A N N U A L R E P O R T

Transcription

1 A N N U A L R E P O R T

2 A N N U A L R E P O R T

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4 Consolidated Financial Statements 2008 CHAIRMAN S MESSAGE

5 2008 Annual Report Dear Shareholders, The global economic context in which this Group has developed, quickly becoming the undisputed leader in the games and services sector, has been characterised by alternating periods of prosperity and recession. Today, in the midst of what is incontrovertibly an economic crisis, our company remains solid and continues to view the future with great optimism. In a year that everybody will remember as the beginning of the worst financial crisis experienced in the post-war period - one that also spread remarkably quickly to traditionally more resistant sectors - Lottomatica once again benefitted from the innovativeness of its strategies. Strength, transparency, security and innovation are the keywords with which we intend to present the Lottomatica Group 008 financial statements. In this prolonged period of economic uncertainty, these words represent the foundations on which a rare success story has been built. Success that has been achieved thanks to the solidity of an effective business model and cutting-edge technological excellence, the ability to implement strong competitive dynamism with maximum transparency, and the security of a perfectly implemented diversification strategy. By meeting its objectives, the Group has also been able to balance its activities with continuous commitment to creating value for its reference community. This has seen plenty of attention focused on cultural, sporting and social activities, with integrated measures carried out in the context of a series of initiatives fully outlined in the Social Report, a tool which the Lottomatica Group introduced for the first time alongside its 007 financial statements. This decision also derives from the belief that you cannot contemplate doing business without interacting to a greater extent with the stakeholders around you. Looking at the results for 008 and the first indications for 009, not only can we confirm that we have achieved the goals we set ourselves, but thanks to the Group s position, we can also face the current year with renewed confidence in our ability to fulfil our objectives and improve on our results. Revenues for 008 came to.059 billion, a 4% rise on the previous year. EBITDA came to million, an 8% increase on 007. During 008, Lottomatica, as operator, continued its research into new opportunities in all possible channels of the games sector in Italy, which continues to be one of the most advanced and rapidly-growing markets in the world. Revenues in the lotteries segment grew by 4%, 705. million as opposed to 678 million in 007. Lotto and instant lottery incomes grew by 7%. The increasing popularity of instant lotteries and the numbers of players participating in them resulted in revenues of around 9. billion, as compared with revenues of 7.9 billion registered in 007. In the area of gaming machines, Lottomatica has implemented a strategy designed to strengthen its presence in the value chain through the direct management of the machines, the astounding growth of which generated significant income in 008. Indeed, revenues in this area rose to 3.5 billion in 008 compared with 1.6 billion registered in 007, whilst our market share in 008 rose to 16% from 9% in 007. Regarding sports betting, with the acquisition of Totosì, Lottomatica ensured itself a leading role in the online sports betting segment, increasing its market share from 14% to 19% in this sector. Furthermore, following the recent introduction of legislation in Italy regarding skill games, an online poker product was launched that has so far proven to be very popular with the public. Having consolidated its reputation as an all-around operator with leadership in all channels, from traditional retail to the more recent online services, Lottomatica is currently in search of new opportunities to bring its experience and skills to other markets. P 4

6 Consolidated Financial Statements 2008 With our BB activities, we have shown the same ability to diversify as suppliers of products and services for the global and regulated gaming market. Revenues in the lotteries segment rose by 14%, from million in 007 to million in 008, and forecasts for 009 point towards further growth. In 008, GTECH successfully developed a new generation of lottery terminals and central systems that operate with the flexibility necessary to fulfil the various requirements of the market. Meanwhile, upon the completion in 009 of a new cutting-edge instant lottery ticket printing plant, our GTECH subsidiary will have invested US$40 million in its Printed Products division. In 008, GTECH, following several strategic acquisitions, created a new division dedicated to interactive wagering, offering a product portfolio comprised of sports betting offerings and skill games (bingo, poker and others), currently the fastest growing segment of the worldwide gaming market. Our strategy remains forward-looking and open to opportunity, even if the global economic scenario remains turbulent. Nevertheless, the excellent results attained in the final quarter of 008 and the positive trend of early months of this year would appear to confirm the resiliency of the sector in which we operate and, in particular, the solidity of our Group's activities. Looking at 009, it is important to underline how, at this moment in the history of the gaming industry, it is the national and local governments that benefit most from our products and services. In fact, the current recession is serving to further drive innovation within our product lines in order to increase revenues derived from games. This is particularly the case in the US, a key market for us, but also in other countries where we have operations or intend to pursue future opportunities. Taking into consideration GTECH s signing of new contracts and renewal of existing contracts worth over 1 billion in total revenues in 008 alone, our widespread penetration in the various global markets, and the range of our combined product portfolio, we expect to see further growth in all our business segments in 009. Our integrated product offering is a tremendous asset, a true differentiator in an increasingly competitive market. In conclusion, in terms of our own commitment, I would like to emphasize Lottomatica s continued and passionate pledge to guarantee the utmost integrity and responsibility in providing player protection and combating illegal gaming. Lorenzo Pellicioli P 5

