-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K0WdarEx4ZsUL8nmVF5AkLz8aZe4mSP2q4uS2sfXrPOxJvjyUb3y5tAEBOItPL/G PM9yjduxCwkN3zFvfcI3pw== 0000857323-97-000017.txt : 19971015 0000857323-97-000017.hdr.sgml : 19971015 ACCESSION NUMBER: 0000857323-97-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970830 FILED AS OF DATE: 19971014 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GTECH HOLDINGS CORP CENTRAL INDEX KEY: 0000857323 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 050450121 STATE OF INCORPORATION: DE FISCAL YEAR END: 0223 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11250 FILM NUMBER: 97694692 BUSINESS ADDRESS: STREET 1: 55 TECNOLOGY WAY CITY: WEST GREENWICH STATE: RI ZIP: 02817 BUSINESS PHONE: 4013921000 MAIL ADDRESS: STREET 1: 55 TECHNOLOGY WAY STREET 2: LEGAL DEPARTMENT CITY: WEST GREENWICH STATE: RI ZIP: 02817 10-Q 1 QUARTERLY REPORT FOR GTECH HOLDINGS CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 30, 1997 Commission file number 1-11250 GTECH Holdings Corporation (Exact name of registrant as specified in its charter) Delaware 05-0450121 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 55 Technology Way, West Greenwich, Rhode Island 02817 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (401) 392-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At October 4, 1997 there were 41,947,946 shares of the registrant's Common Stock outstanding. INDEX GTECH HOLDINGS CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets Consolidated Income Statements Consolidated Statement of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 4. Submission of Matters to Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURES EXHIBITS PART 1. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) August 30, February 22, 1997 1997 ------------ ------------ (In thousands, except share amounts) ASSETS CURRENT ASSETS Cash and cash equivalents ................................................... $ 11,943 $ 11,985 Trade accounts receivable ................................................... 86,611 110,707 Sales-type lease receivables ................................................ 12,513 15,231 Inventories ................................................................. 43,912 35,326 Deferred income taxes ....................................................... 20,237 20,237 Other current assets ........................................................ 16,413 9,743 ------------ ------------ TOTAL CURRENT ASSETS ................................................. 191,629 203,229 SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS ........................ 1,219,568 1,063,651 Less: Accumulated Depreciation ................................................... (633,383) (561,350) ------------ ------------ 586,185 502,301 GOODWILL, net .................................................................... 115,590 112,853 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES ......................... 61,372 56,693 OTHER ASSETS ..................................................................... 86,791 81,465 ------------ ------------ $ 1,041,567 $ 956,541 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings ....................................................... $ 1,380 $ 1,395 Accounts payable ............................................................ 39,375 53,944 Accrued expenses ............................................................ 61,334 52,625 Advance payments from customers ............................................. 10,117 10,534 Employee compensation ....................................................... 22,705 27,991 Income taxes payable ........................................................ 17,901 13,777 Current portion of long-term debt ........................................... 5,595 6,049 ------------ ------------ TOTAL CURRENT LIABILITIES ............................................ 158,407 166,315 LONG-TERM DEBT, less current portion ............................................. 459,889 382,499 OTHER LIABILITIES ................................................................ 18,200 25,907 DEFERRED INCOME TAXES ............................................................ 23,687 23,687 SHAREHOLDERS' EQUITY Preferred Stock, par value $.01 per share--20,000,000 shares authorized, --- --- none issued Common Stock, par value $.01 per share--150,000,000 shares authorized, 43,879,752 and 43,845,651 shares issued, 42,027,071 and 42,490,770 shares outstanding at August 30, 1997 and February 22, 1997, respectively ....... 439 438 Additional paid-in capital .................................................. 170,385 169,705 Equity carryover basis adjustment ........................................... (7,008) (7,008) Cumulative translation adjustment ........................................... 331 1,472 Retained earnings ........................................................... 268,286 228,741 ------------ ------------ 432,433 393,348 Less cost of 1,852,681 and 1,354,881 shares in treasury at August 30, 1997 and February 22, 1997, respectively ...................... (51,049) (35,215) ------------ ------------ 381,384 358,133 ------------ ------------ $ 1,041,567 $ 956,541 ============ ============ See notes to consolidated financial statements
