd and Talarius Limited of $1,100,000,000 was established with maturities of one to five years. In December 2008 the one year facility was extended by a further two years.
The syndicated facility was increased by $600.0 million to $1.7 billion on 4 February 2010 to be utilised for the acquisition of New South Wales Lotteries Corporation Pty Ltd with maturities of three and five years.
The refinancing of Tranche A and B of the syndicated multi-currency facility (with a facility limit of $911.0 million) due in June 2011 was completed over two stages as follows:
• On21December2010,theGroupraisedUS$225.0million(A$202.4million)fromaUSPrivatePlacement(USPP).
The USPP comprised two tranches:
- US$55.0 million (A$49.5 million) with a seven year maturity; and
- US$170.0 million (A$152.9 million) with a 10 year maturity.
To mitigate any potential interest rate and foreign exchange risks arising from this transaction, the Group entered into cross-currency interest rate swaps (CCIRS) to swap the fixed US bond funding to a synthetic floating rate AUD funding at the time of the pricing of the USPP. This was done in accordance with the Group’s financial risk management strategy. The CCIRS converts the USD funds into AUD and translates the USD (semi-annual) fixed interest rate to an Australian bank bill (quarterly) floating rate plus a margin.
• On25March2011,TrancheAandBofthefacilitywerereplacedbynewTranchesAandBof$350.0millioneachwith maturities of three and five years, thereby totalling $700.0 million. This resulted in the syndicated bank facility now having a total limit of $1.489 billion.
This completed the current refinancing requirements of the Group. The next debt maturity for this syndicated facility is March 2013.
Unrestricted access was available at balance date to the following lines of credit:
30 June 2011 30 June 2010
Weighted Weighted Balance Average Balance Average Available Drawn Interest Available Drawn Interest Facility Down Rate 1 Facility Down Rate $’000 $’000 % $’000 $’000 %
Syndicated multi-currency revolving facility 1,489,000 1,077,878 6.14 1,700,000 1,592,090 Loan notes (US Private Placement) 202,385 202,385 4.95 - - 5.43
Total 1,691,385 1,280,263 1,700,000 1,592,090
1. The weighted average rate represents the variable rate at which the funds have been borrowed. This excludes the overlay of any interest rate derivatives at the end of each reporting period.
The domestic banks provided funds under the syndicated multi-currency facility agreement, covered by financial undertakings that impose certain covenants on the Group. In relation to the USD funds raised in December 2010 from Private Placement Investors, the undertakings and covenants are similar to the syndicated multi-currency revolving facility agreement. The financial undertakings state that (subject to certain exceptions) the companies party to these facilities would not provide any other security over their assets, and will ensure that certain financial ratios are maintained. The financial ratios were maintained as at 30 June 2010 and 2011.
(d) Cash flow and fair value interest rate riskInterest rate risk is the risk that the Group will suffer a financial or economic opportunity loss due to an unfavourable change in interest rates. The Group’s interest rate risk arises from the Group’s interest bearing assets and borrowings.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 2. Financial risk management (continued)Borrowings issued at variable rates expose the Group to cash flow interest rate risk, while borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group’s borrowings at variable rates were denominated in Australian Dollars and British Pounds. When required, the Group may enter into interest rate hedge instruments, ranging from 10.0% to 100.0% of the interest rate exposure determined on the debt profile of the Group. Any decision to hedge interest rate risk will be assessed at the inception of each floating rate debt facility and/or at each rollover in light of the overall Group exposure, the prevailing interest rate market and any funding counterparty requirements.
The Group’s interest bearing assets are typically invested at fixed rates for terms ranging between 30 and 180 days due to potential liquidity requirements. As a result, the Group’s income and operating cash flows are not materially exposed to changes in market interest rates.
Group Treasury manages interest rate risk by establishing interest rate hedges in accordance with the Board approved policy.
At balance date, material exposure to interest rate risk is limited to the loans available under the funding arrangements as disclosed in (c) above and cash and cash equivalents as disclosed in Note 10.
All other financial assets and liabilities are either non-interest bearing or not subject to interest rate risk or exposures to such risk are not material.
Sensitivity analysisAt 30 June 2011, if interest rates had increased/decreased by 100 basis points (2010: 100 basis points) from the year end rates with all other variables held constant, the post-tax profit for the year and equity for the Group would have been $7,179,000 lower/higher (2010: $8,266,000 lower/higher).
(e) Fair value of financial assets and liabilitiesOther than those classes of financial assets and liabilities denoted as ‘listed’ (refer Note 13), none of the classes of financial assets and liabilities are readily traded on organised markets in standardised form. The net fair value of financial assets and liabilities is exclusive of costs which would be incurred on realisation of an asset, and inclusive of costs which would be incurred on settlement of liability. The fair values of financial assets and liabilities of the Group are approximately the same as the carrying amount shown in the balance sheet.
(i) On-balance sheetThe fair value of cash and cash equivalents, and non-interest bearing monetary financial assets and financial liabilities of the Group approximates their carrying amounts.
The fair value of other monetary financial assets and financial liabilities is based upon market prices where a market exists or by discounting the expected future cash flows by the current interest rates for assets and liabilities with similar risk profiles.
Equity investments traded in active markets have been valued by reference to market prices prevailing at balance sheet date. For non-traded equity investments, the fair value is an assessment by management based on the underlying net assets, future maintainable earnings and any special circumstances pertaining to a particular investment.
(ii) Off-balance sheetThe Company and certain controlled entities have potential financial liabilities which may arise from certain contingencies disclosed in Note 30. No material losses are anticipated in respect of any of those contingencies.
(iii) Derivative financial instrumentsFor forward foreign exchange contracts, the fair value is taken to be the unrealised gain or loss at balance sheet date calculated by reference to the current forward exchange rates for contracts with similar remaining maturity profiles.
For interest rate swaps, the fair value is taken to be the unrealised gain or loss at balance sheet date calculated by reference to the current interest rate curve with similar remaining maturity profiles.
For cross-currency interest rate swaps, the fair value is taken to the unrealised gain or loss at balance sheet date calculated by reference to the current forward exchange rates and interest rate curve with similar maturity profiles.
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Note 2. Financial risk management (continued)(iv) Fair value hierarchyThe fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes.
AASB 7 Financial Instruments: Disclosures requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
Level 1 – the fair value is calculated using quoted prices in active markets.
Level 2 – the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).
Level 3 – the fair value is estimated using inputs for the asset or liability that are not based on observable market data.
The following table presents the Group’s assets and liabilities measured and recognised at fair value at 30 June 2011 and 30 June 2010:
Level 1 Level 2 Level 3 Total $’000 $’000 $’000 $’000
2011 Assets Available-for-sale financial assets Equity securities 6,949 - - 6,949 Managed fund investment - 26,875 - 26,875
Total assets 6,949 26,875 - 33,824
Liabilities Forward foreign exchange contracts - 1,117 - 1,117Interest rate swap contracts - 17,497 - 17,497Cross-currency interest rate swaps - 33,465 - 33,465
Total liabilities - 52,079 - 52,079
2010 Assets Available-for-sale financial assets Equity securities 5,803 - - 5,803 Managed fund investment - 25,282 - 25,282
Total assets 5,803 25,282 - 31,085
Liabilities Forward foreign exchange contracts - 1,174 - 1,174Interest rate swap contracts - 25,353 - 25,353
Total liabilities - 26,527 - 26,527
(f) Capital risk managementThe Group’s policy is to maintain a capital structure for the business which ensures sufficient liquidity and support for business operations, maintains shareholder and market confidence, provides strong stakeholder returns, and positions the business for future growth.
The ongoing maintenance and pursuit of this policy is characterised by:
• MaintainingagearingratiothatensurestheinvestmentgradepositioningoftheGroup.
• MaintainingappropriatesourcesofdebtfundingthatensureanappropriatematurityprofilefortheGroup.
• Adividendpolicyaimedatdividendpayoutratiosofover90%onafullyfrankedbasis.
• InvestmentcriteriathatconsiderearningsaccretionandriskadjustedrateofreturnrequirementsbasedontheGroup’s weighted average cost of capital.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 2. Financial risk management (continued)• Ongoingcashflowforecastanalysisanddetailedbudgetingprocesseswhich,combinedwithcontinualdevelopment
of banking and investor relationships, is directed at providing a sound financial positioning for the Group’s operations and financial management activities.
The gearing ratios that management monitors as key metrics for capital management are calculated as net debt divided by total capital (balance sheet gearing ratio), and net debt divided by EBITDA (earnings gearing ratio). Net debt is calculated as total borrowings (interest bearing liabilities as shown in the balance sheet, plus derivative financial liabilities and bank guarantees) less cash and cash equivalents (less prize reserves and other committed cash amounts). Total capital is calculated as ‘equity’ as shown in the balance sheet (including non-controlling interests) plus net debt. EBITDA (adjusted) is the earnings before interest, tax, depreciation and amortisation as shown in the income statement, adjusted to reflect full year outcomes of continuing operations, adjusted for non-recurring significant or extraordinary items which are non-cash in nature, adjusted for acquisitions/disposals during the past financial year on a pro forma 12 month basis and with the addition of interest income. Two measures are used for gearing to provide both a balance sheet and earnings/cash flow perspective of the gearing of the business. 2011 2010 $’000 $’000
EBITDA (adjusted) 620,898 600,244 Interest bearing and other liabilities 1,334,400 1,621,430Less: cash and cash equivalents (excluding prize reserves, etc.) (90,505) (256,585)
Net debt 1,243,895 1,364,845Equity 2,554,139 2,463,681
Total capital 3,798,034 3,828,526
Balance sheet gearing ratio 32.75% 35.61%Earnings gearing ratio 2.00:1 2.27:1
The Board and management continually assess the relative merits of the potential for higher returns from increased gearing and the advantages that flow to markets and operational stability and strategic flexibility from a strong capital base.
There were no changes in the Group’s approach to capital management during the year.
Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements, other than normal banking requirements.
Note 3. Critical accounting estimates and judgementsEstimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.
Critical accounting estimates and assumptionsThe Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Estimated impairment of goodwill, licences and brandsThe Group tests six monthly whether goodwill, licences and brands have suffered any impairment, in accordance with the accounting policy stated in Note 1(s). The recoverable amounts of cash generating units have been determined based on fair value less costs to sell calculations. These calculations require the use of assumptions. Refer to Note 17 for details of these assumptions.
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Note 3. Critical accounting estimates and judgements (continued)(b) Income taxesThe Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such difference will impact the current and deferred tax provision in the period in which such determination is made.
(c) Sale of Gaming Machines and Gaming AssetsThe Group has entered into agreements with third parties to sell, for approximately $60 million, its gaming machines classified as plant and equipment with the effective date of sale of these machines being the date when the Gaming Operator Licence expires on 15 August 2012 (unless extended). As a result of the sale agreements, the Group has decided to change the depreciation estimate of the gaming machines to a zero depreciation rate from 31 March 2011 as the sale value of the gaming machines exceeds their written down book value. The remainder of the gaming assets classified under plant and equipment relating to the Gaming Operator Licence will continue to be depreciated at existing rates up to the expiry on 15 August 2012 (unless extended).
The change in accounting estimate for depreciation on gaming machines to zero from 31 March 2011 has reduced the depreciation charge on this group of assets by $6.5 million for the 2011 financial year. A further reduction in the depreciation charge of $26.1 million is expected for the 2012 financial year with a final reduction of $3.3 million expected in the 2013 financial year before the Gaming Machine Operator Licence expires on 15 August 2012 (unless extended).
The gain and cash proceeds on the sale of the gaming machines will be recognised and received on 15 August 2012 when all conditions placed on the sale of the gaming machines have been met.
Note 4. Segment informationOperating segments are reported in a manner that is consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Chief Executive.
Business segmentsThe Group is organised on a global basis into the following divisions by product and service type.
Tatts PokiesThe operation of gaming machines and Club Keno in Victoria.
LotteriesThe operation of lottery licences within Victoria, New South Wales, Tasmania, Australian Capital Territory, and the Northern Territory and the operation of a Lottery Operator Agreement in Queensland.
TattsBetTotalisator and fixed odds betting on thoroughbred, harness, greyhounds and other sporting events pursuant to licences in Queensland, South Australia and the Northern Territory.
MaxgamingGaming machine monitoring and value added services in Queensland, New South Wales and the Northern Territory.
Bytecraft SystemsWarehousing, installation, relocation, repair and maintenance of gaming machines, lottery and wagering terminals and other transaction devices in Australia.
TalariusGaming operations in the United Kingdom.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 4. Segment information (continued)UnallocatedThis segment includes Shared Services, Investment properties and donations made in 2010 by Tattersall’s Foundation Limited. None of these activities constitutes a separately reportable business segment. During the previous financial year the South African Gaming operation was sold (refer Note 9).
Geographical segmentsAlthough the consolidated entity’s divisions are managed on a global basis they have operated in two main geographical areas during the current financial year (United Kingdom and Australia) and in three geographical areas in the comparative financial year: Australia, South Africa and the United Kingdom. During the previous financial year the South African operation was sold (refer Note 9). The South African Gaming operation is included in Unallocated and Talarius, the UK operation, is now separately identified.