7 Italy New York China Spain Arizona Germany France Sweden

8 S T R E N G T H T R A N S PA R E N C Y S E C U R I T Y I N N O V A T I O N

9 2008 Annual Report TABLE OF CONTENTS Lottomatica spa Profile 10 Managemet Report as of December 31, 008 Lottomatica S.p.A. Overview 136 Trends in Revenues by line of Business 136 Lottomatica Group 1 Operating costs and EBITDA analysis 137 Operating and Financial Review 13 Predictable developments 139 Significant business developments during 008 Long term incentive plans 140 Predictable Developments 3 Lottomatica Stock Information 4 Business Overview Lottomatica s Italian Lottery Businesses 4 Lottomatica s Other Businesses 4 GTECH s Business 5 Significant Contract Development During Tables of Customer Contracts 33 Long Term Incentive Plans 39 Consolidated Financial Statements and Footnotes- December 31, 008 Shareholdings of Strategic Management Article 78 of Issuing Regulations - chart 3 exhibit 3C) 14 Regulatory Framework Reference 14 Statement required by article.6., subsections 1 and 13 of the Italian Stock Exchange regulation about compliance with conditions set forth in articles 36 and 37 of Consob resolution no of October 9, 007 (so-called Market Regulations ) 143 Compliance Model under Legislative Decree no. 31/ Compliance Model under Legislative Decree no. 6/ Processing of personal data 144 Shareholders Meeting Proposals 144 Balance Sheets 44 Income Statements 45 Cash Flow Statements 46 Statements of Changes in Equity 47 Notes to Financial Statements 48 Financial Statements and Footnotes - December 31, 008 Balance Sheets 148 Income Statements 149 Cash Flow Statements 150 Statements of Changes in Equity 151 Audit Firm Fees 114 Accounting Principles and Footnotes 15 Summary Schedule of Essential Data of Consolidated Companies Pursuant to Article 49 of Italian Civil Code 115 Additional Disclosures Pursuant to Specific Italian Requirements 11 Compliance with the Conditions Set Forth by Sections 36 and 37 of CONSOB Resolution No of October 9, Compliance Model Under Legislative Decree No. 31/01 1 Regulatory Framework Reference 1 Processing of Personal Data 14 Receipts and Payments (Presidential Decree No. 560 of 9/16/1996) 14 Certification Pursuant to Law 6 15 List of Subsidiaries 17 Net Financial Position 185 Related Parties Disclosure 186 Guarantees 191 Significant Judicial and Arbitration proceedings as of December 31, Financial risk management objectives and policies 196 Events following the closing of the FY008 period 198 Executive Management Benefits 198 Management Stock Option Plans (Article 78 of Issuing Regulations - chart exhibit 3C) 199 Independent Auditor s Report 133 P 8

10 Consolidated Financial Statements 2008 Remuneration of the members of the Board of Directors and of the Board of Statutory Auditors (Article 78 of Issuing Regulations - chart 1 exhibit 3C) Personnel Receipts and Payments (Presidential Decree n. 560 of September 16, 1996 De Agostini S.p.A. Financial Statement List of Subsidiaries Independent Auditor s Report Report of the Board of Auditors P 9

11 2008 Annual Report LOTTOMATICA SPA PROFILE Company Name Lottomatica - Società per Azioni Fiscal Code, VAT no. and no. of enrollment with the Register of enterprises of Rome Share Capital 1.00 par As of December 31, 008: 159,78,775 authorized ordinary shares, value per share; no. 15,86,837 shares paid and subscribed Registered Office Roma - Viale del Campo Boario 56/d Board of Directors (1) Chairman, Managing Director and C.E.O. Mr. Lorenzo PELLICIOLI Vice Chairman Mr. Robert DEWEY Jr. * Managing Director and General Manager Mr. Marco SALA Board Members Mr. Pietro BOROLI Mr. Paolo CERETTI Mr. Marco DRAGO The Rt. Hon. Sir Jeremy HANLEY, KCMG* Mr. James McCANN * Mr. Jaymin PATEL Mr. Anthony RUYS * Mr. Severino SALVEMINI * Mr. Gianmario TONDATO DA RUOS ** Mr. William Bruce TURNER Board of Statutory Auditors(1) Chairman Regular Members Mr. Sergio DUCA Mr. Angelo GAVIANI Mr. Francesco MARTINELLI Substitute Members Mr. Gian Piero BALDUCCI Mr. Giulio GASLOLI Mr. Umile Sebastiano IACOVINO Mr. Guido MARTINELLI Mr. Marco SGUAZZINI VISCONTINI Independent Auditors Reconta Ernst & Young S.p.A. P 10

12 Consolidated Financial Statements 2008 Members of the Executive Committee (2) Mr. Lorenzo PELLICIOLI (Chairman) Mr. Pietro BOROLI Mr. Paolo CERETTI Mr. Marco DRAGO Mr. Jaymin PATEL Mr. Marco SALA Members of the Audit and Compliance Committee (2) Mr. Severino SALVEMINI (Chairman) The Rt. Hon. Sir Jeremy HANLEY, KCMG Mr. Anthony RUYS Members of the Remuneration Committee (2) Mr. Gianmario TONDATO DA RUOS (Chairman) Mr. Robert DEWEY Jr. Mr. James McCANN Subject to the direction and coordination of De Agostini S.p.A. Note: * Denotes Independent Directors ** Denotes Lead Independent Director (1) As enacted by the shareholders at a meeting held on April 15, (2) As enacted by the Board of Directors at a meeting held on April 15, P 11