CONSOLIDATED INCOME STATEMENTS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) Three Months Ended ----------------------- August 30, August 24, 1997 1996 ---------- ---------- (In thousands, except per share amounts) Revenues: Services ............................................ $ 209,139 $ 191,812 Sales of products ................................... 17,671 23,141 ---------- ---------- 226,810 214,953 Costs and expenses: Costs of services ................................... 143,548 133,947 Costs of sales ...................................... 9,169 14,537 ---------- ---------- 152,717 148,484 ---------- ---------- Gross profit .............................................. 74,093 66,469 Selling, general and administrative ....................... 32,939 30,674 Research and development .................................. 7,869 8,544 ---------- ---------- Operating income .......................................... 33,285 27,251 Other income (expenses): Interest income ..................................... 1,792 899 Equity in earnings of unconsolidated affiliates...... 4,957 3,374 Other income ........................................ 510 2,421 Interest expense .................................... (7,916) (3,772) ---------- ---------- Income before income taxes ................................ 32,628 30,173 Income taxes .............................................. (12,403) (12,672) ---------- ---------- Net income ................................................ $ 20,225 $ 17,501 ========== ========== Earnings per common share ................................. $ .48 $ .41 ========== ========== Weighted average common shares outstanding ................ 42,046 43,087 ========== ========== See notes to consolidated financial statements
CONSOLIDATED INCOME STATEMENTS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) Six Months Ended (1) ----------------------- August 30, August 24, 1997 1996 ---------- ---------- (In thousands, except per share amounts) Revenues: Services ............................................ $ 435,069 $ 386,798 Sales of products ................................... 36,912 39,328 ---------- ---------- 471,981 426,126 Costs and expenses: Costs of services ................................... 300,263 265,662 Costs of sales ...................................... 20,497 23,691 ---------- ---------- 320,760 289,353 ---------- ---------- Gross profit .............................................. 151,221 136,773 Selling, general and administrative ....................... 68,853 60,626 Research and development .................................. 16,044 15,174 ---------- ---------- Operating income .......................................... 66,324 60,973 Other income (expenses): Interest income ..................................... 3,545 1,449 Equity in earnings of unconsolidated affiliates...... 8,671 6,591 Other income ........................................ 880 2,467 Interest expense .................................... (14,592) (9,923) ---------- ---------- Income before income taxes ................................ 64,828 61,557 Income taxes .............................................. (25,283) (25,853) ---------- ---------- Net income ................................................ $ 39,545 $ 35,704 ========== ========== Earnings per common share ................................. $ .94 $ .83 ========== ========== Weighted average common shares outstanding ................ 42,065 43,087 ========== ========== (1) 27 weeks in the six month period ended August 30, 1997 and 26 weeks in the six month period ended August 24, 1996 See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY-(Unaudited) GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Common Stock Additional ------------------------ Paid-in Retained Treasury Shares Amount Capital Other Earnings Stock Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Balance at February 22, 1997.... 43,845,651 $ 438 $ 169,705 $ (5,536) $ 228,741 $ (35,215) $ 358,133 Purchase of 497,800 shares of common stock ............ --- --- --- --- --- (15,834) (15,834) Common stock issued under stock award plans .......... 34,101 1 680 --- --- --- 681 Net income ..................... --- --- --- --- 39,545 --- 39,545 Foreign currency translation.... --- --- --- (1,141) --- --- (1,141) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at August 30, 1997...... 43,879,752 $ 439 $ 170,385 $ (6,677) $ 268,286 $ (51,049) $ 381,384 ========== ========== ========== ========== ========== ========== ========== See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) Six Months Ended (1) ---------------------- August 30, August 24, 1997 1996 ---------- ---------- (Dollars in thousands) OPERATING ACTIVITIES Net income .................................................................... $ 39,545 $ 35,704 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................................... 99,289 80,376 Equity in earnings of unconsolidated affiliates ......................... (8,671) (6,591) Other ................................................................... 8,788 264 Changes in operating assets and liabilities: Trade accounts receivable ............................................. 24,132 (21,712) Inventories ........................................................... (8,408) 9,512 Other assets and liabilities .......................................... (21,495) 11,703 Other assets and liabilities of discontinued operations ............... (2,604) (2,622) ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 130,576 106,634 INVESTING ACTIVITIES Purchases of systems, equipment and other assets relating to contracts......... (174,939) (106,325) Purchases of property plant and equipment ..................................... (7,536) (7,064) Cash received from affiliates ................................................. 2,330 354 Investments in and advances to affiliates ..................................... (5,178) (636) Other ......................................................................... (4,426) --- ---------- ---------- NET CASH USED FOR INVESTING ACTIVITIES ........................................ (189,749) (113,671) FINANCING ACTIVITIES Proceeds from issuance of long-term debt ...................................... 433,818 2,965 Principal payments on long-term debt .......................................... (356,592) (1,982) Purchases of treasury stock ................................................... (15,834) --- Other ......................................................................... (1,712) 211 ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 59,680 1,194 Effect of exchange rate changes on cash ....................................... (549) (772) ---------- ---------- DECREASE IN CASH AND CASH EQUIVALENTS ......................................... (42) (6,615) Cash and cash equivalents at beginning of period .............................. 11,985 8,519 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 11,943 $ 1,904 ========== ========== (1) 27 weeks in the six month period ended August 30, 1997 and 26 weeks in the six month period ended August 24, 1996 See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTE A--BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of GTECH Holdings Corporation (the "Company"), the parent of GTECH Corporation ("GTECH"), have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended August 30, 1997 are not necessarily indicative of the results that may be expected for the full 1998 fiscal year ending February 28, 1998. The balance sheet at February 22, 1997 has been derived from the audited financial statements at that date. For further information refer to the consolidated financial statements and footnotes thereto included in GTECH Holdings Corporation's fiscal 1997 Annual Report on Form 10-K. The Company operates on a 52 to 53 week fiscal year ending on the last Saturday in February. Fiscal 1998 is a 53 week year. The Company has included the extra week in its first quarter ended May 31, 1997. Accordingly, there are twenty-seven weeks in the six month period ended August 30, 1997, versus twenty-six weeks in the six month period ended August 24, 1996. NOTE B--INVENTORIES August 30, February 22, 1997 1997 ----------- ----------- (Dollars in thousands) Inventories consist of: Purchased components $ 13,639 $ 11,483 Finished subassemblies 1,784 1,993 Work-in-process 18,754 16,106 Finished goods 9,735 5,744 ----------- ----------- $ 43,912 $ 35,326 =========== =========== NOTE C--LONG-TERM DEBT August 30, February 22, 1997 1997 ----------- ----------- (Dollars in thousands) Long-term debt consists of: Revolving credit facility $ 145,200 $ 367,000 7.75% Series A Senior Notes due 2004 150,000 --- 7.87% Series B Senior Notes due 2007 150,000 --- Other 20,284 21,548 ----------- ----------- 465,484 388,548 Less current maturities 5,595 6,049 ----------- ----------- $ 459,889 $ 382,499 =========== =========== The Company has an unsecured revolving credit facility of $400 million expiring in June 2002 (the "Credit Facility"). At August 30, 1997, the weighted average interest rate for all outstanding borrowings under the Credit Facility was 5.93%. On May 29, 1997, the Company issued in a private placement, $150 million of 7.75% Series A Senior Notes due 2004 and $150 million of 7.87% Series B Senior Notes due 2007 (collectively, the "Senior Notes"). Interest on each issue is payable semiannually in arrears. The proceeds from the sale of the Senior Notes were used to pay down the Credit Facility. NOTE D--INCOME TAXES The Company's effective income tax rate was greater than the statutory rate due primarily to state income taxes and certain expenses that are not deductible for income tax purposes. NOTE E--COMMITMENTS AND CONTINGENCIES See Legal Proceedings in Part II Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 herein. NOTE F--EARNINGS PER COMMON SHARE Earnings per common share are calculated by dividing net income by weighted average common shares outstanding during the period. The exercise of outstanding stock options would not result in a material dilution of earnings per common share. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", that is required to be adopted by the Company in the fourth quarter of fiscal 1998. At that time, the Company will be required to change the method currently used to calculate earnings per share and to restate all prior periods presented. Under the new standard, primary earnings per share will be replaced with basic earnings per share and fully diluted earnings per share will be replaced with diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by weighted average common shares outstanding for the period without consideration for common stock equivalents. Diluted earnings per share is computed similarly to fully diluted earnings per share under the provisions of APB Opinion No. 15. Had the provisions of Statement No. 128 been used to calculate earnings per share for the first six months of fiscal 1998 and 1997, earnings per share would not have differed materially from the reported amounts. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this section and elsewhere in this report are forward looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Such statements include, without limitation, statements relating to (i) the future prospects for and stability of the lottery industry and other businesses in which the Company is or expects to be engaged, (ii) the future operating and financial performance of the Company, (iii) the ability of the Company to retain existing business and to obtain and retain new business, and (iv) the results and effects of legal proceedings and investigations. Such forward looking statements reflect management's assessment based on information currently available, but are not guarantees and are subject to risks and uncertainties which could cause actual results to differ materially from those contemplated in the forward looking statements. These risks and uncertainties include but are not limited to those set forth herein and in the Company's press releases and filings with the Securities and Exchange Commission. General The Company has derived substantially all of its revenues from the rendering of services and the sale or supply of computerized on-line lottery systems and components to government-authorized lotteries. Service revenues have been derived primarily from service contracts, that are typically of at least five years' duration, and are generally based upon a percentage of a lottery's gross on-line lottery sales. These percentages typically fall within a range of 1.5% to 5.0%. Product sales revenues have been derived primarily from the installation of new on-line lottery systems and sales of lottery terminals and equipment in connection with the expansion of existing lottery systems. The size and timing of these transactions have resulted in variability in product sales revenues from period to period. The Company also has taken steps to broaden its offerings of high volume transaction processing services outside of its core business of providing on-line lottery services. The Company's Transactive subsidiary currently provides benefits delivery systems and services on behalf of government authorities. The Company's Dreamport subsidiary ("Dreamport") pursues gaming opportunities other than on-line lottery. In addition, the Company's WorldServ subsidiary provides network communications services to private sector clientele. The Company's business is highly regulated, and the competition to secure new government contracts is often intense. Awards of contracts to the Company are, from time to time, challenged by competitors. Further, there have been and continue to be investigations of various types, including grand jury investigations, conducted by governmental authorities into possible improprieties and wrongdoing in connection with efforts to obtain and/or the awarding of lottery contracts and related matters. Although the Company does not believe that it has engaged in any wrongdoing in connection with these matters, certain investigations that are conducted largely in secret are still underway. Accordingly, the Company lacks sufficient information to determine with certainty their ultimate scope and whether the government authorities will assert claims resulting from these or other investigations that could implicate or reflect adversely upon the Company. Because the Company's reputation for integrity is an important factor in its business dealings with lottery and other government agencies, if government authorities were to make an allegation of, or if there were to be a finding of, improper conduct on the part of or attributable to the Company in any matter, such an allegation or finding could have a material adverse effect on the Company's business, including its ability to retain existing contracts and to obtain new or renewal contracts. In addition, continuing adverse publicity resulting from these investigations and related matters could have such a material adverse effect. See "Legal Proceedings" in Part II, Item 1 herein; Part I, Item 1 - "Factors Affecting Future Performance - Maintenance of Business Relationships and Certain Legal Matters" and Part I, Item 3 - "Legal Proceedings" of the Company's fiscal 1997 annual report on Form 10-K; and Note H to the Consolidated Financial Statements in the Company's fiscal 1997 annual report on Form 10-K for further information concerning these matters and other contingencies. Results of Operations The Company operates on a 52 to 53 week fiscal year ending on the last Saturday in February. Fiscal 1998 is a 53 week year. The Company has included the extra week in its first quarter ended May 31, 1997. Accordingly, there are twenty-seven weeks in the six month period ended August 30, 1997, versus twenty-six weeks in the six month period ended August 24, 1996. Revenues for the second quarter of fiscal 1998 were $226.8 million, representing a $11.8 million, or 5.5%, increase over revenues of $215.0 million in the second quarter of fiscal 1997. Service revenues in the fiscal 1998 second quarter were $209.1 million, representing a $17.3 million, or 9.0%, increase over the $191.8 million of service revenues in the second quarter of fiscal 1997. This increase resulted primarily from $19.2 million of service revenues from new on-line lottery systems operated by the Company that commenced operations since the second quarter of fiscal 1997, including service revenues from the on-line lottery system that the Company implemented for Caixa Economica Federal ("Caixa"), Latin America's largest financial institution that runs Brazil's National Lottery, partially offset by the absence of service revenues from the Maryland contract which terminated in September 1996. Product sales in the second quarter of fiscal 1998 were $17.7 million, representing a $5.5 million, or 23.6%, decrease from the $23.2 million of product sales in the second quarter of fiscal 1997. This decrease resulted primarily from lower sales of component parts and equipment ("OEM equipment") to Camelot Group plc ("Camelot") and other members of the U.K. lottery consortium. The Company sold approximately 2,000 lottery terminals in both the second quarter of fiscal 1998 and 1997. Gross margins on service revenues were 31.4% in the fiscal 1998 second quarter compared to 30.2% in the second quarter of fiscal 1997. This increase was due primarily to improved margins on certain existing lottery contracts, partially