The total of non-current assets other than financial instruments and deferred tax assets located in Australia is $4,140,889,992 (2010: $4,177,783,603) and the total of these non-current assets located in other countries is $159,859,381 (2010: $191,532,703). Segment assets are allocated to countries based on where the assets are located.
Notes to and forming part of the segment information(a) Accounting policiesSegment information is prepared in conformity with the accounting policies of the Group disclosed in Note 1(d) and accounting standard AASB 8 Operating Segments, which states that disclosure of total assets and liabilities for each reportable segment is only required if such an amount is regularly provided to the chief operating decision maker (Chief Executive). Segment revenues and expenses are those that are directly attributable to a segment and the relevant portion of corporate expenses that can be allocated to a segment on a reasonable basis.
(b) Inter-segment transfersSegment revenues, expenses and results include transfers between segments. Such transfers are priced on an ‘arm’s-length’ basis and are eliminated on consolidation.
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Note 4. Segment information (continued)Segment information provided to the Chief Executive of the Group
Inte
r-
Tota
l
Tatt
s
Tatt
s
B
ytec
raft
S
egm
ent
Con
tinu
ing
Dis
cont
inue
d
Po
kies
Lo
tter
ies
Tatt
sBet
1 M
axga
min
g S
yste
ms
Tala
rius
2 U
nallo
cate
d El
imin
atio
ns3
Ope
rati
ons
Ope
rati
ons
Con
solid
ated
2011
$’
000
$’00
0 $’
000
$’00
0 $’
000
$’00
0 $’
000
$’00
0 $’
000
$’00
0 $’
000
Tota
l seg
men
t
reve
nu
e an
d
oth
er in
com
e 1,
226,
689
1,60
5,01
0 59
3,04
3 11
6,75
3 91
,409
72
,341
3,
929
(39,
879)
3,
669,
295
- 3,
669,
295
E
BIT
DA
22
7,13
0 19
6,38
8 14
3,30
4 65
,672
7,
887
9,19
2 (3
3,31
7)
- 61
6,25
6 -
616,
256
Dep
reci
atio
n
and
amor
tisat
ion
(28,
137)
(2
1,42
3)
(19,
744)
(2
6,10
1)
(1,1
92)
(9,1
56)
(13,
662)
-
(119
,415
) -
(119
,415
)
EB
IT
198,
993
174,
965
123,
560
39,5
71
6,69
5 36
(4
6,97
9)
- 49
6,84
1 -
496,
841
20
10
Tota
l seg
men
t
reve
nu
e an
d
oth
er in
com
e 1,
223,
407
1,22
3,66
3 59
4,47
4 12
1,87
9 78
,783
89
,421
2,
307
(35,
911)
3,
298,
023
53,2
62 5
3,35
1,28
5
E
BIT
DA
22
2,34
6 14
3,34
9 14
6,94
6 67
,866
6,
410
(11,
293)
(3
3,52
0)
- 54
2,10
4 19
,641
56
1,74
5D
epre
ciat
ion
an
d am
ortis
atio
n (3
0,41
1)
(13,
163)
(1
8,93
2)
(50,
607)
4 (1
,637
) (1
0,72
5)
(10,
744)
(6
4)
(136
,283
) (3
,798
) (1
40,0
81)
Impa
irmen
t -
- -
- -
- (1
40,0
00)
- (1
40,0
00)
- (1
40,0
00)
EB
IT
191,
935
130,
186
128,
014
17,2
59
4,77
3 (2
2,01
8)
(184
,264
) (6
4)
265,
821
15,8
43
281,
664
1. D
iscl
osed
as
‘UN
iTA
B W
ager
ing’
seg
men
t in
pre
viou
s fin
anci
al r
epor
ts.
2. T
alar
ius
has
its o
wn
segm
ent.
Pre
viou
sly
it w
as d
iscl
osed
in t
he ‘I
nter
natio
nal/B
usin
ess
Dev
elop
men
t’ s
egm
ent.
All
othe
r co
mpa
nies
pre
viou
sly
disc
lose
d in
the
‘Int
erna
tiona
l/Bus
ines
s D
evel
opm
ent’
seg
men
t ha
ve m
oved
into
‘Una
lloca
ted’
. The
201
0 co
mpa
rativ
e ha
s be
en a
men
ded
acco
rdin
gly.
Thi
s is
con
sist
ent
with
the
inte
rnal
rep
ortin
g pr
ovid
ed t
o th
e ch
ief
oper
atin
g de
cisi
on m
aker
.
3. In
ter-s
egm
ent e
limin
atio
ns a
gain
st re
venu
e fo
r the
full
year
201
1 co
mpr
ise
Byt
ecra
ft S
yste
ms
reve
nue
of $
39,0
27,0
00 a
nd o
ther
seg
men
t rev
enue
of $
852,
000.
In fu
ll ye
ar 2
010
inte
r-seg
men
t el
imin
atio
ns c
ompr
ise
Byt
ecra
ft S
yste
ms
reve
nue
of $
35,4
53,0
00 a
nd o
ther
seg
men
t re
venu
e of
$45
8,00
0.
4. T
he M
axga
min
g se
gmen
t in
clud
es a
dditi
onal
am
ortis
atio
n of
$25
.4 m
illio
n in
the
pre
viou
s pe
riod
follo
win
g th
e re
visi
on o
f th
e us
eful
life
of
cert
ain
soft
war
e as
sets
.
5. In
clud
es g
ain
on s
ale
of d
isco
ntin
ued
oper
atio
ns (S
outh
Afr
ican
Gam
ing)
– $
12.0
06 m
illio
n (r
efer
Not
e 9)
.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 4. Segment information (continued)A reconciliation of EBIT from continuing operations to operating profit before tax is as follows:
2011 2010 $’000 $’000
EBIT from continuing operations 496,841 265,821Interest income 4,642 9,251Finance costs (102,565) (60,434)
Profit before income tax from continuing operations 398,918 214,638
Note 5. Revenue(a) From continuing operations Sales revenue Entertainment products and services 3,520,945 3,164,003Rendering of services 136,006 123,958
3,656,951 3,287,961Other revenue Rents and sub-lease rentals 3,563 2,695Interest on unpaid prizes and prize reserves 5,191 4,598Dividends and distributions 1,110 45Other revenue 2,450 2,634
3,669,265 3,297,933
(b) From discontinued operations (Note 9) Entertainment products and services - 41,256
Note 6. Other incomeNet gain on disposal of property, plant and equipment 30 -Gain on disposal of shares in other related parties - 90
30 90
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Note 7. Expenses 2011 2010 $’000 $’000
(a) Net gains and expenses Profit before income tax includes the following specific expenses:
Expenses Depreciation Buildings 2,288 2,473 Plant and equipment 58,293 60,973 Leasehold improvements 5,627 5,337 Freehold improvements 410 368 Investment properties 386 280
Total depreciation 67,004 69,431
Amortisation Deferred expenditure 527 344 Licences 14,115 9,405 Brand 894 2,433 Computer software 34,699 28,792 Computer software – effective life revision – Maxgaming - 25,386 Other 2,176 492
Total amortisation 52,411 66,852
Finance costs Interest and finance charges paid/payable 102,565 57,465 Loss on foreign currency hedge restructure - 2,969
Finance costs expensed 102,565 60,434
Other items: Minimum lease payments expense relating to operating leases 18,486 22,802 Net foreign exchange losses 769 630 Net loss on disposal of property, plant and equipment - 11 Defined contribution superannuation expense 11,326 9,731 (b) Significant revenue and expenses The following material expense items are relevant in explaining the financial performance:
Restructuring costs: Restructuring costs – various 5,251 7,025 Venue closure costs – United Kingdom - 18,014
5,251 25,039
Impairment losses on assets:
Intangibles – goodwill (Note 17) - 140,000
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 8. Income tax expense 2011 2010 $’000 $’000
(a) Income tax expense Current tax 133,171 122,865Deferred tax (14,215) (10,217)Adjustments for current tax of prior periods 4,534 (2,211)
123,490 110,437
Income tax expense is attributable to: Profit from continuing operations 123,490 109,248 Profit from discontinued operations (Note 9) - 1,189
Aggregate income tax expense 123,490 110,437
Deferred income tax expense included in income tax expense/(benefit) comprises: Decrease/(Increase) in deferred tax assets (Note 18) (5,362) 10,577 (Decrease)/Increase in deferred tax liabilities (Note 23) (8,853) (20,794)
(14,215) (10,217)
(b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense 398,918 214,638Profit from discontinuing operations before income tax expense - 16,099
398,918 230,737
Tax at the Australian tax rate of 30% (2010: 30%) 119,675 69,221 Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Depreciation and amortisation 632 733 Investment allowance - (311) Non-assessable income (86) (6,226) Non-deductible items – impairment of intangible asset - 42,000 Non-deductible items 2,487 6,656 Net capital gains - 9 Unrecognised tax losses 199 100 Sundry items - (21)
122,907 112,161
Difference in overseas tax rates 50 487Change in overseas tax rates 703 -Under/(over) provision in prior years in current tax 4,534 (2,211)(Over) provision in prior years in deferred tax (4,704) -
Income tax expense 123,490 110,437
(c) Tax expense (income) relating to items of other comprehensive income Available-for-sale financial assets (554) (207)Cash flow hedges 1,842 4,123
1,288 3,916
(d) Tax losses Unused tax losses for which no deferred tax asset has been recognised 31,877 36,368
Potential tax benefit @ 27.59% (2010: 28%) 8,795 10,183
All unused tax losses were incurred by overseas entities that are not part of the tax consolidated group.
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Note 8. Income tax expense (continued)Tax consolidation legislationTatts Group Limited and its wholly-owned Australian-controlled entities have adopted the tax consolidation legislation. The accounting policy in relation to this legislation is set out in Note 1(ae)(ii).
Note 9. Discontinued operations(a) Previous corresponding yearOn 30 June 2010, Wintech Investments Pty Ltd, a wholly-owned subsidiary of the Group, completed the sale of Carentan Investments (Pty) Ltd and its controlled entities to GPI Slots (Pty) Ltd for 179.3 million Rand. Carentan Investments (Pty) Ltd and its controlled entities provided gaming operations throughout South Africa.
(b) Financial performance and cash flow informationThe financial performance and cash flow information presented are for the period from 1 July 2009 to 30 June 2010 for Carentan Investments (Pty) Ltd and its controlled entities. 2010 $’000
Revenue (Note 5) 41,256Expenses (37,419)
EBIT 3,837Interest income 262Finance costs (6)
Profit before income tax 4,093Income tax expense (Note 8(a)) (1,189)
Profit after income tax of discontinued operations 2,904 Gain on sale of discontinued operations before income tax 12,006Income tax expense on gain on sale of discontinued operations -
Profit from discontinued operations 14,910Non-controlling interests (945)
Profit from discontinued operations, net of non-controlling interests 13,965
Profit attributable to owners of the parent entity relates to: Profit from continuing operations 105,390 Profit from discontinued operations 13,965
119,355
Net cash inflow from operating activities 7,285Net cash outflow from investing activities (4,137)Effect of exchange rate changes on cash and cash equivalents 62
Net increase in cash generated by Carentan and its controlled entities 3,210For
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 9. Discontinued operations (continued) 2010 $’000
(c) Details of the sale of Carentan and its controlled entitiesConsideration received or receivable: Cash 8,998Receivable due 1 July 2010 18,076
Total disposal consideration 27,074 Carrying amounts of net assets sold (14,068)Transaction costs (1,000)
Gain on sale before income tax 12,006 Income tax expense -
Gain on sale after income tax 12,006
Note 10. Cash and cash equivalents 2011 2010 $’000 $’000
Cash at bank and in hand 214,219 161,016Deposits at call 1,290 9,617Fixed interest securities 46,639 222,634
262,148 393,267
Reconciliation to cash at the end of the year The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows:
Balances as above 262,148 393,267Bank overdrafts (Note 21) - (603)
Balances per statement of cash flows 262,148 392,664
Interest rate risk exposure(i) Cash at bank and in handCash at bank is bearing floating interest rates between zero and 4.72% (2010: zero and 4.50%).
(ii) Deposits at callThe deposits are bearing floating interest rates between 4.50% and 4.72% (2010: 2.95% and 4.50%) and have a maturity of between one and 14 days.
(iii) Fixed interest securitiesFixed interest securities are bearing fixed interest rates with a weighted average of 5.72% (2010: 4.90%) and have maturities between one and three months. F
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Note 11. Trade and other receivables 2011 2010 $’000 $’000
Current Trade receivables Weekly sweeps1 43,464 57,062 Trade debtors 19,344 15,100Less: Provision for impairment of receivables (376) (359)
62,432 71,803
Other receivables 46,592 45,789
Amounts receivable from: Joint Venture entities (Note 32(e)) 10,659 7,073
Prepayments 10,485 6,220
130,168 130,885
Non-current Prepayments 96 226
1. Balances with venues, agencies and outlets are swept on recurring cycles of between two and seven days.
Impaired trade and other receivablesThe Group has recognised losses of $529,000 in the income statement (2010: loss of $244,000) in respect of bad and doubtful trade receivables during the year ended 30 June 2011.