13 2008 Annual Report LOTTOMATICA GROUP Lottomatica S.p.A. is one of the leading gaming operators in the world based on total wagers and, through its subsidiary GTECH Corporation, is a leading provider of lottery and gaming technology solutions worldwide. It is the goal of Lottomatica Group to be the leading commercial operator and provider of technology in the regulated worldwide gaming markets, by delivering market leading products and services, with a steadfast commitment to the highest levels of integrity, responsibility and growth. Lottomatica is listed on the Stock Exchange of Milan under the trading symbol LTO and has a Sponsored Level 1 American Depository Receipt (ADR) program listed on the United States over the counter market under the trading symbol LTTOY. In this report, the term "Lottomatica" refers to Lottomatica S.p.A., the parent entity, and its subsidiaries excluding GTECH; the term "GTECH" refers to GTECH Corporation and its subsidiaries; and the terms "the Group", "we", "our" and "us" refer to Lottomatica and all subsidiaries included in this report. As further described in the Business Overview section of this report, the Group operates in the publicly regulated gaming market consisting of online, instant and traditional lotteries, sports pools, fixed-odds and pari-mutuel betting, machine gaming and interactive gaming. Lottomatica, the principal Italian operating entity of the Group, has built an extensive distribution network in Italy, with approximately 6,700 terminals in about 97,00 points of sale (including approximately 30,000 points of sale where Lottomatica provides processing services for third parties), comprised of tobacconists, bars, petrol stations, newspaper stands and motorway restaurants. Since 1993, Lottomatica has been the sole concessionaire for the Italian Lotto game. Since 004, Lottomatica has operated instant and traditional lottery games, which in recent years has been a high growth area. In 006, Lottomatica received authorization to distribute online instant lottery games. In 007, Lottomatica began operating fixed odds sports betting and sports pools through a retail network of 1,144 points of sale and 504 points of sale, respectively. Prior to this license, Lottomatica had operated only sports pools with a concession that began in 003 and expired in December 007. Lottomatica is also acquiring further points of sale in order to develop the Italian sports betting/interactive market, and as of December 31, 008, 1,700 points of sale were acquired. GTECH is the world's leading operator of highly secure online lottery transaction processing systems, doing business in more than 50 countries worldwide. GTECH designs, sells and operates a complete suite of lottery enabled point-of-sale terminals that are electronically linked with a centralized transaction processing system that reconciles lottery funds between the retailer, where a transaction is enabled, and the lottery authority. GTECH currently operates, provides online equipment and services to, or has been awarded and/or has entered into, contracts to operate or provide equipment and services in the future to, 6 of the 43 lottery authorities in the United States, and 55 non U.S. lottery authorities. GTECH s New Media and Sports Betting division provides technologt, games and a full suite of e-commerce services to government sponsored lottery markets and regulated commercial sports betting and Internet gaming markets. The Group operates in the gaming machine market segment through Lottomatica's Italian subsidiary Lottomatica Videolot Rete S.p.A. (formerly known as RTI Videolot), its Canadian subsidiary Spielo Manufacturing, ULC, a leading provider of video lottery terminals and related products and services to the global gaming industry, and its Atronic group of companies ("Atronic"). Lottomatica Videolot Rete operates on its networks approximately 49,000 amusement with prize machines. GTECH completed its acquisition of a 50% controlling equity interest in Atronic in January 008, and of the remaining 50% interest in Atronic in May 008. Atronic, a leading video gaming machine provider in Europe, Russia and Latin America, operates in the United States and is licensed in approximately 8 worldwide gaming jurisdictions. Additionally, the Group has leveraged its distribution and transaction processing competence to expand its activities beyond Lottery and also provides Commercial Services through its networks worldwide. The Group currently operates in the following segments: its Lottery segment (traditional and instant) where the Group operates and provides a full range of services, technology and products to government sponsored online, instant and traditional lotteries; its Gaming Solutions segment where the Group operates and provides solutions, products and services relating to video lottery terminals (VLTs) and systems for VLTs for the government sponsored market and video and traditional mechanical reel slot machines and systems for the commercial gaming markets; its Sports Betting segment, where the Group operates and provides retail, internet, call center and mobile technology products and services, including fixed odds sports betting, pari-mutuel betting, live event betting, totalizator betting and sports pools; its Interactive segment, where the Group provides digitally-distributed, multichannel gaming entertainment products and services, including bingo, poker, P 1