offset by lower margins experienced on new lottery contracts in the early stages of lottery operations. Gross margins on product sales fluctuate depending primarily on the mix, volume and timing of product sales contracts. Gross margins on product sales were 48.1% in the second quarter of fiscal 1998 compared to 37.2% in the second quarter of fiscal 1997. This improvement was reflective of product mix. Revenues for the first six months of fiscal 1998 were $472.0 million, representing a $45.9 million, or 10.8%, increase over revenues of $426.1 million in the first six months of fiscal 1997. Service revenues for the first six months of fiscal 1998 were $435.1 million, representing an increase of $48.3 million, or 12.5%, over the $386.8 million of service revenues in the first six months of fiscal 1997. This increase resulted primarily from $31.0 million of higher revenues from the Company's existing lottery customer base along with $24.1 million of service revenues from new on-line lottery systems operated by the Company that commenced operations since the second quarter of fiscal 1997, including service revenues from the Caixa, partially offset by the absence of service revenues from the Maryland contract. Product sales in the first six months of fiscal 1998 were $36.9 million, representing a decrease of $2.4 million, or 6.1%, from the $39.3 million of product sales in the first six months of fiscal 1997. This decrease resulted primarily from lower sales of OEM equipment to Camelot and other members of the U.K. lottery consortium, partially offset by higher revenues from central lottery and instant ticket validation system sales in the first six months of fiscal 1998 than in the first six months of fiscal 1997. The Company sold approximately 3,100 lottery terminals in the first six months of fiscal 1998 as compared to approximately 3,000 lottery terminals in the first six months of fiscal 1997. Gross margins on service revenues were 31.0% in the first six months of fiscal 1998 compared to 31.3% in the first six months of fiscal 1997. This decline was due primarily to lower margins experienced on new lottery contracts in the early stages of lottery operations, partially offset by improved margins on certain existing lottery contracts. Gross margins on product sales were 44.5% in the first six months of fiscal 1998 compared to 39.8% in the first six months of fiscal 1997. This improvement was reflective of product mix. Selling, general and administrative expenses in the second quarter of fiscal 1998 were $32.9 million, representing a $2.2 million, or 7.4%, increase from the $30.7 million incurred in the second quarter of fiscal 1997. Selling, general and administrative expenses in the first six months of fiscal 1998 were $68.9 million, representing an $8.3 million, or 13.6%, increase from the $60.6 million incurred in the first six months of fiscal 1997. These increases were primarily attributable to higher legal costs relating in large part to investigations and legal proceedings along with higher administrative, selling and government relations costs that were necessary to support expanded operations. As a percentage of revenues, selling, general and administrative expenses were 14.5% and 14.3% during the second quarters of fiscal 1998 and 1997, respectively, and 14.6% and 14.2% during the first six months of fiscal 1998 and 1997, respectively. Research and development expenses in the second quarter of fiscal 1998 were $7.9 million, representing a $.6 million, or 7.9%, decrease from research and development expenses of $8.5 million in the second quarter of fiscal 1997. This decrease reflects the capitalization of costs relating to standard software product offerings in the fiscal 1998 second quarter, partially offset by increased development activity for hardware products and the design and related software for new games. Research and development expenses in the first six months of fiscal 1998 were $16.0 million, representing a $.8 million, or 5.7%, increase from research and development expenses of $15.2 million in the first six months of fiscal 1997. This increase reflects increased development activity for new hardware products and the design and related software for new games, partially offset by the capitalization of cost relating to standard software product offerings in the first six months of fiscal 1998. As a percentage of revenues, research and development expenses were 3.5% and 4.0% during the second quarters of fiscal 1998 and 1997, respectively, and 3.4% and 3.6% during the first six months of fiscal 1998 and 1997, respectively. Interest income in the second quarter of fiscal 1998 was $1.8 million, an increase of $.9 million over interest income of $.9 million earned during the second quarter of fiscal 1997. Interest income in the first six months of fiscal 1998 was $3.5 million, an increase of $2.0 million over interest income of $1.5 million earned during the first six months of fiscal 1997. These increases reflect higher dollar denominated cash balances in Brazil to fund the on-line lottery system implementation underway for the Caixa. Equity in earnings of unconsolidated affiliates in the second quarter of fiscal 1998 was $5.0 million, an increase of $1.6 million over the $3.4 million earned during the second quarter of fiscal 1997. Equity in earnings of unconsolidated affiliates in the first six months of fiscal 1998 was $8.7 million, an increase of $2.1 million over the $6.6 million earned during the first six months of fiscal 1997. These increases were due primarily to higher equity income from Camelot along with higher equity income from Dreamport partnership investments. Interest expense in the second quarter