At 30 June 2011, there were no material receivables either past due which have not been impaired or individual balances specifically impaired. Collateral is not normally obtained for balances owing.
Movement in provision for impairment of receivables 2011 2010 $’000 $’000
At 1 July (359) (451)Additions through acquisition of entities - (12)Provision for impairment recognised during the year (529) (49)Receivables written off during the year as uncollectable 502 145Effect of exchange rate changes on provision for impairment of receivables 10 8
At 30 June (376) (359)
Other receivablesThese amounts generally arise from transactions outside the usual operating activities of the Group. Where interest is charged, this is on commercial terms. Collateral is not normally obtained.
Foreign exchange and interest rate riskInformation concerning exposure to foreign currency and interest rate risk in relation to trade and other receivables is set out in Note 2.
Fair value and credit riskDue to the short term nature of trade and other receivables, their carrying amount is assumed to approximate their fair value. Information concerning the credit risk of receivables is set out in Note 2.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 12. Inventories 2011 2010 $’000 $’000
Spare parts – at cost 19,514 15,688Less: Accumulated depreciation of spare parts inventory (12,948) (9,530)
6,566 6,158 Finished goods – at cost 1,293 1,093
Total inventory 7,859 7,251
Depreciation represents the write down of spare parts inventory. The write down for the year ended 30 June 2011 is $3,587,000 (2010: $3,311,000) and has been included in operating fees and direct costs in the income statement.
Note 13. Available-for-sale financial assets 2011 2010 $’000 $’000
Available-for-sale financial assets comprise:
Listed securities Equity securities – at fair value 6,949 5,803 Unlisted investments Managed fund investment – at fair value 26,875 25,282
Total available-for-sale financial assets 33,824 31,085
Impairment and price risk exposureInformation concerning exposure to price and credit risk is set out in Note 2.
The Group has recognised no impairment loss on its available-for-sale financial assets during the year ended 30 June 2011 (2010: $Nil).
Note 14. Derivative financial instruments 2011 2010 $’000 $’000
Current liabilities Cash flow hedges – forward foreign exchange contracts 1,117 1,174
Non-current liabilities Cash flow hedges – interest rate swap contracts 17,497 25,353Cash flow hedges – cross-currency interest rate swaps (US Private Placement) 33,465 -
50,962 25,353
The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates in accordance with the Group’s financial risk management policies (refer Note 2). Information regarding exposure to the credit risk, foreign exchange risk and interest rate risk is provided in Note 2.
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Note 14. Derivative financial instruments (continued)Interest rate swap contracts – cash flow hedgesThe Group has entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and pay interest at fixed rates. Swaps currently in place cover approximately 57.1% of the loan principal outstanding (2010: 31.7%) and are timed to match each interest rate payment as it falls due. The contracts require settlement of net interest receivable or payable every three or six months, and are settled on a net basis. Variable interest rates range between 0.65% and 5.20% (2010: 0.65% and 4.90%) while the fixed interest rate is at averages of AUD 5.78% and GBP 4.82% (2010: AUD 5.78% and GBP 4.82%).
The gain or loss from remeasuring the hedging instruments at fair value is recognised in the statement of comprehensive income and deferred in equity in the hedging reserve to the extent that the hedge is effective (refer Note 26).
Forward foreign exchange contracts – cash flow hedgesThe Group has entered into forward foreign exchange contracts to purchase British Pounds. These contracts are hedging highly probable future interest payments for the next six to 12 months. The contracts are timed to mature when interest payments and contractual payments are due to occur.
The gain or loss from remeasuring the forward foreign exchange contracts at fair value is recognised in the statement of comprehensive income and deferred in the hedging reserve to the extent that the hedge is effective (refer Note 26).
Cross-currency interest rate swap contracts/Loan notes (US Private Placement) – cash flow hedgesInformation concerning the cross-currency interest rate swap contracts and US Private Placement Loan notes is set out in Note 2.
The gain or loss from remeasuring the loan notes at fair value is recognised in the statement of comprehensive income and deferred in the hedging reserve to the extent that the hedge is effective (refer Note 26).
Note 15. Property, plant and equipment Reconciliations of the carrying amounts of each class of property, plant and equipment at the beginning and end of each financial year are set out below: Plant and Equipment Freehold Freehold Leasehold Plant and Under Land Buildings Improvements Improvements Equipment Development Total $’000 $’000 $’000 $’000 $’000 $’000 $’000
Cost 21,417 70,091 17,781 52,561 639,382 16,131 817,363Accumulated depreciation - (24,913) (15,291) (33,252) (486,004) - (559,460)
Carrying amount at 30 June 2010 21,417 45,178 2,490 19,309 153,378 16,131 257,903 Additions 3,964 3,762 259 328 23,093 30,913 62,319Disposals - - - - (462) - (462)Depreciation (Note 7) - (2,288) (410) (5,627) (58,293) - (66,618)Transfers in/(out)1 - 411 639 6,546 5,081 (23,126) (10,449)Foreign exchange movements (288) (1,351) - (967) (2,445) (959) (6,010)
Carrying amount at 30 June 2011 25,093 45,712 2,978 19,589 120,352 22,959 236,683
Cost 25,093 69,566 18,680 55,132 650,781 22,959 842,211Accumulated depreciation - (23,854) (15,702) (35,543) (530,429) - (605,528)
Carrying amount at 30 June 2011 25,093 45,712 2,978 19,589 120,352 22,959 236,683
1. Transfers include assets transferred (to)/from property, plant and equipment to intangible assets and from Investment properties.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 15. Property, plant and equipment (continued) Plant and Equipment Freehold Freehold Leasehold Plant and Under Land Buildings Improvements Improvements Equipment Development Total $’000 $’000 $’000 $’000 $’000 $’000 $’000
Cost 19,850 86,633 17,219 49,026 608,463 13,861 795,052Accumulated depreciation - (30,190) (15,342) (31,290) (415,902) - (492,724)
Carrying amount at 1 July 2009 19,850 56,443 1,877 17,736 192,561 13,861 302,328 Fair value adjustments on acquisition of a subsidiary - - - - (82) - (82)Additions through acquisition of entities - - - 13 8,253 237 8,503Additions 1,839 - 649 165 20,864 27,115 50,632Assets included in disposal of discontinued operations - - - (457) (10,056) (175) (10,688)Assets included in disposal of closed venues – restructuring - (748) - (821) (1,962) - (3,531)Disposals - - - - (1,060) - (1,060)Depreciation (Note 7) - (2,473) (368) (5,337) (60,973) - (69,151)Depreciation charge for assets used in year by discontinued operations - - - (125) (3,415) - (3,540)Transfers in/(out)1 - (6,484) 332 8,979 12,956 (24,572) (8,789)Foreign exchange movements (272) (1,560) - (844) (3,708) (335) (6,719)
Carrying amount at 30 June 2010 21,417 45,178 2,490 19,309 153,378 16,131 257,903
Cost 21,417 70,091 17,781 52,561 639,382 16,131 817,363Accumulated depreciation - (24,913) (15,291) (33,252) (486,004) - (559,460)
Carrying amount at 30 June 2010 21,417 45,178 2,490 19,309 153,378 16,131 257,903
1. Transfers include assets transferred (to)/from property, plant and equipment to intangible assets and from Investment properties.
Valuation of land and buildingsThe basis of valuation of land and buildings is at cost less subsequent depreciation for buildings. Where required, land and buildings of the Group were assessed during the current financial year by independent valuers, and these assessments were greater than the carrying value.F
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Note 16. Investment properties 2011 2010
Investment Investment Properties Properties Investment Under Investment Under Properties Construction Total Properties Construction Total $’000 $’000 $’000 $’000 $’000 $’000
Cost 17,431 14,548 31,979 15,631 - 15,631Accumulated depreciation (972) - (972) (692) - (692)
Carrying amount at 1 July 16,459 14,548 31,007 14,939 - 14,939Additions through acquisition from joint venture entities - - - 1,800 14,548 16,348Additions - 16,919 16,919 - - -Depreciation (Note 7) (386) - (386) (280) - (280)Transfers in/(out)1 28,503 (28,909) (406) - - -
Carrying amount at 30 June 44,576 2,558 47,134 16,459 14,548 31,007Cost 46,340 2,558 48,898 17,431 14,548 31,979Accumulated depreciation (1,764) - (1,764) (972) - (972)
Carrying amount at 30 June 44,576 2,558 47,134 16,459 14,548 31,007
1. Transfers include assets transferred to property, plant and equipment.
2011 2010 $’000 $’000
Amounts recognised in profit and loss for investment property Rental income 2,008 876Cost recoveries 110 72Direct operating expenses in property that generated rental income (393) (283)
1,725 665
Valuation basisThe basis of the valuation of Investment properties is at cost less subsequent depreciation. The properties have been assessed by independent valuers in the current financial year, and these assessments were greater than the carrying value.
During the previous financial year, the Group acquired from Joint Venture entities Investment properties. This represents costs incurred developing a number of properties for future rental use and/or capital appreciation. The basis of the valuation of Investment properties under construction is at cost. This represented a non-cash transaction.
Contractual obligationsRefer to Note 31 for disclosure of any contractual obligations to purchase, construct or develop Investment property or for repairs, maintenance or enhancements. Leasing arrangementsThe Investment properties are leased to tenants under long term operating leases with rentals payable monthly. Minimum lease payments receivable on leases of Investment properties are as follows: 2011 2010 $’000 $’000
Minimum lease payments under non-cancellable operating leases of Investment properties not recognised in the financial statements are receivable as follows:
Within one year 2,868 723Later than one year but not later than five years 11,363 3,895Later than five years 15,005 3,944
29,236 8,562
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 17. Intangible assets Goodwill Licences Brands1 Software2 Other3 Total $’000 $’000 $’000 $’000 $’000 $’000
At 30 June 2010 Cost 3,380,255 547,568 105,417 227,044 135,854 4,396,138Accumulated amortisation - (29,872) (2,877) (140,893) (6,666) (180,308)Impairment (140,000) - - - - (140,000)
Net book amount 3,240,255 517,696 102,540 86,151 129,188 4,075,830
Additions - - - 2,054 - 2,054Disposals - - - (26) - (26)Transfers in/(out)4 - - - 10,855 - 10,855Amortisation charge (Note 7) - (14,115) (894) (34,699) (2,176) (51,884)Foreign exchange movements (23,679) - - (29) - (23,708)
Closing net book amount 3,216,576 503,581 101,646 64,306 127,012 4,013,121
At 30 June 2011 Cost 3,356,576 547,568 105,417 239,731 135,854 4,385,146Accumulated amortisation and impairment (140,000) (43,987) (3,771) (175,425) (8,842) (372,025)
Net book amount 3,216,576 503,581 101,646 64,306 127,012 4,013,121
At 1 July 2009 Cost 2,689,484 298,296 105,417 181,690 135,854 3,410,741Accumulated amortisation - (20,679) (444) (72,480) (6,174) (99,777)
Net book amount 2,689,484 277,617 104,973 109,210 129,680 3,310,964 Additions through acquisitions of subsidiaries 735,951 250,000 - 7,115 - 993,066Additions - - - 15,985 - 15,985Impairment (Note 7) (140,000) - - - - (140,000)Assets included in disposal of discontinued operations - (201) - (185) - (386)Transfers in/(out)4 - - - 8,381 - 8,381Amortisation charge (Note 7) - (9,405) (2,433) (54,178) (492) (66,508)Amortisation charge for intangibles used in year by discontinued operations - (29) - (80) - (109)Foreign exchange movements (45,180) (286) - (97) - (45,563)
Closing net book amount 3,240,255 517,696 102,540 86,151 129,188 4,075,830
1. Brands include $53,400,000 of assets with an indefinite life, which is included in the TattsBet segment.
2. Software includes capitalised development costs being an internally generated intangible asset.
3. Refer to Note 1(s)(vi) for details of other intangibles.
4. Transfers include assets transferred (to)/from property plant and equipment.
(a) Impairment tests for goodwillThe accounting policy for impairment of assets is set out in Note 1(j).
Goodwill is allocated to the Group’s cash-generating units (CGUs) expected to benefit from the synergies of those business combinations.
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Note 17. Intangible assets (continued)A segment-level summary of the goodwill allocation is presented below: 2011 2010 $’000 $’000
Tatts Pokies 15,552 15,552Lotteries 1,196,164 1,196,164TattsBet 1,368,091 1,368,091Maxgaming 500,000 500,000Bytecraft Systems 10,291 10,291Talarius 126,478 150,157
Total 3,216,576 3,240,255
The recoverable amount of each CGU is determined based on fair value less costs to sell. These calculations use cash flow projections based on the budget approved by the Board for the next financial year and management’s forecasts covering a five year period. Cash flows beyond the five year period are extrapolated using a growth rate not exceeding the long term growth rate for the business in which the CGU operates.