14 Consolidated Financial Statements 2008 casino games and quick games, and real-time transaction and information management systems for the commercial sports-betting market; and its Commercial Services segment, where the Group performs high-volume transaction processing of non-lottery commercial transactions such as prepaid cellular telephone recharges, bill payments, electronic tax payments, utility payments, and retail-based programs. The Group has operations in more than 50 countries worldwide on six continents and has 7,494 employees, comprised of the following personnel: Composition of Employees as of December 31, 008 Description December 31, Average Executives Middle Management All Other Permanent Employees 5,975 5,740.9 Employees with Temporary Employment Contracts Total 7,496 7,230.3 For additional information on the Group, please go to its website at: Lottomatica complies with the self-regulatory code of March 006 issued by the Italian Stock Exchange. The report on the compliance with the above-mentioned code is available at Lottomatica s headquarters and on its website ( Operating and Financial Review The following operating and financial review is provided as a supplement to, and should be read in conjunction with, the Group s financial statements and accompanying notes. As described earlier in this report, beginning in the second quarter ended June 30, 008 after successfully completing acquisitions in the Interactive segment, the Group expanded into the following business segments: (i) Lottery; (ii) Gaming Solutions; (iii) Sports Betting; (iv) Interactive; and (v) Commercial Services. Prior period amounts have been reclassified to conform to the current year presentation. Despite unexpected negative changes in the worldwide economic environment, the Group achieved growth in revenues and EBITDA due to the resiliency of the business and an international portfolio which constitutes a natural hedge against fluctuations. Given the backdrop of the world recession, the Group s 008 performance was encouraging. Revenues were up 4%, net income rose by 30%, and earnings per share grew by 7%. Revenues from lotteries continued on a steady growth trend. Contributions from Gaming Solutions and Sports Betting experienced an exponential increase, doubling and tripling, respectively, largely due to new programs in Italy as well as acquisitions by GTECH. Strategic investments were made during 008 to broaden the Group s geographical footprint, expand product offerings, and enter new delivery channels and market segments to help ensure sustainable performance. As envisioned in the Group s three year plan, during 008, investments of 500 million were made in a diversification strategy that is expected to be a major driver in sustaining performance going forward. The Italian market has continued to develop and has become one of the most advanced gaming markets in the world. Having achieved leading positions in every channel, from traditional retail to the latest internet wagering options, Lottomatica has consolidated its role as the leading gaming operator in the Italian market, capturing 41% of all wagers. Lotto and scratch tickets continued their solid performance in 008. The gaming machine market grew dramatically to become a significant contributor. In addition, sports betting and online poker were launched and are experiencing widespread player acceptance, becoming significant contributors as well in 008. In summary, Lottomatica achieved revenue growth in all segments at an overall growth rate of 5%. In the traditional on-line lottery industry, GTECH maintained its market leadership position and experienced growth in same store revenue largely driven by international contracts. Having made a 0 million investment in 008 in a state-of-the-art printing press and facility which is planned to come on-line in the second quarter of 009, GTECH is expected to become a leading provider of instant tickets, an industry segment that has not had significant competition for major contracts. Since entering the instant ticket printing business, GTECH has tripled its revenues. GTECH also established a leadership position in internet wagering, the fastest growing gaming market segment, by acquiring Finsoft, Boss Media and St. Minver, leading providers of sports-betting solutions, online bingo, poker, games and casino products and fully managed e-gaming services for a total investment of more than 60 million in this segment. In the Gaming Solutions segment, we recorded non-cash impairment and other charges of 78 million in 008, which has reduced operating income. While Spielo experienced substantial contract wins in 008 in the government sponsored machine P 13

15 2008 Annual Report gaming sector, further enhancing its market leadership, the US casino market has entered into a period of substantial contraction. Atronic America s operations, which were in the earlystagesof its entryintothe US market, couldnot be sustainedin the faceof significantly diminishing demand. Accordingly, a decision was taken to curtail Atronic Americas activities and fold them into Spielo s operations. On the lottery side, an international customer encountered a sustained period of political instability that has prevented the lottery system deployed there from launching. While we have not fully lost confidence that the lottery system may go live in the near future, we recorded a non-cash impairment charge of 7 million in 008, which has also reduced operating income. Presented below are the Group s key performance indicators as of December 31, 008 and 007. Key performance indicators For the year ended December 31, Increase (decrease) (thousands of euros) % Revenue,058,940 1,661, , EBITDA 755, ,58 54, Operating income 339, ,93 (54,98) (13.9) EBIT 35, ,319 (5,303) (6.7) Net income 137, ,964 31, Diluted earnings per share ( ) Consolidate revenue A comparison of the Group s revenue concentration is as follows: Lottomatica s revenue is primarily derived from concessions awarded by the Italian government. Under these operating contracts, Lottomatica manages all of the activities along the lottery value chain including collecting wagers, paying out prizes, managing all accounting and other back-office functions, running advertising and promotions, operating data transmission networks and processing centers, training staff, providing retailers with assistance and supplying materials for the game. Revenues are typically based on a percentage of wagers. For the Lotto game this percentage of wagers decreases as the total wagers increase during an annual period. Therefore, higher revenue and operating profits for the Lotto game are expected in the first half of the year than in the second half of the year. GTECH s revenue is principally comprised of service revenue derived primarily from lottery service contracts, which are typically at least five to seven years in duration for the base contract term with one to five years of extension options. These contracts generally provide compensation to GTECH based upon a percentage of a lottery's gross online and instant ticket sales. These percentages vary depending on the size of the lottery and the scope of services provided to the lottery. GTECH s product sale revenue is derived primarily from the installation of new online lottery systems, installation of new software and sales of lottery terminals and equipment in connection with the expansion of existing lottery systems. GTECH s product sale revenue from period to period may not be comparable due to the size and timing of product sale transactions. GTECH has developed and continues to develop new lottery games, licenses new game brands and installs a range of new lottery distribution devices, all of which are designed to maintain a strong level of same store sales growth for its customers. Consolidated Revenues For the year ended December 31, Increase (decrease) (thousands of euros) % By Segment Lottery 1,550,105 1,418, , Gaming Solutions 3,51 101, , Sports Betting 144,76 40, ,590 >00.0 Commercial Services 83,508 96,897 (13,389) (13.8) Interactive 48,350 4,463 43,887 >00.0 Total revenue 2,058,940 1,661, , By Legal Entity Lottomatica 1,0,634 81,641 00, GTECH 1,036, , , Total revenue 2,058,940 1,661, , EBITDA and EBIT EBITDA and EBIT are considered alternative performance measures that are not defined measures under International Financial Reporting Standards ( IFRS ) and may not take into account the recognition, measurement and presentation requirements associated with IFRS. We believe that EBITDA and EBIT assist in explaining trends in our operating performance, provide useful information about our ability to incur and service indebtedness and are commonly used measures of performance by securities analysts and investors in the gaming industry. EBITDA and EBIT should not be considered as alternatives to operating income as indicators of our performance or to cash flows as measures of our liquidity. As we define them, EBITDA and EBIT may not be comparable to other similarly titled measures used by other companies. EBITDA and EBIT are computed as follows: P 14