of fiscal 1998 was $7.9 million, an increase of $4.1 million over the $3.8 million incurred during the second quarter of fiscal 1997. Interest expense in the first six months of fiscal 1998 was $14.6 million, an increase of $4.7 million over the $9.9 million incurred during the first six months of fiscal 1997. These increases were due primarily to higher average debt outstanding to fund the on-line lottery system implementation underway for the Caixa along with higher average interest rates. The Company's effective income tax rate decreased from 42% in the second quarter of fiscal 1997 to 38% in the second quarter of fiscal 1998 and decreased from 42% in the first six months of fiscal 1997 to 39% in the first six months of fiscal 1998 due principally to a reduction in nondeductible expenditures, increased recognition of tax credits and the full year effect of the restructuring of financing and operations in Brazil. The Company's effective income tax rate was greater than the statutory rate due primarily to state income taxes and certain expenses that are not deductible for income tax purposes. As previously reported, the Texas Lottery Commission had indicated its intention to rebid the Texas Lottery contract currently held by GTECH and in August 1997 the Commission issued a Request for Proposals ("RFP") with respect to the contract. (See "Legal Proceedings" in Part II, Item 1). The Chairman of the Commission has declared that issuing the RFP is not and should not be deemed an exercise by the Texas Lottery of the termination provision of GTECH's contract, without cause, upon 30 days prior notice. Nevertheless, the Texas Lottery Commission has further asserted that it has no obligation to deal with GTECH in good faith with respect to the termination of its contract with the Company, a position with which GTECH strongly disagrees. Pursuant to the amendment to GTECH's contract executed in April 1996 which extended the term of the contract for five years, the Company is making major capital investments of more than $20.0 million and has incurred significant related expenses. A substantial portion of such investment, along with a substantial portion of the Company's existing investment in its Texas lottery contract ($38.7 million at August 30, 1997) may be required to be written off should the Company lose all or a portion of the Texas lottery contract. The Company is pursuing all available options to ensure that its contract, amended to extend through August 2002 and negotiated in good faith with the Texas Lottery, is honored. In fiscal 1997, 1996 and 1995, the aggregate revenues from the State of Texas (including lottery and electronic benefits transfer) represented 18.6%, 19.6% and 16.1%, respectively, of the Company's consolidated revenues. No other customer accounted for as much as 10% of the Company's consolidated revenues in such periods, although the Company's lottery contracts in a number of jurisdictions, including California, Georgia, New York and the United Kingdom, are important sources of revenues and earnings for the Company. Reference is also made to Items 1 and 3 of, and Note H of Notes to Consolidated Financial Statements included in, the Company's fiscal 1997 Annual Report on Form 10-K, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Part II, Item 1 "Legal Proceedings" of the Company's Quarterly Report on From 10-Q for its period ending May 31, 1997, for further information respecting legal proceedings and related matters involving the Company. Changes in Financial Position, Liquidity and Capital Resources During the first six months of fiscal 1998, the Company generated $130.6 million of cash from operations. This cash, along with $77.2 million of net borrowings was used primarily to fund the purchase of $174.9 million of systems, equipment and other assets relating to contracts and the repurchase of $15.8 million of the Company' common stock. The cost of systems, equipment and other assets relating to contracts increased by $155.9 million from $1,063.7 million at February 22, 1997 to $1,219.6 million at August 30, 1997. This increase reflects the installation of a portion of the new lottery system for the Caixa, the continuing installation of new lottery systems for lotteries in Wisconsin, Kansas, Oregon and Ohio and the expansion of lottery systems in several domestic and international locations. Trade accounts receivable decreased by $24.1 million from $110.7 million at February 22, 1997 to $86.6 million at August 30, 1997, due primarily to scheduled collections of accounts receivable relating to the high level of product sales recorded in the fourth quarter of fiscal 1997. Inventories increased by $8.6 million from $35.3 million at February 22, 1997 to $43.9 million at August 30, 1997, due primarily to inventory on hand relating to scheduled shipments of terminals in the third quarter of fiscal 1998. Other current assets increased by $6.7 million from $9.7 million at February 22, 1997 to $16.4 million at August 30, 1997, due primarily to a $3.7 million interest bearing loan to NTN Communications, Inc. Accounts payable decreased by $14.5 million from $53.9 million at February 22, 1997 to $39.4 million at August 30, 1997, due primarily to the timing of payments relating to ongoing lottery system installations. Accrued expenses increased by $8.7 million from $52.6 million at February 22, 1997 to $61.3 million at August 30, 1997, due primarily to accrued interest associated with the Senior Notes that require semi-annual interest payments. Accrued employee compensation decreased by $5.3 million from $28.0 million at February 22, 1997 to $22.7 million at August 30, 1997, due primarily to the payment of fiscal 