Lottomatica announced ruling by third party neutral in connection with Northstar’s PMA

2012-09-14

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(US).- Lottomatica Group announced that Northstar Lottery Group, a consortium in which Lottomatica’s fully-owned subsidiary Gtech Corporation holds an 80 % controlling interest, received a preliminary determination from a third-party neutral in accordance with the adjustment process contemplated by the Private Management Agreement (PMA) between Northstar and the State of Illinois, acting through the Illinois Department of the Lottery.

The third party neutral preliminarily determined that Northstar is entitled to downward adjustments to Net Income Targets of us$ 55.6 million in total for the Lottery’s fiscal year 2012 and us$ 20.2 million for fiscal year 2013 due to certain actions taken by the State that impacted the assumptions upon which Northstar based its business plan. The neutral third-party professional has given both parties a two-week period to make any submissions for amendment or reconsideration, after which he will issue a final determination. The State may have the right to dispute the final determination of the third party neutral in accordance with the relevant provisions of the PMA.

Under the PMA, Northstar guaranteed a minimum profit level (referred to in the PMA as Net Income Targets) for each of the first five full contract years of the PMA, commencing with the State’s fiscal year ending June 30, 2012. Northstar sought downward adjustments to the Net Income Targets as a result of six instances that it believed were adverse actions.

As a reference, the PMA, which was executed on January 18, 2011, established a framework allowing either party to recommend adjustments to the Net Income Levels or Targets, which are the income levels that determine whether Northstar is entitled to be paid incentive compensation and/or required to pay a financial penalty. The PMA permits Northstar to seek a downward adjustment to Net Income Levels in the event that it believes an adverse action has occurred.

An adverse action is defined in the PMA in relevant part as “any affirmative action (or any failure to act which results in a breach of the PMA) by the State…the effect of which is reasonably expected to have a material adverse effect on the Lottery’s Net Income and Northstar’s ability to earn and collect incentive compensation.”

It should be noted that other matters that could impact Net Income Levels or Targets have been identified by the parties as issues to be resolved.

Based on the ruling, Lottomatica Group reiterates its previously stated position that potential penalties under the PMA, if any, will not have any material impact on 2012 results.