16 Consolidated Financial Statements 2008 EBITDA and EBIT For the year ended December 31, Increase (decrease) (thousands of euro) % Operating income 339, ,93 (54,98) (13.9) Depreciation and amortization 311,556 73,319 38, Impairment losses 100,778 8,56 9,5 >00.0 Other 3,547 4,760 (1,13) (85.7) EBITDA 755, ,528 54, Operating income 339, ,93 (54,98) (13.9) Equity income (loss) (1,85) 753 (,578) >00.0 Other income 6,193 18,705 (1,51) (66.9) Other expense (,699) (3,357) (658) (19.6) Foreign exchange gain (loss), net 10,35 (33,705) 44, EBIT 352, ,319 (25,303) (6.7) Acquisition Atronic On January 31, 008, GTECH acquired a 50% controlling interest in the Atronic group of companies ( Atronic ) owned by Paul and Michael Gauselmann (the Gauselmanns ) for 0 million, which was previously paid into escrow in October 006. Atronic is a video gaming machine manufacturer and also develops video machine games and customized solutions for dynamic gaming operations. In May 008, GTECH paid 3 million for the remaining 50% interest in Atronic. Boss Media AB On February 1, 008, GTECH and Medströms AB, through GEMed AB (a Swedish private limited liability company owned % and 1.546% by GTECH and Medströms AB, respectively) announced a public cash offer to the shareholders of Boss Media AB ( Boss Media ). Boss Media is a leading developer of innovative software and systems for digitally-distributed gaming entertainment. The public cash offer resulted in GEMed acquiring approximately 94% of the outstanding shares of Boss Media. Pursuant to Swedish law, on March 10, 008 GTECH and Medströms AB commenced a process to compel the sale of the untendered shares, which was completed on September 8, 008 for a total cost of 9.7 million. From February 1, 008 through March 5, 008, GEMed (through GTECH) purchased approximately 46.3 million shares of Boss Media for approximately SEK 1. billion ( 14. million) resulting in GTECH owning approximately 8% of Boss Media. On April 4, 008, GEMed obtained control of Boss Media when the Board of Directors of Boss Media was reconstituted such that GEMed was able to utilize the voting rights attached to the shares acquired. St. Enodoc Holdings Limited On April 30, 008, GTECH acquired 90% of Gibraltar-based St. Enodoc Holdings Limited and its subsidiaries including St. Minver Limited (collectively St. Minver ), the leading provider of end-to-end white label gaming services. GTECH paid 3.8 million in cash ( 30.4 million at the April 30, 008 exchange rate) for the 90% equity stake on a debt free basis and expects to pay an additional 9. million ( 9.6 million at the December 31, 008 exchange rate) based on the performance of the business in 008 and 009. The remaining 10% interest in St. Minver will remain with Gary Shaw, Founder and Chairman, until at least 01, at which point both Mr. Shaw and GTECH have the right to cause GTECH to acquire Mr. Shaw's shares. Toto Carovigno S.p.A. On August 9, 008, Lottomatica acquired 100% of the shares of Toto Carovigno S.p.A., ( Toto Carovigno ), the owner of the Totosi sports-betting brand and the leading Italian online betting company concessionaire for sports and horse race betting, for a total cash purchase price of 35.8 million. In addition, a refundable payment of 4.4 million has been paid into escrow. The final purchase price will be determined after the results of certain procedures performed on the acquiree s statement of financial position as of the date of acquisition, which is currently underway. Royal Gold On December 5, 008, Lottomatica acquired 100% of the shares of Royal Gold S.r.l., an Italian entity that owns and operates amusement with prize machines, for a purchase price of 1.4 million. Comparision of 008 with 007 Consolidated revenue for 008 increased 3.9% over 007. Lottomatica s revenue increased 4.5% and GTECH s revenue increased 3.4%. Lottomatica Revenue Consolidated revenue for the year ended December 31, 008 and 007 includes the following amounts for Lottomatica: P 15