1997 management bonuses, partially offset by provisions for fiscal 1998 management bonuses. The Company's business is capital-intensive. Although it is not possible to estimate precisely, due to the nature of the business, the Company currently anticipates that the level of capital expenditures for systems, equipment and other assets relating to contracts required during fiscal 1998 will be in a range of $325.0 million to $375.0 million. Approximately $120.0 million of such spending will be required to implement the on-line lottery system for the Caixa. At August 30, 1997, the net book value of the Company's investments in Brazil was approximately $172.9 million. In addition, the Company currently anticipates that the level of capital expenditures for property, plant and equipment in fiscal 1998 will approximate $15.0 million. The principal sources of liquidity for the Company are expected to be cash generated from operations and borrowings under the Company's Credit Facility. On October 4, 1997 the Company had utilized approximately $167.5 million of its $400 million Credit Facility. The Company currently expects that its cash flow from operations and available borrowings under its Credit Facility, together with other sources of capital believed to be available, will be sufficient to permit it to meet its anticipated working capital and ordinary capital expenditure needs, to service its debt obligations and to permit it to fund anticipated internal growth. Inflation, Interest Rates and Foreign Exchange Fluctuation The impact of inflation on the Company's operations has not been significant to date. While the Company believes that its business is not highly sensitive to inflation, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operations. The Company uses various techniques to reduce the risk associated with future increases in interest rates on its floating rate long-term debt including utilization of interest rate hedging instruments. In January 1996, the Company entered into three interest rate swaps with an aggregate notional amount of $125.0 million that provided interest rate protection over the period January 26, 1996 to April 28, 1997. The swaps effectively entitled the Company to receive payments from the financial institutions that were counterparties to the swaps should the three-month London Interbank Offered Rates ("LIBOR") exceed approximately 5.05%. On April 28, 1997, the Company received approximately $.2 million in connection with the settlement of these swaps. In addition, the Company issued seven and ten year fixed rate debt on May 29, 1997, in a private placement. The Company attempts to manage its foreign exchange risk by securing payment from its customers in U.S. dollars, by sharing risk with its customers, by utilizing foreign currency borrowings, by leading and lagging receipts and payments and by entering into foreign currency exchange contracts. In addition, a significant portion of the costs attributable to the Company's foreign currency revenues are incurred in the local currencies. The Company, from time to time, enters into foreign currency exchange contracts to hedge the risk associated with certain firm sales commitments, anticipated revenue streams and certain assets and liabilities denominated in foreign currencies. The Company does not engage in currency speculation. Gains and losses on contracts that hedge specific foreign currency commitments are deferred and accounted for as part of the transaction being hedged. Contracts used to hedge anticipated revenue streams and certain assets and liabilities are marked to market, and the resulting transaction gain or loss is included in the determination of net income. As of October 4, 1997, the Company had approximately $110.4 million of outstanding foreign currency exchange contracts to purchase foreign currencies (primarily Japanese Yen) and approximately $174.6 million of outstanding foreign currency exchange contracts to sell foreign currencies (primarily Japanese Yen and Pounds Sterling). Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS As widely reported in the Texas media and as previously reported, the Texas Lottery Commission is inquiring of GTECH regarding its business relationships relating to the Texas Lottery and GTECH has cooperated with that inquiry. The Texas Lottery is also inquiring about several other matters which could have material negative implications with respect to GTECH's business in Texas, including the following: - GTECH's consulting contracts with Ben Barnes, former Lieutenant Governor of Texas, which contracts were entered into in 1991 and were bought out and terminated by the Company in February 1997; - GTECH's retention in October 1992 of Michael Moeller, a friend of Nora Linares, the then Executive Director of the Texas Lottery, as a consultant regarding New Mexico; - Mr. Barnes' gift in December 1992 of a $100 paperweight to then Governor of Texas, Ann Richards; and - Any other instances in which GTECH entertained or gave a gift to a state official (without reimbursement). In addition, the Texas State Auditor has issued to GTECH a Request for Information, and, in response, GTECH has provided information and documents to the Texas State Auditor. The Texas State Auditor has indicated that it intends to issue to the Company supplemental requests for information. As previously reported, the Texas Lottery Commission had indicated its intention to rebid the Texas Lottery contract currently held by GTECH and in August 1997 the Commission issued a Request for Proposals (the "RFP") with respect to this contract. The RFP invites vendors to submit proposals for any or all of three components: On-Line Gaming System