(b) Key assumptions used for fair value calculationsThe following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill and other non-current assets:
(i) Cash flow forecastsCash flow forecasts are based on the 2011 financial year budget approved by the Board and management’s five year forecasts.
(ii) Terminal valueTerminal value is calculated using a perpetuity growth rate based on the cash flow forecast for year five, pre-tax weighted average cost of capital and forecast growth rates.
(iii) Forecast growth ratesForecast growth rates are principally based on management’s expectations for future performance in each business segment. These growth rates take into account historical growth rates for each CGU. The growth rates range from 4% to 5% for each CGU (2010: 4% to 5%).
(iv) Discount ratesDiscount rates used are based on the Group’s pre-tax weighted average cost of capital and reflect specific risks relating to the relevant segments and the countries in which they operate. The pre-tax discount rates used range from 9.8% to 15.0% (2010: 10.8% to 15.3%).
(c) Impact of possible changes in key assumptionsManagement do not believe that a reasonably possible change in any of the key assumptions (growth rates and discount rates), after allowing for any consequential impacts on other key assumptions of any such change, would cause the carrying value of any of the segments to exceed their recoverable amounts.
(d) Prior year impairment chargeOn 29 June 2010, the Directors advised the Australian Securities Exchange that the Group had booked an impairment charge of $140.0 million against the carrying value of goodwill relating to the Talarius business following a review of its performance, and its expected future cash flows.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 18. Deferred tax assets 2011 2010 $’000 $’000
The balance comprises temporary differences attributable to:
Employee benefits 8,606 7,388Depreciation 13,803 12,735Provisions 484 404Tax losses 492 1,130Listed securities 1,372 1,715Cash flow hedges 5,840 4,123Other 3,149 1,257
Total deferred tax asset 33,746 28,752
Deferred tax assets to be settled within 12 months 12,165 3,282Deferred tax assets to be settled after more than 12 months 21,581 25,470
33,746 28,752
Employee Listed Benefits Depreciation Provisions Float Costs Tax Losses SecuritiesMovements $’000 $’000 $’000 $’000 $000 $000
Opening balance at 1 July 2009 6,849 24,772 1,646 574 2,238 1,565Credited/(charged) to the income statement (Note 8(a)) 665 (9,735) (1,189) (574) 1,004 284Charged to other comprehensive income (Note 8(c)) - - - - - (134)Foreign exchange movement - - - - - -Credited/(charged) to the balance sheet - (3,116) (26) - - -Acquisition of subsidiary - 814 - - - -Disposal of subsidiary (126) - (27) - (2,112) -
Closing balance at 30 June 2010 7,388 12,735 404 - 1,130 1,715
Credited/(charged) to the income statement (Note 8(a)) 1,218 1,068 80 - (638) -Charged to other comprehensive income - - - - - (343)Foreign exchange movement - - - - - -
Closing balance at 30 June 2011 8,606 13,803 484 - 492 1,372
Cash Flow Hedge Other TotalMovements (continued) $’000 $’000 $’000
Opening balance at 1 July 2009 - 2,761 40,405Credited/(charged) to the Income statement (Note 8(a)) - (1,032) (10,577)Credited to other comprehensive income (Note 8(c)) 4,123 (73) 3,916Foreign exchange movement - (1,185) (1,185)Credited/(charged) to the Balance sheet - 944 (2,198)Acquisition of subsidiary - - 814Disposal of subsidiary - (158) (2,423)
Closing balance at 30 June 2010 4,123 1,257 28,752
Credited/(charged) to the Income statement (Note 8(a)) - 3,634 5,362Credited to other comprehensive income 1,717 (14) 1,360Foreign exchange movement - (1,728) (1,728)
Closing balance at 30 June 2011 5,840 3,149 33,746
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Note 19. Other non-current assets 2011 2010 $’000 $’000
Non-current Unlisted investments: Units in unit trusts 350 350 Shares in other related parties - 233 Shares in other unlisted investments 403 403Redeemable preference shares 150 150Deferred expenditure 500 1,029
1,403 2,165
Unlisted investmentsUnlisted investments are not traded in active markets.
Redeemable preference sharesFollowing re-negotiation of the interest receivable on the redeemable preference shares, these are unsecured and interest is payable monthly at the fixed rate of 7.5% per annum compounded daily (2010: 11am market average interest rate of 3.70% and an additional 1.25% per annum).
Note 20. Trade and other payables 2011 2010 $’000 $’000
Current Trade payables 472,539 441,313Other payables and accruals 77,376 76,033
549,915 517,346
Non-current Trade payables 70,293 66,230
Foreign exchange and interest rate riskInformation concerning exposure to foreign currency and interest rate risk in relation to trade and other payables is set out in Note 2.
Fair value and maturity analysis disclosuresDetails of the fair value and the maturity analysis are set out in Note 2.
Note 21. Interest bearing liabilities 2011 2010 $’000 $’000
Current Unsecured Bank overdrafts (Note 10) - 603Bank loans - 795,650
Total current interest bearing liabilities - 796,253
Non-current Unsecured Bank loans 1,068,702 785,171Loan notes (US Private Placement) 202,385 -
Total non-current interest bearing liabilities 1,271,087 785,171
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 21. Interest bearing liabilities (continued)All interest bearing liabilities are unsecured. The bank loans are disclosed net of capitalised borrowing costs of $13.4 million (2010: $11.3 million), of which $4.2 million has been disclosed as prepayments in the current assets on the balance sheet following the refinancing of the syndicated multi-currency revolving facility during the current financial year.
Foreign currency and interest rate risk exposuresInformation concerning exposure to foreign currency and interest rate risk in relation to interest bearing liabilities is set out in Note 2.
Fair value and maturity analysis disclosuresDetails of the fair value borrowings for the Group and the maturity analysis are set out in Note 2.
Refinancing detailsInformation concerning the refinancing of the syndicated multi-currency revolving facility is set out in Note 2.
Note 22. Provisions 2011 2010 $’000 $’000
Current Employee benefits 16,699 16,760Onerous leases 92 924Dilapidations 2,438 4,420
19,229 22,104
Non-current Employee benefits 2,490 2,346Onerous leases 2,578 4,112
5,068 6,458
Reconciliation of provision movements Onerous Leases Dilapidations Total $’000 $’000 $’000
Opening balance at 1 July 2010 5,036 4,420 9,456Additional provision recognised - 538 538Utilisation of the provision (1,007) (1,565) (2,572)Credited to the Income statement (265) - (265)Foreign exchange movements (1,094) (955) (2,049)
Closing balance at 30 June 2011 2,670 2,438 5,108
Onerous leasesA provision for onerous leases is recognised for venues in the United Kingdom which have closed but are contracted to future payments under an operating lease.
DilapidationsA provision for dilapidations is recognised for leasehold properties requiring remedial dilapidations work at the expiry of the lease arrangement.
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Note 23. Deferred tax liabilities 2011 2010 $’000 $’000
The balance comprises temporary differences attributable to:
Depreciation 2,080 4,571Intangibles 209,230 216,531Unclaimed dividends 3,132 3,075Interest receivable - 74Accrued revenue 1,673 2,156Other 3,277 1,331
Total deferred tax liabilities 219,392 227,738
Deferred tax liabilities to be settled within 12 months 9,805 3,077Deferred tax liabilities to be settled after more than 12 months 209,587 224,661
219,392 227,738
Non- Consolidated Unclaimed Interest Accrued Group Depreciation Intangibles Dividends Receivable Revenue MemberMovements $’000 $’000 $’000 $’000 $’000 $’000
Closing balance at 1 July 2009 4,692 162,714 3,315 69 1,163 343Charged/(credited) to the income statement (Note 8(a)) 2,996 (21,315) (240) 5 993 (343)Charged/(credited) to the balance sheet (3,116) 266 - - - -Acquisition of subsidiary - 75,000 - - - -Disposal of subsidiary (1) (134) - - - -
Closing balance at 30 June 2010 4,571 216,531 3,075 74 2,156 -
Charged/(credited) to the income statement (Note 8(a)) (2,491) (7,301) 57 (74) (483) -Charged/(credited) to other comprehensive income - - - - - -
Closing balance at 30 June 2011 2,080 209,230 3,132 - 1,673 -
Other TotalMovements (continued) $’000 $’000
Closing balance at 1 July 2009 4,422 176,718Charged/(credited) to the income statement (Note 8(a)) (2,890) (20,794)Charged/(credited) to the balance sheet (26) (2,876)Acquisition of subsidiary - 75,000Disposal of subsidiary (175) (310)
Closing balance at 30 June 2010 1,331 227,738
Charged/(credited) to the income statement (Note 8(a)) 1,439 (8,853)Charged/(credited) to other comprehensive income 507 507
Closing balance at 30 June 2011 3,277 219,392
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 24. Retirement benefit obligationsAll employees of the Group are entitled to benefits from one of the Group’s superannuation plans on retirement, disability or death.
Defined benefit superannuation plan – New South Wales Lotteries Corporation Pty LimitedFollowing the Group’s acquisition of New South Wales Lotteries Corporation Pty Limited on 31 March 2010, the Group has consolidated the net liability relating to Tatts Employment Co (NSW) Pty Limited’s defined benefit plans for those employees who transferred employment to Tatts Employment Co (NSW) Pty Limited, a subsidiary of Tatts Group Limited.
Sub funds were created in relation to the transferred employees who are members of the following New South Wales public sector superannuation schemes:
• StateAuthoritiesSuperannuationScheme(SASS)
• StateSuperannuationScheme(SSS)
• StateAuthoritiesNon-contributorySuperannuationScheme(SANCS).
These schemes are all defined benefit schemes – at least a component of the final benefit is derived from a multiple of member salary and years of membership.
All these schemes are closed to new members.
Employees contribute to the schemes at various percentages of their salaries. Tatts Employment Co (NSW) Pty Limited contribute to the investment of the plans based on actuarial advice, but generally at a multiple of the employees’ contributions, depending on the fund.
Actuarial based gains and losses are recognised in the statement of comprehensive income in the year in which they occur.
The figures below relate only to those employees who transferred to Tatts Employment Co (NSW) Pty Limited on 31 March 2010. During the period from 1 April 2010 to 30 June 2010, State Super transferred the balances into the new sub funds. The financial performance and information below for the 2010 year (2010 column) is from 1 April 2010 to 30 June 2010 only.
(i) Balance sheet amounts 2011 2010 $’000 $’000
Present value of the defined benefit obligation (27,480) (27,007)Fair value of defined benefit plan assets 19,519 18,670
Net liability in the balance sheet (7,961) (8,337)
(ii) Categories of plan assetsCash 996 1,792Fixed interest securities 1,718 1,942Equity instruments 12,277 10,791Property 1,932 1,774Other assets 2,596 2,371
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Note 24. Retirement benefit obligations (continued)(iii) Reconciliation of movements 2011 2010 $’000 $’000
Reconciliation of the present value of the defined benefit obligation:
Balance at the beginning of the year (27,007) -Amounts transferred in following acquisition - (27,007)Current service cost (510) -Interest cost (1,375) -Contributions from fund participants (410) -Actuarial gains 520 -Benefits paid 1,302 -
Balance at the end of the year (27,480) (27,007)
Reconciliation of the fair value of defined benefit assets:
Balance at the beginning of the year 18,670 -Amounts transferred in following acquisition - 18,670Expected return on fund assets 1,588 -Actuarial losses (275) -Employer contributions 428 -Contributions by fund participants 410 -Benefits paid (1,302) -
Balance at the end of the year 19,519 18,670
(iv) Amounts recognised in income statementThe amounts recognised in the income statement are as follows:
Current service cost 510 -Interest cost 1,375 -Expected return on plan assets (1,588) -
Net expense recognised in the income statement 297 -
Actual return on plan assets 1,592 420
(v) Amounts recognised in statement of comprehensive incomeActuarial gain recognised in the year – gross of tax 1,448 -
Cumulative actuarial gains recognised in statement of comprehensive income 1,448 -
(vi) Valuation method and principal actuarial assumptions at 30 June 2011The Projected Unit Credit (PUC) valuation method was used to determine the present value of the defined benefit obligations and the related current service costs. This method sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.
Economic assumptions: 2011 2010 % %
Discount rate 5.3 5.2Expected rate of return on assets 8.6 8.6Salary inflation rate – long term 3.5 3.5Rate of CPI increase 2.5 2.5
The demographic assumptions at 30 June 2011 are those that were used in the 2010 triennial actuarial valuation. The triennial review report is available from the New South Wales Treasury website.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 24. Retirement benefit obligations (continued)(vii) Employer contributionsEmployer contributions to the defined benefit section of the plan were based on recommendations by the plan’s actuary. The method used to determine employer contributions at the last actuarial review was the Aggregate Funding method. The method adopted affects the timing of the cost to the Group. Under the Aggregate Funding method, the employer contribution rate is determined so that sufficient assets will be available to meet benefit payments to existing members, taking into account current values of assets and future contributions. For the period from 1 July 2010 to 30 June 2011, Tatts Employment Co (NSW) Pty Limited accrued 14.8% of defined benefit members’ salaries.