17 2008 Annual Report Lottomatica revenues For the year ended December 31, Increase (decrease) (thousands of euros) % Lotto 378,87 398,1 (19,95) (4.8) Instant tickets 33,789 77,775 46, Other,580, Sports Betting Sports betting revenue increased million in 008, a substantial increase over 007 due to the strong performance of fixed odds sports-betting operations that commenced on August 19, 007 (19% market share as of December 31, 008) as detailed in the table below. As of December 31, 008, 1,144 fixed odds sportsbetting and 504 sports pool points of sale locations were operational. Lottery 705, ,990 27, Sports Betting 144,76 40, ,590 >00.0 Commercial Services 83,508 74,908 8, Gaming Solutions 89,04 8,607 60,597 >00.0 Total revenue 1,022, , , Lotto Lotto revenue declined 4.8% primarily due to a corresponding decline in Lotto wagers as detailed in the table below. Lotto wagers For the year ended December 31, Increase (decrease) (millions of euro) wagers % Core wagers 5, ,34.9 (189.1) (3.6) Wagers for late numbers (136.) (14.5) 5, ,177.3 (325.3) (5.3) Instant tickets Throughout 008, the strong performance in instant ticket sales continued. Instant ticket revenue increased 16.6% over the same period last year primarily due to higher sales of Scratch and Win tickets as detailed in the table below. The 1.3 billion increase in instant ticket sales was driven by increased sales of lottery tickets across all price points. Sports Betting wagers For the year ended December 31, Increase (decrease) (millions of euro) Wagers % Fixed odds sports betting wagers >00.0 Sports pool wagers (44.0) (.6) Commercial Services Revenue from Commercial Services in 008 increased 11.5% over 007 principally due to an increase in bill payment services, electronic top-up services for prepaid mobile, and ticketing services for sporting and musical events. Gaming Solutions Revenue from Gaming Solutions in 008 increased substantially over 007, driven primarily by the increased placement of amusement with prize machines (AWP machines), resulting in a 1.9 billion increase in wagers. Approximately 49,000 AWP machines were installed at the end of 008 compared to approximately 3,000 installed at the end of 007. GTECH Revenue Consolidated revenue for the year ended December 31, 008 and 007 includes the following amounts for GTECH: Scratch & Win tickets For the year ended December 31, Increase (decrease) Amount % Total tickets sold (in millions),531.0, Total sales (in millions) 9, ,866. 1, Average price point P 16

18 Consolidated Financial Statements 2008 GTECH revenues For the year ended December 31, Increase (decrease) (thousands of euros) % United States 417, ,008 (18,403) (4.) International 77,577 61,875 15, Lottery 695, ,883 (2,701) (0.4) Gaming Solutions 56,71 35,00 1, Interactive 43,730 3,63 40,098 >00.0 Commercial Services - 1,989 (1,989) (100.0) Service revenue 79, ,704 36, Product sales 40,673 81, , Total revenue 1,036, , , Lottery United States lottery service revenue declined 4.% primarily due to the strengthening of the euro against the US dollar. International lottery service revenue increased 6.0% primarily due to higher service revenues from an approximate 9% increase in sales by our international lottery customers, partially offset by rate changes. Gaming Solutions Solutions service revenue increased 61.1% principally due to the January 008 acquisition of Atronic Gaming. Interactive Interactive service revenue increased substantially over the same period last year due to the April 008 acquisitions of Boss Media and St. Minver. Commercial Services Due to the August 1, 007 sale of its equity interest in POLCARD S.A., a debit/credit card merchant transaction acquirer, bank-card issuer and ATM management company in Poland, GTECH no longer has revenue (or related costs) from its Commercial Services business segment. Product Sales Product sales were million higher in 008 compared to 007 principally due to 57. million of product sales from Atronic, along with the sale of a new lottery central system to our customer in Finland and the sale of 8,500 lottery terminals to our customer in the United Kingdom. Consolidated operating costs For the year ended December 31, Increase (decrease) (thousands of euros) % Raw materials, services and other costs 991,47 693,459 97, Personnel 410, ,95 41, Depreciation and amortization 311,556 73,319 38, Impairment losses 100,778 8,56 9,5 >00.0 Capitalization of internal construction costs - labor and overhead (95,149) (78,131) (17,018) (1.8) Total operating costs 1,718,945 1,266, , Percentage of total revenue (%) Consolidated operating costs detailed by legal entity are as follows: Consolidated operating costs detailed by legal entity For the year ended December 31, Increase (decrease) (thousands of euros) % Lottomatica 464, ,860 14, GTECH 56,9 35, , Raw materials, services and other costs 991, , , Lottomatica 93,98 89,797 4, GTECH 316,585 79,498 37, Personnel 410, ,295 41, Lottomatica 64,164 54,666 9, GTECH 47,39 18,653 8, Depreciation and amortization 311, ,319 38, Lottomatica 0 1,8 (1,6) (98.4) GTECH 100,758 7,44 93,514 >00.0 Impairment losses 100,778 8,526 92,252 >200.0 Lottomatica GTECH (95,149) (78,131) (17,018) (1.8) Capitalization of internal construction costs (95,149) (78,131) (17,018) (21.8) Lottomatica 63, , , GTECH 1,095, , , Total operating costs 1,718,945 1,266, , P 17