The expected employer contributions for the period 1 July 2011 to 30 June 2012 is $359,544. Economic assumptions:
The economic assumptions for the 2009 actuarial review of the fund were: 2011 2010 % %
Weighted average assumptions:
Expected rate of return on fund assets backing current pension liabilities 8.3 8.3Expected rate of return on fund assets backing other liabilities 7.3 7.3Expected salary increase rate 4.0 4.0Expected rate of CPI Increase 2.5 2.5 (viii) Historic summary 2011 2010 $’000 $’000
Defined benefit plan obligation (27,480) (27,007)Plan assets 19,519 18,670
Surplus/(deficit) (7,961) (8,337)
Experience adjustments arising on plan liabilities (520) (7,917)
Experience adjustments arising on plan assets 275 (420)
Nature of asset/liabilityIf a surplus exists in the employer’s interest in the fund, the employer may be able to take advantage of it in the form of a reduction in the required contribution rate, depending on the advice of the fund’s actuary.
Where a deficiency exists, the employer is responsible for any difference between the employer’s share of fund assets and the defined benefit obligation.
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Note 25. Contributed equity(a) Share capital 2011 2010 2011 2010 Shares Shares $’000 $’000
Ordinary Shares – fully paid 1,318,687,024 1,281,937,479 2,444,886 2,362,593 (b) Movements in ordinary share capital Ascribed Number ValueDates Details of Shares $ $’000
1 July 2009 Opening balance 1,270,070,761 2,333,193
2 October 2009 Dividend Reinvestment Plan issues 5,570,683 2.52 14,0386 April 2010 Dividend Reinvestment Plan issues 6,296,035 2.44 15,362
1 July 2010 Opening balance 1,281,937,479 2,362,593 2 September 2010 Performance rights issue 87,108 2.56 2236 September 2010 Performance rights issue 7,698 2.56 201 October 2010 Dividend Reinvestment Plan issues 18,856,180 2.29 43,18128 February 2011 Unclaimed Dividends – Reinvestment issues 186,091 2.50 4653 March 2011 Performance rights issue 22,123 2.56 576 April 2011 Dividend Reinvestment Plan issues 17,590,345 2.18 38,347
30 June 2011 Closing balance 1,318,687,024 2,444,886
Ordinary sharesOrdinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held.
On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Voting power may be subject to certain restrictions arising from a combination of the Company’s Constitution, statute, the ASX Listing Rules and other general law.
There is no current on-market share buy-back. Dividend Reinvestment PlanThe Company has a Dividend Reinvestment Plan (DRP) in operation under which holders of ordinary shares may elect to have all or part of their dividend entitlements satisfied by the provision of ordinary shares rather than being paid in cash.
A 1.5% discount is applicable to shares acquired under the DRP for the final dividend. Shares acquired by a participant under the DRP will be provided via a share issue.
Options and rights issuesRefer to Note 40 regarding options and rights issued as share based payments.F
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 26. Reserves and retained profits 2011 2010 $’000 $’000
(a) Reserves Available-for-sale financial assets revaluation reserve 672 (33)Foreign currency translation reserve (60,063) (49,739)Hedge reserve 45,041 31,200Share based payments reserve 6,973 5,956
(7,377) (12,616)
Movements Available-for-sale financial assets revaluation reserve Balance 1 July (33) (941) Revaluation 705 908
Balance 30 June 672 (33)
Foreign currency translation reserve Balance 1 July (49,739) (20,660) Currency translation differences arising during the year (10,324) (29,079)
Balance 30 June (60,063) (49,739)
Hedge reserve Balance 1 July 31,200 14,834 Interest rate swap movement, net of tax 6,715 (12,498) Forward foreign exchange contracts movements, net of tax 392 (580) Cross currency interest rate swaps, net of tax (6,180) - Foreign currency net investment hedge movements 12,914 29,444
Balance 30 June 45,041 31,200
Share-based payments reserve Balance 1 July 5,956 3,938 Performance options and rights expense 1,317 2,018 Rights exercised (300) -
Balance 30 June 6,973 5,956
(b) Retained earnings Movements in retained earnings were as follows: Balance 1 July 117,827 265,744 Net profit for the year 275,428 119,355 Actuarial gain on retirement benefit obligation, net of tax (Note 24) 1,014 - Dividends (Note 27) (277,639) (267,272)
Balance 30 June 116,630 117,827
(c) Nature and purpose of reserves(i) Available-for-sale financial assets revaluation reserveChanges in the fair value and exchange differences arising on translation of investments, such as equities, classified as available-for-sale financial assets, are recognised in the statement of comprehensive income as described in Note 1(o) and accumulated in a separate reserve within equity. Amounts are reclassified to the income statement when the associated assets are sold or impaired.
(ii) Foreign currency translation reserveExchange differences arising on translation of foreign controlled entities are recognised in the statement of comprehensive income as described in Note 1(e) and accumulated in a separate reserve within equity. The reserve is reclassified to the income statement upon disposal of the net investment.
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Note 26. Reserves and retained profits (continued)(iii) Hedge reserveThe hedge reserve is used to recognise the portion of the gain or loss on a hedging instrument in a net investment or cash flow hedge that is determined to be an effective hedge. Amounts are reclassified to the income statement if the hedge is ineffective.
(iv) Share-based payments reserveThe share-based payments reserve is used to recognise the fair value at grant date of performance options and performance rights issued but not exercised.
Note 27. Dividends(a) Ordinary shares 2011 2010 $’000 $’000
Final dividend for year ended 30 June 2009 of 11.0 cents per fully paid share paid on 2 October 2009 Fully franked based on tax paid @ 30% - 139,708 Special dividend for year ended 30 June 2010 of 11.0 cents per fully paid share paid on 1 October 2010 Fully franked based on tax paid @ 30% 141,024 - Interim dividend for year ended 30 June 2011 of 10.5 cents (2010: 10.0 cents on 6 April 2010) per fully paid share paid on 6 April 2011 Fully franked based on tax paid @ 30% 136,615 127,564
277,639 267,272
(b) Dividends not recognised at year endIn addition to the above dividends, since the balance sheet date the Directors have determined the payment of a final dividend of 11.0 cents (2010: Special – 11.0 cents) per fully paid ordinary share, fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend to be paid on 5 October 2011 out of retained profits, but not recognised as a liability at year end, is $145,055,572 (2010: $141,013,123).
(c) Franked dividendsThe franked portions of the final dividend determined after 30 June 2011 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ended 30 June 2012.
2011 2010 $’000 $’000
Franking credits available for subsequent financial years based on a tax rate of 30% (2010: 30%) 172,808 154,310
The above amounts represent the balance of the franking account as at the end of the financial year, adjusted as necessary for:
(i) franking credits that will arise from the payment of the amount of the provision for income tax;
(ii) franking debits that will arise from the payment of dividends recognised as a liability at the end of each reporting period; and
(iii) franking credits that will arise from the receipt of dividends recognised as receivables at the end of each reporting period.
The consolidated amounts include franking credits that would be available to the Company if distributable profits of subsidiaries were paid as dividends.
The impact on the franking account of the final dividend determined by the Directors since year end, but not recognised as a liability at year end, will be a reduction in the franking account of $62,166,674 (2010: $60,434,195).
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 28. Key management personnel disclosures(a) Key management personnel compensation 2011 2010 $ $
Short term employee benefits – cash salary, fees and cash bonus 5,139,549 4,927,077Post-employment benefits 100,437 88,125Long term benefits 56,153 53,893Share-based payments 654,229 709,185
5,950,368 5,778,280
The key management personnel of the Group includes those executives with responsibility for the planning, controlling and directing of the Group and therefore excludes those executives who lead individual SBUs.
(b) Equity instrument disclosures relating to key management personnel(i) Performance options and rights provided as remuneration and shares issued on exercise of such options and rightsDetails of performance options and rights provided as remuneration and the shares issued on the exercise of such options and rights, together with terms and conditions of the equity instruments, can be found in Sections E, F, J, K and L of the Remuneration report.
Non-executive Directors are not entitled to receive performance options or performance rights.
(ii) Performance options holdings The number of performance options over ordinary shares in the Company held during the financial year by each Director of the Company and other key management personnel of the Group, including their personally related parties, are set out below. Granted During Balance at the the Year as Lapsed During Balance at the Exercisable at 2011 Start of the Year Compensation the Year End of the Year End of the Year
Dick McIlwain 2,000,000 - - 2,000,000 1,308,800Ray Gunston 1,147,370 - (19,081) 1,128,289 291,341Stephen Lawrie 662,767 - - 662,767 116,688
Granted During Balance at the the Year as Lapsed During Balance at the Exercisable at 2010 Start of the Year Compensation the Year End of the Year End of the Year
Dick McIlwain 2,000,000 - - 2,000,000 1,024,000Ray Gunston 1,147,370 - - 1,147,370 160,446Stephen Lawrie 662,767 - - 662,767 33,632
No options were forfeited in the current financial year.
84.7% of options granted on 16 December 2005 vested on 7 January 2009, however none have been exercised as at the end of the year. 65.4% of options granted on 30 November 2006 vested on 30 November 2010, however none have been exercised as at the end of the year. 72.1% of options granted on 30 November 2007 vested on 30 November 2010, however none have been exercised as at the end of the year. No other options vested or were exercisable as at the end of the year. (iii) Performance rights holdingsThe number of performance rights over ordinary shares in the Company held during the financial year by each Director of the Company and other key management personnel of the Group, including their personally related parties, are set out below.
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Note 28. Key management personnel disclosures (continued) Granted During Balance and in Respect Exercised Lapsed Balance Exercisable at the Start of the Year as During During at the End at the End 2011 of the Year Compensation the Year the Year of the Year of the Year
Dick McIlwain 250,000 250,000 - - 500,000 -Ray Gunston 184,904 37,393 (15,523) (3,447) 203,327 -Stephen Lawrie 117,693 11,752 (7,474) - 121,971 2,078
Granted During Balance and in Respect Exercised Lapsed Balance Exercisable at the Start of the Year as During During at the End at End 2010 of the Year Compensation the Year the Year of the Year of the Year
Dick McIlwain - 250,000 - - 250,000 -Ray Gunston 27,168 157,736 - - 184,904 12,145Stephen Lawrie 14,597 103,096 - - 117,693 7,474
No rights were forfeited in the current financial year.
84.7% of rights granted on 16 December 2005 vested on 7 January 2009, with 19,111 of these rights exercised as at the end of that financial year and 3,447 lapsed in this financial year. 65.4% of rights granted on 30 November 2006 vested on 30 November 2010, with 22,997 of these rights exercised as at the end of the current year. No other rights vested or were exercisable as at the end of the year. Rights granted in respect of the current year are not able to be exercised until October 2012.
(iv) Share holdingsThe number of shares in the Company held during the financial year by each Director of the Company and other key management personnel of the Group, including their personally related parties, are set out below. There were no shares granted during the year as compensation.
All shares in the Company are ordinary shares. Received During Other the Year on Changes Balance Balance at the the Exercise of During at the End 2011 Start of the Year Options/Rights the Year of the Year
Directors of Tatts Group Limited Harry Boon 150,000 - - 150,000Dick McIlwain 1,947,500 - - 1,947,500Robert Bentley 160,000 - - 160,000Lyndsey Cattermole 182,663 - - 182,663Brian Jamieson 80,943 - - 80,943Julien Playoust 100,000 - 76,000 176,000Kevin Seymour 24,000,000 - (10,000,000) 14,000,000
Received During Other the Year on Changes Balance Balance at the the Exercise of During at the End 2010 Start of the Year Options/Rights the Year of the Year
Directors of Tatts Group Limited Harry Boon 150,000 - - 150,000Dick McIlwain 1,947,500 - - 1,947,500Robert Bentley 160,000 - - 160,000Lyndsey Cattermole 172,663 - 10,000 182,663Brian Jamieson 78,000 - 2,943 80,943Julien Playoust 75,000 - 25,000 100,000Kevin Seymour 24,000,000 - - 24,000,000
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 28. Key management personnel disclosures (continued) Received During Other the Year on Changes Balance Balance at the the Exercise of During at the End 2011 Start of the Year Options/Rights the Year of the Year
Other key management personnel of the Group Ray Gunston 1,131,905 15,523 (250,000) 897,428Stephen Lawrie 3,972 7,474 (10,950) 496
Received During Other the Year on Changes Balance Balance at the the Exercise of During at the End 2010 Start of the Year Options/Rights the Year of the Year
Other key management personnel of the Group Ray Gunston 1,131,905 - - 1,131,905Stephen Lawrie 3,972 - - 3,972
(c) Loans to Directors and key management personnelNo loans are made to Directors or key management personnel.
(d) Other transactions with Directors and key management personnel A Non-executive Director, Mr Robert Bentley, is the Chairman of Racing Queensland Limited, which controls Queensland Race Product Co Ltd. Payments for the year to 30 June 2011 totalling $101,223,000 (2010: $107,212,000) were made to Queensland Race Product Co Ltd pursuant to the Product and Program Agreement dated 9 June 1999 for the provision of certain racing information. This contract is based on normal commercial terms and conditions.