19 2008 Annual Report The 97.8 million increase in raw materials, services and other costs resulted from the 97.8 million increase in raw materials, services and other costs resulted from 14.1 million of higher costs incurred by Lottomatica along with million of higher costs incurred by GTECH. The higher costs incurred by Lottomatica principally related to 67.6 million of variable costs associated with higher service revenue and 56.5 million of higher costs related to the substantial growth in revenue, principally in the Sports Betting and Gaming Solutions segments. Of this 56.5 million increase in costs, 30.4 million related to betting taxes which are a percentage of wagers, 15.7 million related to accounts receivable write-downs in the Gaming Solutions segment and 11.3 million relates to higher consulting costs. The higher costs incurred by GTECH principally related to the 008 acquisitions of Atronic, Boss Media and St. Minver. The 41. million increase in personnel resulted from 4.1 million of higher costs incurred by Lottomatica along with 37.1 million of higher costs incurred by GTECH. The higher costs incurred by Lottomatica are principally comprised of costs related to higher service revenue from Italian operations. The higher costs incurred by GTECH principally related to the 008 acquisitions of Atronic, Boss Media and St. Minver. The 38. million increase in depreciation and amortization resulted from 9.5 million of higher costs incurred by Lottomatica along with 8.7 million of higher costs incurred by GTECH. The higher costs incurred by Lottomatica principally related to an increase in sports betting licenses generated from new point of sales acquisitions and additional AWP machines installed during the year. The higher costs incurred by GTECH principally related to the 008 acquisitions of Atronic, Boss Media and St. Minver. As previously discussed, the 9.3 million increase in impairment losses relate to 74.0 million of goodwill and other impairment losses primarily related to Atronic America s operations in the Gaming Solutions segment and 6.8 million related to a lottery system we deployed for an international customer in the Lottery segment that has encountered a sustained period of political instability that has prevented the lottery system from launching. The 95.1 million of Capitalization of internal construction costs - labor and overhead (relating to the capitalization of GTECH labor and overhead costs during the construction phase of lottery system implementations)were principally comprised of spending on new lottery systems and the expansion of existing lottery systems in the United Kingdom, Finland, Michigan, Oregon, and New York, along with the placement of additional video lottery terminals in Rhode Island and other participation markets. With respect to facilities management contracts, these costs are generally recovered over the term of the lottery contract, which is typically at least five to seven years with options permitting the lottery authority to extend the contract under the same terms and conditions for one or more additional periods. Costs that relate to product sale contracts (approximately 6% of the 95.1 million) are recovered as payments are received under product sale contracts. As of December 31, 008, we collected 36.7 million of advance payments from customers, primarily related to product sale contracts, representing approximately 69% of our associated product sale inventory. Foreign exchange gain (loss), net For the year ended December 31, Increase (decrease) (thousands of euros) % Realized foreign exchange losses (5,984) (1,867) 4,117 >00.0 Unrealized foreign exchange gains (losses) 16,336 (31,838) (48,174) (151.3) 10,352 (33,705) (44,057) (130.7) In connection with GTECH s August 007 sale of POLCARD S.A. to First Data International, on August 3, 007, GTECH s Polish subsidiary, GTECH Polska Sp.z.o.o., loaned Polish zloty 55.6 million to GTECH Global Services Corporation Limited, whose functional currency is the US dollar. The loan bears market interest rates and is repayable on July 31, 009. Unrealized foreign exchange gains of 16.3 million incurred during 008 includes 14.7 million of gains related to this loan due to fluctuations in the Polish zloty to US dollar exchange rate. Unrealized foreign exchange losses of 31.8 million incurred during 007 are principally comprisedofnon-cashlossesassociatedwithausdollardenominatedintragrouploanbetween LottomaticaandGTECHinconnectionwithLottomatica sacquisitionofgtechinaugust006. On July 13, 007, the intragroup loan was converted from US dollars to euro and effective September 7, 007, management determined that the intragroup loan would be refinanced uponmaturitywithanewintragrouploanorloans.therefore,beginningonseptember7,007, the intragroup loan forms part of the net investment in GTECH and gains or losses on the retranslation of the intragroup loan are recorded to equity. Interest expense For the year ended December 31, Increase (decrease) (thousands of euros) % GTECH Senior Credit Facilities (70,777) (103,89) (33,05) (31.8) Capital Securities (64,403) (64,530) (17) (0.) 4.8% Bonds (17,303) (17,811) (508) (.9) Lottomatica Revolving Credit Facility (6,961) - 6,961 - Atronic related debt (5,904) - 5,904 - Lottomatica Term Loan Facility (80) Other (11,387) (7,646) 3, (177,555) (193,816) (16,261) (8.4) P 18