Racing Queensland Limited has also issued approvals for TattsBet Limited (formerly UNiTAB Limited), SA TAB Pty Ltd and NT TAB Pty Ltd to make payments to Racing Queensland Limited to use Queensland race information. These approvals require the wagering operators to pay a fee for the use of this information. The fees paid on normal commercial terms and conditions were $2,148,000 (2010: $1,553,000).
Note 29. Remuneration of auditorsDuring the year the following fees were paid or payable to PricewaterhouseCoopers for services provided by the auditor of the Company, its related practices and non-related audit firms: 2011 2010 $ $
Audit services Fees paid to PricewaterhouseCoopers Australian firm: Audit and review of financial statements and other audit work under the Corporations Act 2001 1,002,112 1,092,000Fees paid to related practices of PricewaterhouseCoopers Australian firm 192,489 225,005
Total remuneration for audit services 1,194,601 1,317,005
Non-audit services (a) Assurance services Fees paid to PricewaterhouseCoopers Australian firm: Audit of regulatory returns 69,000 57,470 Due diligence services - -Fees paid to related practices of PricewaterhouseCoopers Australian firm: Due diligence services - 20,938
Total remuneration for assurance services 69,000 78,408
(b) Taxation services Fees paid to PricewaterhouseCoopers Australian firm: Provision of tax training materials 4,178 3,295
Total remuneration for taxation services 4,178 3,295
Total remuneration for non-audit services 73,178 81,703
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Note 29. Remuneration of auditors (continued)Subject to maintaining their independence it is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the Group are important. These assignments are principally tax advice and due diligence reporting on acquisitions.
Note 30. Contingent liabilities Contingent liabilitiesThe Group had contingent liabilities at 30 June 2011 in respect of:
Bank guarantees Guarantees in respect of bank facilities drawn down but not included in the Company accounts of the Group are $2,058,000 (2010: $2,210,000).
Note 31. Commitments for expenditure(a) Capital commitmentsCapital expenditure contracted for at the reporting date but not recognised as liabilities is as follows:
2011 2010 $’000 $’000
Property, plant and equipment – payable:
Within one year 2,288 3,102
Investment properties – payable:
Within one year 6,450 13,660
(b) Operating lease commitmentsThe Group leases motor vehicles and various buildings under non-cancellable operating leases. The leases have varying terms and renewal rights. On renewal, the terms of the leases are to be negotiated.
2011 2010 $’000 $’000
Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows:
Within one year 17,563 18,655Later than one year but not later than five years 29,231 40,731Later than five years 7,985 13,049
Commitments not recognised in the financial statements 54,779 72,435
(c) Operating commitmentsOperating commitments, being supply, marketing and sponsorship contracted for at the reporting date but not recognised as liabilities are as follows:
2011 2010 $’000 $’000
Commitments in relation to non-cancellable operating activities are payable as follows: Within one year 50,362 47,429Later than one year but not later than five years 6,749 31,642Later than five years 1,621 2,227
58,732 81,298
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 31. Commitments for expenditure (continued)(d) Employee remuneration commitments 2011 2010 $’000 $’000
Commitments under non-cancellable employment contracts not provided for in the financial statements and payable:
Within one year 6,834 6,845
(e) Other commitmentsThe Group has entered into agreements with third party gaming machine service providers and/or venue operators in relation to the disposal of Tatts Pokies’ gaming machines, allowing replacement of these machines. These arrangements allow these service providers on behalf of venue operators or the venue operators themselves to trade-in existing machines owned by the Group for new machines to be supplied at the cost of these third parties and/or the venue operators. The Group will receive the proceeds from the sale of the Tatts Pokies’ gaming machines to the third party gaming machine service providers and/or venue operators in August 2012. At balance date, 115 of these new machines were installed and operating at venues. A further 199 machines were waiting to be installed. At the expiry of the Gaming Operator Licence these machines remain with their respective venues. The Group’s commitment is to ensure the machines are maintained until the expiry of the Gaming Operator Licence on 15 August 2012 (unless extended), and then left in the venue. The Group’s share of the revenues generated by these machines continue to be reported in accordance with accounting policy Note 1(f), but as the new machines are not owned by the Group, no asset value has been included in the accounts.
Note 32. Related party transactions(a) Parent entitiesThe ultimate parent entity within the Group is Tatts Group Limited.
(b) Controlled entitiesInvestments in controlled entities are set out in Note 34.
(c) Directors and key management personnelDisclosures relating to Directors and specified executives are set out in Note 28.
(d) Transactions with related parties
2011 2010 $’000 $’000
Superannuation contributions Contributions to superannuation funds on behalf of employees 15,342 13,699
(e) Outstanding balancesThe following balances are outstanding at the end of each reporting period in relation to transactions with related parties: 2011 2010 $’000 $’000
Current receivables Loans to joint venture entities 10,659 7,073
No provisions for impairment of receivables have been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts from related parties.
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Note 32. Related party transactions (continued)(f) Reconciliation of loans to/from related parties 2011 2010 $’000 $’000
Loans to joint venture entities Beginning of year 7,073 7,475 Loans advanced 4,001 250 Loan repayments received (415) (652)
End of year 10,659 7,073
Loans to related entities Beginning of year - 2,541 Exchange movements - (85) Loan repayments received - (2,456)
End of year - -
No provisions for impairment of receivables have been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts from related parties. (g) Terms and conditionsTransactions relating to dividends were on the same terms and conditions that applied to other shareholders.
All other transactions were made on normal commercial terms and conditions and at market rates, except that there are no fixed terms for the repayment of principal on loans advanced by the Company. There was no interest charged on loans during the year (2010: 5.28%).
Outstanding balances are unsecured and are repayable in cash.
Note 33. Business combinations(a) Current yearThere were no acquisitions in the current financial year.
(b) Previous corresponding yearNew South Wales Lotteries Corporation Pty Limited.
Summary of acquisitionOn 31 March 2010, the Group acquired 100% of New South Wales Lotteries Corporation Pty Limited for a total consideration of $845.7 million. Details of the fair values of the assets and liabilities acquired and the goodwill arising are disclosed in the 2010 Tatts Group Annual Report. At this date following the acquisition, New South Wales Lotteries Corporation Pty Limited was granted a 40 year lottery licence to operate lotteries in New South Wales.
At the date of acquisition, the acquired entity’s principal activities were the development, marketing and conduct of lottery games in New South Wales. Licences for these lottery games have been issued under the Public Lotteries Act 1996.
There have been no further preliminary fair value adjustments to these amounts in the current period. For
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 34. Investments in controlled entities Equity Equity Holding Holding Country of 2011 2010Name of Entity Incorporation % %
Controlled entities of Tatts Group Limited:
TattsBet Limited1* Australia 100 100 NT TAB Pty Ltd* Australia 100 100 Broadcasting Station 4IP Pty Ltd Australia 100 100 SA TAB Pty Ltd* Australia 100 100 TAB Queensland Pty Ltd Australia 100 100Maxgaming Holdings Pty Ltd* Australia 100 100 Maxgaming NSW Pty Ltd* Australia 100 100 Maxgaming QLD Pty Ltd* Australia 100 100 Maxgaming Vic Pty Ltd Australia 100 100Bytecraft Systems Pty Ltd* Australia 2 2
Bytecraft Systems (NSW) Pty Ltd Australia 100 100 Bytecraft Systems (NZ) Limited New Zealand 100 100 EGM Tech Pty Ltd Australia 100 100Reaftin Pty Ltd* Australia 100 100 Bytecraft Systems Pty Ltd* Australia 2 2
Tattersall’s Holdings Pty Ltd* Australia 100 100 Tatts Online Pty Ltd Australia 100 3
Tattersall’s Sweeps Pty Ltd* Australia 100 100 Tattersall’s Gaming Pty Ltd* Australia 100 100 Tattersall’s Club Keno Pty Ltd Australia 100 100 tatts.com Pty Ltd Australia 100 100 New South Wales Lotteries Corporation Pty Limited* Australia 100 100 Tatts Employment Co (NSW) Pty Limited* Australia 100 100 George Adams Pty Ltd Australia 100 100 Tattersall’s Australia Pty Ltd Australia 100 100 TattsNet Limited+ United Kingdom 100 100 Golden Casket Lottery Corporation Limited* Australia 100 100 Tattersall’s Investments (South Africa) (Pty) Limited South Africa 100 100 Wintech Investments Pty Ltd* Australia 100 100 Tattersall’s Gaming Systems (NSW) Pty Ltd Australia 100 100Victorian Licence Bid Co Pty Ltd Australia 100 100 VicTote Participant Pty Ltd Australia 100 3
VicTote Manager Pty Ltd Australia 100 3
VicTote Assets Pty Ltd Australia 100 3
European Gaming (Finance) Limited United Kingdom 100 100 European Gaming Limited United Kingdom 100 100 Talarius Limited United Kingdom 100 100 Edinburgh Dungeon Limited+ United Kingdom 100 100 In-To-Save Limited United Kingdom 100 100 Blackheath Leisure (Carousel) Limited United Kingdom 100 100 RAL Services Limited+ United Kingdom 100 100 RAL Limited United Kingdom 100 100 RAL Machines Limited+ United Kingdom 100 100 RAL (S&G) Limited+ United Kingdom 100 100 RAL (Channel Islands) Limited# United Kingdom - 100 RAL Holdings Limited+ United Kingdom 100 100 RAL Employee Benefit Trustees Limited United Kingdom 100 100 RAL Investments Limited+ United Kingdom 100 100 RAL Interactive Limited United Kingdom 100 100 CZ Trading Limited United Kingdom 100 100 Cyberslotz Services SRL Romania 100 100
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Note 34. Investments in controlled entities (continued) Equity Equity Holding Holding Country of 2011 2010Name of Entity Incorporation % %
CZ Holdings Limited Malta 100 100 Cyberslotz Services Malta Limited Malta 100 100 CZ Back Office Limited Malta 100 100 CZ Trading Limited Malta 100 100 Leisure Promotions Limited United Kingdom 100 100 Leisurama Holdings Limited United Kingdom 100 100 Leisurama Entertainment Limited United Kingdom 100 100 Displaymatics Holdings Limited United Kingdom 100 100 Winners Amusements Limited United Kingdom 100 100 Palma Leisure Limited United Kingdom 100 100 National Leisure Limited United Kingdom 100 100 George Adams Holdings Limited United Kingdom 100 100 tatts.com UK Limited+ United Kingdom 100 100Tattersall’s Sweeps Consultation Long Service Leave Fund Australia 4 4
Tattersall’s Foundation Limited Australia - 5
Shareholdings in all controlled entities are classed as ordinary.
* These subsidiaries have, where applicable, been granted relief from the necessity to prepare financial statements in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. Refer to Note 35 for further information.
+ Dormant entity. On 21 April 2010, this entity was placed into Member’s Voluntary Liquidation. The liquidation process was not completed at year end and it remained a registered entity of the Group at 30 June 2011.
# Dormant entity. On 21 April 2010, this entity was placed into Member’s Voluntary Liquidation. The liquidation process was completed during the 2011 financial year.
1. Entity’s name was changed during the 2011 financial year from UNiTAB Limited to TattsBet Limited.
2. Owned 50% by Tatts Group Limited and 50% by Reaftin Pty Ltd. 100% equity holding within the Group.
3. Entity not incorporated at 30 June 2010.
4. Not incorporated. The trustees of the entity are employees of the Group, therefore in accordance with AIFRS, the Group controls the Fund and the Fund is consolidated.
5. Company was limited by guarantee. The majority of the members and Directors of the trustee company Tattersall’s Foundation Limited are Directors of Tatts Group Limited, therefore in accordance with AIFRS the Group controlled the Foundation and the company was consolidated. Tattersall’s Foundation Limited was de-registered on 8 June 2011.
Note 35. Deed of Cross GuaranteeTatts Group Limited, Tattersall’s Holdings Pty Ltd, Tattersall’s Gaming Pty Ltd, Tattersall’s Sweeps Pty Ltd, Reaftin Pty Ltd, Wintech Investments Pty Ltd, Bytecraft Systems Pty Ltd, TattsBet Limited (formerly UNiTAB Limited), SA TAB Pty Ltd, NT TAB Pty Ltd, Maxgaming Holdings Pty Ltd, Maxgaming NSW Pty Ltd, Maxgaming QLD Pty Ltd and Golden Casket Lottery Corporation Limited are parties to a Deed of Cross Guarantee (Deed) dated 1 May 2009 under which each company guarantees the debts of the others in the event of the winding up of any of those companies in the circumstances contained in the Deed. Tatts Employment Co (NSW) Pty Limited became a party to the Deed by way of a Deed of Assumption dated 29 June 2010. New South Wales Lotteries Corporation Pty Limited became a party to the Deed by way of a Deed of Assumption dated 24 March 2011.
By entering into the current Deed, the wholly-owned entities have been relieved under ASIC Class Order 98/1418 from certain requirements including preparing and lodging a financial report and Directors’ report.
(a) Consolidated income statement, statement of comprehensive income and a summary of movements in consolidated retained earningsThe above parties represent a ‘Closed Group’ for the purposes of the Class Order and they also represent the ‘Extended Closed Group’. Set out below is a Consolidated income statement, a Consolidated statement of comprehensive income and a summary of movements in consolidated retained earnings for the year ended 30 June 2011 of the Closed Group consisting of the companies listed above.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 35. Deed of Cross Guarantee (continued) 2011 2010Consolidated income statement $’000 $’000
Revenue from continuing operations 3,574,389 3,026,346 Statutory outgoings Government share (1,757,255) (1,419,442)Venue share/commission (679,385) (591,800)Product/program fees (188,269) (186,988) Other income - 11,750 Other expenses from ordinary activities Employee expenses (142,911) (119,853)Operating fees and direct costs (64,944) (64,075)Telecommunications and technology (36,097) (27,961)Marketing and promotions (31,024) (26,326)Information services (17,653) (17,063)Property expenses (25,077) (22,886)Restructuring costs (5,262) (3,502)Other expenses (24,253) (22,167)
Profit before interest, income tax, depreciation, amortisation and impairment 602,259 536,033 Impairment of assets - (140,000)Depreciation and amortisation (109,050) (121,631)Interest income 3,958 8,418Finance costs (94,568) (58,347)
Profit before income tax 402,599 224,473 Income tax expense (119,248) (108,397)
Profit for the year 283,351 116,076
Statement of comprehensive income Profit for the year 283,351 116,076 Other comprehensive income Changes in the fair value of available-for-sale financial assets, net of tax 705 908Changes in the value of net investment hedges 12,914 29,444Changes in the value of interest rate swaps, net of tax 6,715 (4,981)Changes in the fair value of cash flow hedges, net of tax (6,180) -Actuarial gain on retirement benefit obligation, net of tax 1,014 -Changes in the fair value of forward foreign exchange contracts, net of tax 392 (580)Exchange differences on translation of foreign operations (10,000) (138)
Other comprehensive income for the year, net of tax 5,560 24,653
Total comprehensive income for the year 288,911 140,729
Summary of movements in consolidated retained earnings Retained earnings at the beginning of the financial year 110,916 262,112Net profit for the year 283,351 116,076Dividends (Note 27) (277,639) (267,272)Actuarial gain on retirement benefit obligation, net of tax 1,014 -Transfer of retained earnings from entities outside the closed group 14,397 -
Retained earnings at the end of the financial year 132,039 110,916
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Note 35. Deed of Cross Guarantee (continued)(b) Consolidated balance sheetSet out below is a Consolidated balance sheet as at 30 June 2011 of the Closed Group consisting of the companies listed above. 2011 2010 $’000 $’000
Assets Current assets Cash and cash equivalents 240,805 313,546Trade and other receivables 184,734 153,175Inventories 7,625 6,954
Total current assets 433,164 473,675
Non-current assets Trade and other receivables 96 226Available-for-sale financial assets 33,824 31,085Other financial assets 128,915 724,649Property, plant and equipment 184,558 201,575Intangible assets 3,883,205 2,931,212Deferred tax assets 23,342 11,421Other non-current assets 500 1,030
Total non-current assets 4,254,440 3,901,198
Total assets 4,687,604 4,374,873
Liabilities Current liabilities Trade and other payables 532,469 159,713Interest bearing liabilities - 715,500Derivative financial instruments 1,117 1,174Current tax liabilities 19,795 37,630Provisions 14,857 14,416
Total current liabilities 568,238 928,433
Non-current liabilities Trade and other payables 70,293 43,578Interest bearing liabilities 1,142,188 715,845Derivative financial instruments 43,373 13,713Provisions 2,268 2,159Deferred tax liabilities 218,836 152,817Retirement benefit obligations 7,961 -
Total non-current liabilities 1,484,919 928,112
Total liabilities 2,053,157 1,856,545
Net assets 2,634,447 2,518,328
Equity Contributed equity 2,444,885 2,362,593Reserves 57,523 44,819Retained earnings 132,039 110,916
Total equity 2,634,447 2,518,328
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 36. Investments accounted for using the equity method 2011 2010 $’000 $’000
Joint venture entities 2,312 2,185
(a) Investments in joint venture entitiesInterests are held in the following joint ventures: End of Carrying Amount Each Ownership Interest of Investment Country of Principal Reporting 2011 2010 2011 2010Unlisted Residence Activities Period % % $’000 $’000
LH Developments Pty Ltd Property Australia Development 30 June 50 50 2,312 2,185 George Adams Pty Ltd and Prizac Investments Pty Ltd Property (Splash) Australia Development 30 June -1 50 - -Highlands Hotel Victoria Property Pty Ltd Australia Development 30 June 50 - - -
2,312 2,185
1. The joint venture was in the process of winding up at 30 June 2010, and was completed during the current financial year.
(b) Reconciliation of movements in joint ventures 2011 2010 $’000 $’000
Carrying amount of investment in joint ventures Balance at the beginning of the financial year 2,185 8,605Share of gain/(loss) after income tax 127 (44)Share of assets and liabilities settled and released from joint venture - (6,376)
Balance at the end of the financial year 2,312 2,185
Share of joint venture assets and liabilities Current assets 758 542Non-current assets 12,229 9,129
Total assets 12,987 9,671
Current liabilities 16 413Non-current liabilities 10,659 7,073
Total liabilities 10,675 7,486
Share of net assets of joint ventures 2,312 2,185
Share of joint venture revenue, expenses and results Revenue 376 104Expenses (249) (151)
Profit/(loss) before income tax 127 (47)Income tax benefit/(expense) - 3
Profit/(loss) after income tax 127 (44)
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Note 36. Investments accounted for using the equity method (continued)(c) Contingent liabilities and commitments relating to joint venturesEach party to the joint venture is jointly and severally liable for the debts of the entity. The assets of the entities exceed their debts. At 30 June 2011 contingent liabilities are $Nil (2010: $Nil). The share of capital commitments which have not been recognised as a liability at 30 June 2011 are $6,677,000 (2010: $Nil).
Note 37. Reconciliation of profit from ordinary activities after income tax to net cash inflow from operating activities 2011 2010 $’000 $’000
Profit for the year 275,428 120,300 Non cash flows in operating profit Depreciation and amortisation 119,415 136,283 Depreciation and amortisation – discontinued operations - 3,649 Amortisation of borrowing costs 3,526 2,213 (Profit)/loss on sale of fixed assets (30) 11 Profit on sale of discontinued operations - (12,006) Loss on sale of fixed assets – discontinued operations - 40 Deferred expenditure charges – discontinued operations - 116 Restructure charges – United Kingdom venue closure costs - 5,596 Impairment of assets - 140,000 Employee share options 1,317 2,018 Bad and doubtful debts 529 244 Bad and doubtful debts – discontinued operations - 83 Dividends/distributions reinvested (891) (882) Share of joint venture (profit)/loss (127) 44 Loss on foreign currency hedge restructure - 2,969Change in operating assets and liabilities, net of effects from purchase of controlled entities Decrease/(increase) in trade and other receivables 8,887 56,639 (Increase)/decrease in inventories (608) (465) (Increase)/decrease in deferred tax assets (4,994) 14,140 (Increase)/decrease in other operating assets (19,426) (7,905) Increase/(decrease) in trade and other payables 38,696 (77,514) (Decrease)/increase in provision for current tax liabilities (17,257) 5,902 (Decrease)/increase in deferred tax liabilities (8,346) (24,756) (Decrease)/increase in other provisions (4,265) 2,521
Net cash inflow from operating activities 391,854 369,240
Non-cash financing activitiesDividends satisfied by the issue of shares under a dividend reinvestment plan are shown in Note 25 (b). Options and rights issued to employees under the Group’s long term incentive plan are shown in Note 40.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 38. Parent entity financial information (a) Summary financial informationThe individual financial statements of the parent entity show the following aggregate amounts:
2011 2010 $’000 $’000
Balance sheet Current assets 662,318 675,862 Total assets 3,260,169 3,281,973Current liabilities 29,094 649,670Total liabilities 662,280 746,449 Shareholders’ equity Issued capital 3,544,353 3,462,061Reserves Hedge reserve (8,473) (14,887) Share-based payments 6,974 5,956 Foreign currency translation (6,601) -Retained earnings (938,365) (917,606)
Total equity 2,597,888 2,535,524
Profit/(loss) for the year 256,879 (28,949)
Total comprehensive income/(loss) 252,570 (34,511)
(b) Guarantees entered into by the parent entityThe parent entity has not provided any financial guarantees in respect of bank overdrafts or loans to subsidiaries as at 30 June 2011 or 30 June 2010.
There are cross guarantees given by the parent entity and its nominated subsidiaries as described in Note 35. No deficiencies of assets exist in any of these entities.
(c) Contingent liabilities of the parent entityThe parent entity did not have any contingent liabilities as at 30 June 2011 or 30 June 2010.
(d) Contractual commitments for the acquisition of property, plant and equipment The parent entity did not have any contractual commitments for the acquisition of property, plant and equipment as at 30 June 2011 or 30 June 2010.
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Note 39. Earnings per share 2011 2010 Cents Cents
(a) Basic earnings per share From continuing operations attributable to the ordinary equity shareholders of the Company 21.2 8.2From discontinued operations - 1.2
Total basic earnings per share attributable to the ordinary equity shareholders of the Company 21.2 9.4
(b) Diluted earnings per share From continuing operations attributable to the ordinary equity shareholders of the Company 21.2 8.2From discontinued operations - 1.2
Total diluted earnings per share attributable to the ordinary equity shareholders of the Company 21.2 9.4
2011 2010 $’000 $’000
(c) Reconciliation of earnings used in calculating earnings per share Basic and diluted earnings per share Profit from continuing operations 275,428 105,390 Profit from continuing operations attributable to non-controlling interests - (945)
Profit from continuing operations attributable to the ordinary equity shareholders of the Company used in calculating basic and diluted earnings per share 275,428 104,445 Profit from discontinued operations - 14,910
Profit attributable to the ordinary equity shareholders of the Company used in calculating basic and diluted earnings per share 275,428 119,355
2011 2010 Number Number
(d) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 1,300,233,100 1,275,673,002Adjustments for calculation of diluted earnings per share: Performance options and performance rights 1,709,664 917,913
Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 1,301,942,764 1,276,590,915
Note 40. Share-based payments(a) New incentive structureExecutives and senior managers who have greater potential impact on share price and long term value generation receive part of any annual incentive awarded to them as cash and part as rights to restricted shares.
Rights granted under this incentive structure are priced at the Value Weighted Average Price (VWAP) of the 10 trading days prior to the day the Remuneration Committee decides to award them. The rights will be able to be exercised into restricted shares 12 months after grant provided the executive remains employed with the Group. Once the shares are acquired, they will be placed in a restricted class and employees will be required to retain them for a further two years. No exercise price is payable upon the exercise of the rights. The rights granted under this structure carry no dividend or voting rights. The restricted shares do carry dividend and voting rights.
(b) Long term incentive plan pre 2011 financial yearStaff eligible to participate in the long term incentive plan (LTIP) pre the 2011 financial year were those of Senior Manager level and above (including Executive Directors).
Performance options and performance rights granted under the LTIP were for no consideration. Options and rights granted were for a three year vesting period for the earnings per share performance level with a subsequent one or two year testing period to achieve the requisite total shareholder return. The exercise period for these instruments granted to date will expire on the seventh anniversary of their allocation date. The performance rights issued to the Chief Executive expire 90 days after the last date for vesting.
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 40. Share-based payments (continued)Performance options and performance rights granted under the LTIP carry no dividend or voting rights.
The exercise price of performance options was based on the weighted average price at which the Company’s shares are traded on the Australian Securities Exchange during the 30 days immediately before the determination date. No exercise price is payable upon the exercise of performance rights.