20 Consolidated Financial Statements 2008 Interest expense decreased 16.3 million principally due to lower interest rates in 008 on the GTECH Senior Credit Facilities as compared to 007, along with the strengthening of the euro against the US dollar, partially offset by interest expense on debt assumed in connection with 008 investment activities. Weighted Average Diluted Shares Weighted average diluted shares during 008 totaled million shares (including the impact of treasury shares purchased), in line with the same period last year. Income Taxes The Group's effective income tax rate during 008 was 5.6% compared to 46.1% during 007. The rate decrease was primarily due to a reduction in the Italian corporate income tax rate from 33% to 7.5%, including its effect on deferred taxes, for years beginning in 008. Also contributing to the rate decrease was a larger percentage of foreign profits taxed at rates that are lower than the Italian statutory income tax rate and certain foreign losses that produced tax benefits at rates higher than the Italian statutory income tax rate. Liquidity, capital resource and financial position The Group s objective is to maintain adequate liquidity and flexibility through the use of cash generated by operating activities, bank overdrafts and bank loans. We believe our ability to generate excess cash from operations to reinvest in our business is one of our fundamental financial strengths and combined with our committed borrowing capacity, we expect to meet our financial obligations and operating needs in the foreseeable future. We expect to use cash generated primarily from operating activities to meet contractual obligations and to pay dividends. Our growth is expected to be financed through a combination of cash generated from operating activities, existing sources of committed liquidity, access to capital markets, and other sources of capital. Our corporate debt ratings of Baa3 from Moody s and BBB- from Standard and Poor s contribute to our ability to access capital markets at attractive prices. In May 008, Lottomatica entered into a 300 million senior unsecured revolving credit facility (the "LTO Revolving Credit Facility") that expires in August 01. During the quarter ended June 30, 008, Lottomatica borrowed the 300 million available under the LTO Revolving Credit Facility and the Group used the proceeds to prepay US$467.4 million of the GTECH Term Facilities that had scheduled repayment dates in 008, 009 and 010. In December 008, Lottomatica entered into a 360 million senior unsecured term loan facility that expires in November 013, the proceeds of which were principally used to repay the 4.80% Bonds that came due in December 008. In addition to extending the weighted average maturity of the Group's debt portfolio, the current composition of US dollar and euro debt reflects the increase in euro denominated cash flow in our business which is primarily driven by recent acquisitions. Summary Cash Flow Statement For the year ended December 31, (thousands of euros) Net cash flows from operating activities 680, ,759 Acquisitions (49,667) (48,688) Acquisitions - cash acquired 39,689 Purchases of systems, equipment and other assets related to contracts (195,178) (178,33) Purchases of property, plant and equipment (6,176) (13,835) Purchases of intangible assets (18,439) (60,377) Finsoft contingent consideration (13,415) - Net cash proceeds from the sale of POLCARD S.A ,77 Other investing activities, net,806 4,80 Net cash flows used in investing activities (460,380) (129,663) Principal payments on long-term debt (957,580) (40,94) Interest paid (159,850) (180,188) Dividends paid (15,393) (119,695) Treasury share purchases (74,830) - Dividends paid - minority interest (31,357) (5,90) Net proceeds from (repayments of) short-term borrowings 44,54 (6,066) Proceeds from issuance of long-term debt 763,440 - Proceeds from shares issued to employees at a discount - 15,301 Other financing activities, net (5,905) 5,189 Net cash flows used in financing activities (546,933) (332,303) Net cash flow (326,509) 41,793 Analysis of Cash Flows During 008, we generated million of net cash flows from operating activities. Net cash flows used in investing activities were million, principally due to 10.0 million for the acquisitions of Atronic, Boss Media, St. Minver and Toto Carovigno, along with capital additions of 195. million for systems, equipment and other assets (principally related to spending in the United Kingdom, Michigan, Oregon, New York, California, and Italy). Net cash flows used in financing activities of million were principally comprised of million of net principal payments on long-term debt; million of interest paid primarily on the Capital Securities and GTECH Senior Credit Facilities; 15.4 million of dividends paid to our shareholders in April 008; and 74.8 million of P 19

21 2008 Annual Report treasury share purchases. These uses of cash were partially offset by 44.5 million of net proceeds from short-term borrowings. At December 31, 008, we had million of cash and cash equivalents on hand. Our business is capital-intensive. We expect our principal sources of liquidity to be existing cash balances, cash generated from operations and borrowings under our GTECH Senior Credit Revolving Facilities (totaling US$500 million) and LTO Revolving Credit Facility (totaling 300 million). At December 31, 008, there was million of committed undrawn capacity under these two facilities. These facilities have covenants and restrictions including, among other things, requirements relating to the maintenance of certain financial ratios, limitations on capital expenditures and acquisitions and limitations on dividends, none of which are expected to impact the Group s liquidity or capital resources. At December 31, 008, we were in compliance with all applicable covenants. We currently expect that our excess cash flow from operations, existing cash, undrawn capacity under existing borrowing facilities and access to additional sources of capital will be sufficient, for the foreseeable future, to fund our anticipated working capital and ordinary capital expenditure needs, to service our debt obligations, to fund anticipated internal growth, to fund all or a portion of the cash needed for potential acquisitions and to pay dividends. We may also seek alternative sources of financing to fund future potential acquisitions and other growth opportunities. Summary Consolidated Balance Sheet December 31, Increase (decrease) (thousands of euros) % Systems, equipment and other assets related to contracts, net 758, ,60 18,457.5 Goodwill 3,086,97,793,186 93, Intangible assets, net 853, ,613 11, Deferred income taxes 35,41 160,758 74,663 46,4 Other non-current assets 113, ,103 5, Total non-current assets 5,047,467 4,542, , Inventories 19, ,98, Trade and other receivables 773, , 78, Cash and cash equivalents 109,74 434,065 (34,791) (74.8) Other current assets 91,10 71,507 19, Non-current assets classified as held for sale 7,456-7,456 - Total assets 6,158,454 5,850, , Equity 1,667,43 1,733,191 (65,768) (3.8) Long-term debt, less current portion,573,80,143,7 430, Deferred income taxes 441,409 45,735 (11,36) (.5) Other non-current liabilities 09,985 16,591 83, Total non-current liabilities 3,225,196 2,723, , Accounts payable 800,653 60, , Short-term borrowings 60,848 7,610 53,38 >00.0 Current portion of long-term debt 61, ,384 (46,75) (87.5) Income taxes payable 49,457 61,77 (11,80) (19.3) Other current liabilities 93,768 35,630 58, Total equity and liabilities 6,158,454 5,850, , The 18.5 million increase in systems, equipment and other assets related to contracts, net was principally due to capital additions of 0.3 million, 3.5 million primarily related to the 008 acquisitions of Atronic, Boss Media, St. Minver and Toto Carovigno, and 4.6 million of foreign currency translation. These increases were partially offset by depreciation and impairment losses of 33.1 million. The 93.1 million increase in goodwill was primarily related to the 008 acquisitions of Atronic, Boss Media, St. Minver, Toto Carovigno and Royal Gold, along with million of foreign currency translation, partially offset by 48.7 million of goodwill impairment. The 11.5 million increase in intangible assets, net was principally due to million of intangible assets primarily associated with the 008 acquisitions of Atronic, Boss Media, St. Minver and Toto Carovigno, along with 4.1 million of foreign currency translation, partially offset by 89.3 million of amortization and impairment losses. P 0