(c) Options and rights granted under the incentive plans and structuresSet out below are summaries of the performance options and rights granted or to be granted in respect of the 2011 financial year under the incentive structures:
2011 Grant Date Expiry Date
Exercise Price
Balance at Start
of the Year
Number
Granted During and in
Respect of the
YearNumber
Exercised During
the YearNumber
Lapsed/ Forfeited
During the YearNumber
Balance at End of the YearNumber
Exercisable at End of the YearNumber
Performance Options16 December 2005 7 July 2012 $3.10 248,606 - - (54,152) 194,454 194,45430 November 2006 – Chief Executive
30 November 2013 $3.13 2,000,000 - - - 2,000,000 1,308,800
30 November 2006
30 November 2013 $3.65 619,879 - - (81,630) 538,249 352,229
30 November 2007
30 November 2014 $3.99 1,303,983 - - (133,775) 1,170,208 843,251
30 November 2008
30 November 2015 $2.56 6,862,300 - - (638,700) 6,223,600 -
Weighted average exercise price $2.91 $2.89 $2.91 $3.46
Performance Rights16 December 2005 7 July 2012 N/A 11,132 - - (1,186) 9,946 -30 November 2006
30 November 2013 N/A 190,105 - (116,929) (10,747) 62,429 62,429
30 October 2009 – Chief Executive 10 January 2014 N/A 125,000 - - - 125,000 -30 October 2009 – Chief Executive 10 January 2013 N/A 125,000 - - - 125,000 -30 November 2009
30 November 2016 N/A 1,189,039 - - (25,236) 1,163,803 -
29 October 2010 – Chief Executive
10 January 2015 N/A - 125,000 - - 125,000 -
29 October 2010 – Chief Executive
10 January 2014 N/A - 125,000 - - 125,000 -
September 2011 October 2012 N/A - 158,227 - - 158,227 -
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Note 40. Share-based payments (continued)
2010 Grant Date Expiry Date
Exercise Price
Balance at Start
of the Year
Number
Granted During
the Year Number
Exercised During
the Year Number
Lapsed/ Forfeited
During the Year Number
Balance at End of the Year Number
Exercisable at End of the Year Number
Performance Options16 December 2005 7 July 2012 $3.10 274,935 - - (26,329) 248,606 220,28530 November 2006 – Chief Executive
30 November 2013 $3.13 2,000,000 - - - 2,000,000 1,024,000
30 November 2006
30 November 2013 $3.65 628,106 - - (8,227) 619,879 317,378
30 November 2007
30 November 2014 $3.99 1,322,369 - - (18,386) 1,303,983 -
30 November 2008
30 November 2015 $2.56 7,139,200 - - (276,900) 6,862,300 -
Weighted average exercise price $2.90 $2.71 $2.91 $3.10
Performance Rights16 December 2005 7 July 2012 N/A 12,768 - - (1,636) 11,132 -30 November 2006
30 November 2013 N/A 194,219 - - (4,114) 190,105 97,334
30 October 2009 – Chief Executive 10 January 2014 N/A - 125,000 - - 125,000 -30 October 2009 – Chief Executive 10 January 2013 N/A - 125,000 - - 125,000 -30 November 2009
30 November 2016 N/A - 1,189,039 - - 1,189,039 -
No options or rights expired during the periods covered by the above tables.
The weighted average share price at the date of the exercise of rights exercised during the year ended 30 June 2011 was $2.56 (2010: $Nil).
The weighted average remaining contractual life of exercisable rights outstanding at the end of the period was 4.45 years (2010: 5.56 years).
The weighted average remaining contractual life of share options outstanding at the end of the period was 3.73 years (2010: 4.75 years).F
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Notes to the consolidated financial statements continued
For the year ended 30 June 2011
Note 40. Share-based payments (continued)Fair value of options and rights grantedThe model inputs for rights granted during the year ended 30 June 2011 included:
Performance Rights Performance Rights Performance Rights
Rights Granted to Qualifying Executives TSR – Market Based EPS – Non-Market Based Under Current Performance Conditions – Chief Executive – Chief Executive Incentive Scheme
Grant date 29 October 2010 29 October 2010 September 2011Expiry date 10 January 2015 10 January 2014 October 2012Share price at grant date $2.50 $2.50 $2.34Expected life 4.1 years 3.1 years 1.0 yearsVesting period 3.0 years 3.0 years 1.0 yearsVolatility 29.00% 29.00% N/ARisk free interest rate 4.86% 4.85% N/ADividend yield 8.20% 8.20% 8.20%Fair value $1.47 $1.96 $2.18
The model inputs for options granted during the year ended 30 June 2010 included:
Performance Rights Performance Rights Performance Rights Performance Rights TSR – Market EPS – Non- Based – Chief Market Based TSR – Market EPS – Non- Performance Conditions Executive – Chief Executive based Market Based
Grant date 30 October 2009 30 October 2009 30 November 2009 30 November 2009Expiry date 10 January 2014 10 January 2013 30 November 2016 30 November 2016Share price at grant date $2.48 $2.48 $2.41 $2.41Expected life 3.0 years 3.1 years 3.1 years 3.0 yearsVesting period 2.95 years 2.95 years 3.0 years 3.0 yearsVolatility 30.00% 30.00% 30.00% 30.00%Risk free interest rate 5.08% 5.10% 4.76% 4.74%Dividend yield 8.52% 8.52% 8.50% 8.50%Fair value $1.45 $1.93 $1.36 $1.87
(d) Expenses arising from share-based payment transactionsTotal expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: 2011 2010 $’000 $’000
Performance rights issued under LTIP1 821 535Performance options issued under LTIP1 496 1,483Performance rights issued under 2011 incentive scheme2 345 -
1,662 2,018
1. Represents the amortised cost charged in the relevant financial year for all LTIP grants that are still in, or remain to enter into, their vesting period.
2. Represents the total value of the rights to be granted in respect of the relevant financial year.
Note 41. Events occurring after the reporting periodOn 19 July 2011, the Victorian Minister for Gaming announced that the Group had not been successful in its bid to be awarded the Victorian Wagering and Betting Licence.
Other than the matter mentioned above, in the opinion of the Directors, there have been no other material matters or circumstances which have arisen between 30 June 2011 and the date of this report that have significantly affected or may significantly affect the operations of the Group, the result of those operations or the state of affairs of the Group in subsequent financial periods.
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Directors’ declaration
In the Directors’ opinion:
(a) the financial statements and notes set out on pages 53 to 122 are in accordance with the Corporations Act 2001, including:
(i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and
(ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2011 and of its performance for the financial year ended on that date; and
(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and
(c) at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 35 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the Deed of Cross Guarantee described in Note 35.
Note 1(b) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board.
The Directors have been given the declarations by the Chief Executive and Chief Financial Officer required by section 295A of the Corporations Act 2001.
This declaration is made in accordance with a resolution of the Directors.
Harry Boon Dick McIlwainChairman Managing Director/Chief Executive
Melbourne25 August 2011
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Independent auditor’s report
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Shareholder information
The shareholder information set out below was applicable as at 2 September 2011 based on the details recorded on the Tatts Group Limited share register.
Distribution of shareholdersAnalysis of number of ordinary shareholders by size of holding:
Ordinary Shares
Range Number of Holders Number of Shares Held
1 – 1,000 14,578 8,309,6381,001 – 5,000 53,405 139,970,9485,001 – 10,000 8,907 66,555,73410,001 – 100,000 7,321 166,122,733100,001 and over 448 937,727,971
Total 84,659 1,318,687,024
There were 1,714 holders of less than a marketable parcel of ordinary shares.
Twenty largest shareholdersThe names of the 20 largest quoted equity security holders as they appear on Tatts Group’s share register are listed below:
Ordinary Shares
Name Number of Shares Percentage of Issued Shares
JP Morgan Nominees Australia Limited 189,404,716 14.36HSBC Custody Nominees (Australia) Limited 141,935,534 10.76National Nominees Limited 127,192,320 9.65RBC Dexia Investor Services Australia Nominees Pty Limited <RBC DRP a/c> 39,748,511 3.01Citicorp Nominees Pty Limited <DRP account> 28,522,271 2.16UBS Wealth Management Australia Nominees Pty Ltd 20,126,216 1.53Tassyd Pty Ltd <Estate Thomas Lyons a/c> 19,438,443 1.47Cogent Nominees Pty Limited 18,137,677 1.38ANZ Nominees Limited <Income Reinvest Plan a/c> 17,584,719 1.33AMP Life Limited 15,754,498 1.19Robin Edward Davey <Estate Alexander Hubbard a/c> 13,715,264 1.04Vermont Park Holdings Pty Ltd 10,389,029 0.79ANZ Nominees Limited <Cash Income a/c> 9,656,125 0.73Woodross Nominees Pty Ltd 9,568,668 0.73Wentworth Investments Pty Ltd 7,900,000 0.60Sank Pty Ltd <SJF Discretionary a/c> 7,176,501 0.54Credit Suisse Securities (Europe) Ltd <Collateral a/c> 6,769,231 0.51Bainpro Nominees Pty Limited 5,878,318 0.45CS Fourth Nominees Pty Ltd <Accumulation Account> 4,976,308 0.38Next trading Pty Limited <Stephen Grant Family a/c> 4,686,642 0.36
Total 698,560,991 52.97
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Domicile of ordinary shareholders Number Percentage Number Percentage Domicile of Holders of Holders of Shares of Shares
Australian Capital Territory 857 1.01 3,784,945 0.29New South Wales 10,537 12.45 612,761,190 46.47Northern Territory 355 0.42 1,659,823 0.13Queensland 45,462 53.70 226,340,096 17.16South Australia 2,188 2.58 18,907,413 1.43Tasmania 1,255 1.48 56,563,579 4.29Victoria 20,901 24.69 371,967,580 28.21Western Australia 2,725 3.22 19,733,379 1.49Overseas 379 0.45 6,969,019 0.53
Total 84,659 100.00 1,318,687,024 100.00
Unquoted equity securities Number on Issue Number of Holders
Performance options in respect of ordinary shares issued under the Tatts Group Incentive Plan 9,932,057 35
Performance rights in respect of ordinary shares issued or to be issued under the Tatts Group Incentive Plans 1,884,459 35
Note: Includes 158,227 performance rights approved but not yet issued as at 2 September 2011.
Substantial shareholdersThe following is the only substantial holder of ordinary shares in the Company based on the last notice received:
Number of Shares Percentage of Shares
Perpetual Limited 80,512,273 6.11%
Details based on the notice of change of interests of substantial shareholder filed on 12 August 2011.
Voting rightsThe voting rights attaching to each class of equity securities are set out below:
(a) Ordinary sharesOn a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote.
(b) Performance options and rightsNo voting rights.
On market buy-backThere is no current on-market buy-back in respect of Tatts Group’s ordinary shares.
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Corporate directory
Registered and principal administrative office in AustraliaTatts Group Limited615 St Kilda RoadMelbourne VIC 3004Telephone + 61 3 8517 7777ABN 19 108 686 040
Website addresswww.tattsgroup.com
Australian Securities Exchange (ASX) listingTatts Group Limited shares are listed on the ASX under the code TTS.
DirectorsRefer to profiles on pages 26 to 29.
Senior ExecutivesMichael CarrChief Executive Maxgaming
Barrie FlettonChief Executive TattsBet
Penny GrauGeneral Counsel and Company Secretary
Raymond GunstonChief Financial Officer
Peter HarveyChief Executive Talarius
Bruce HoustonExecutive General Manager Media, Government and Community Relations
Stephen LawrieChief Information Officer
Frank MakryllosChief Executive Tatts Pokies
Maree PataneChief Auditor
Kevin SzekelyChief Executive Bytecraft
Bill ThorburnChief Executive Tatts Lotteries
Investor RelationsGary [email protected]
MediaMichael [email protected]
Strategy and Business DevelopmentFrancis [email protected]
AuditorPricewaterhouseCoopersFreshwater Place Level 19 2 Southbank BoulevardSouthbank VIC 3006
Share registry Computershare Investor Services Pty LimitedYarra Falls, 452 Johnston StreetAbbotsford VIC 3067Email [email protected] within Australia 1300 367 346Telephone outside Australia +61 3 9415 4199Facsimile +61 3 9473 2500
To maintain or update your details online and enjoy full access to all your holdings and other valuable information, simply visit www.investorcentre.com
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Dividend historyDate Paid Type Cents Per Share DRP Share Price
5 April 2006 2006 Interim 8.75 -26 September 2006 2006 Final 7.50 -30 March 2007 2007 Interim 8.0 -5 October 2007 2007 Final 10.0 -5 October 2007 2007 Special 4.0 -4 April 2008 2008 Interim 9.5 -3 October 2008 2008 Special1 10.5 -3 April 2009 2009 Interim 10.0 2.582 October 2009 2009 Final 11.0 2.526 April 2010 2010 Interim 10.0 2.441 October 2010 2010 Special2 11.0 2.296 April 2011 2011 Interim 10.5 2.185 October 2011 2011 Final 11.0 3
1. Paid in place of a 2008 final dividend – refer to ASX Releases dated 23 June and 28 August 2008.
2. Paid in place of a 2010 final dividend – refer to ASX Release dated 26 August 2010.
3. Not available at date of printing. Refer to www.tattsgroup.com/investors
All dividend payments are fully franked.
Shareholder calendar2012 Events Calendar Date
Interim results announcement 23 February 2012
Ex dividend 29 February 2012
Record date 6 March 2012
DRP pricing period commences 8 March 2012
Dividend payment 4 April 2012
Full year results announcement 23 August 2012
Ex dividend 30 August 2012
Record date 5 September 2012
DRP pricing period commences 7 September 2012
Dividend payment 3 October 2012
Annual General Meeting 24 October 2012
All dates may be subject to change and will be updated under ‘Investors’ at www.tattsgroup.com
Major announcementsAnnouncement Date
Announcement of 1.5% discount applied to DRP 2 August 2010
2010 full year results and dividend details released 26 August 2010
2010 Annual General Meeting presentations 29 October 2010
2011 interim results and dividend details released 24 February 2011
Tatts unsuccessful in bid for Victorian wagering and betting licence 19 July 2011
2011 full year results and dividend details released 25 August 2011
All announcements available under ‘Investors’ at www.tattsgroup.com
Designed and produced by MDM Design
Dividend history and shareholder calendar
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