and Services, Instant Ticket Gaming System and Services and Instant Ticket Manufacturing and Services. Under the terms of the RFP, the Commission may award contracts to one or several vendors, and may award a contract with respect to the On-Line Gaming System and Services to two separate vendors. Subsequent to the issuance of the RFP, GTECH filed a protest with the Commission's General Counsel challenging the issuance and various terms of the RFP and the Executive Director of the Texas Lottery issued his determination with respect to GTECH's protest, denying the vast majority of the protest and amending certain discrete provisions of the RFP in response to GTECH's protest. GTECH thereupon appealed the Executive Director's determination to the Commission and, in September 1997, the Commission denied GTECH's appeal. However, the Chairman of the Commission has declared that issuing the RFP is not and should not be deemed an exercise by the Texas Lottery of the termination provision of GTECH's contract, without cause, upon 30 days prior notice. The Texas Lottery Commission has further asserted that it has no obligation to deal with GTECH in good faith with respect to the termination of its contract with the Company, a position with which GTECH strongly disagrees. Pursuant to the amendment to GTECH's contract executed in April 1996 which extended the term of the contract for five years, the Company is making major capital investments of more than $20 million and has incurred significant related expenses (See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations). The Texas Lottery contract is GTECH's largest, accounting for approximately 16% of GTECH's total revenues in fiscal 1997 and a significant percentage of operating income. GTECH is pursuing all available options to ensure that its contract, amended to extend through August 2002 and negotiated in good faith with the Texas Lottery, is honored. As previously reported, in April 1997, Nora Linares, the former Executive Director of the Texas Lottery Commission, filed suit against GTECH and James Hosker, the Company's Texas Site Director (captioned Nora Alicia Linares v. GTECH Corporation and James Hosker, et al.), in the District Court of Travis County, Texas (261st Judicial District). Ms. Linares, who had been terminated as Executive Director of the Texas Lottery Commission in January 1997, alleges that GTECH, in violation of Texas State Law and its lottery contract with the State of Texas, tortiously interfered with her employment relationship with her former employer by, among other things, hiring Michael Moeller as a consultant, and intentionally inflicted emotional distress upon her. Ms. Linares seeks both a declaratory judgment setting forth the rights, duties and responsibilities which GTECH owes to public officials such as Ms. Linares, as well as actual and exemplary damages from GTECH. GTECH believes that this lawsuit is without merit and is defending itself (and Mr. Hosker) vigorously. On May 2, 1997, GTECH filed a notice of removal in the Austin Division of the United States District Court for the Western District of Texas, seeking to have the case transferred from the state court to the federal court, and on June 2, 1997 Ms. Linares filed a motion to remand, opposing GTECH's attempt to transfer the case to federal court from state court. Ms. Linares' motion to remand was granted and the matter was remanded to the District Court of Travis County, Texas by order dated September 25, 1997. As previously reported, in September 1996, Jack M. Janis and Linda Janis, both individually and on behalf of a class of persons similarly situated, filed suit against the California State Lottery Commission, Southland Corporation and the Company in the Supreme Court of the State of California (County of Los Angeles). This suit alleges, in light of the June 1996 decision of the California Supreme Court, Western Telcon, Inc. et. al. v. California State Lottery (which held that the California State Lottery's keno game as then structured was not a lottery game and therefore was not authorized by California lottery law), that the defendants were unjustly enriched and were guilty of unfair business practices and misleading advertising in connection with the sale of keno tickets from January 1, 1992 through suspension of the keno game in June 1996. The suit seeks restitution of all amounts realized by the defendants through the sale of keno tickets less funds paid to public schools pursuant to relevant California law and proceeds paid to holders of winning keno tickets, together with costs, disbursements and prejudgment interest. The Company responded with a vigorous defense. In February 1997, the Court granted the Company summary judgment but granted the plaintiffs limited leave to amend their complaint alleging alternative theories of recovery. The plaintiffs filed an amended complaint in March 1997. In June 1997, the Court granted the Company's motion to strike and for summary judgment as to the amended complaint, this time without leave to amend. Plaintiffs have filed a notice of appeal. The Company believes that these claims are without merit and intends to continue to defend itself vigorously in the appeal. In July 1997, Border Capital (Nevada) Corp. ("BCNC"), Border Capital Corp., IBC Investments Limited ("IBC") and Gaming Properties & Investments, LLC ("GPI") filed suit against the Arizona Lottery, the Company and GTECH in the United States District Court for the District of Delaware. The plaintiffs allege that "Arizona Bingo," a game recently offered by GTECH and the Arizona Lottery, infringes upon United States patents issued in 1994 and 1996 which are represented to be owned by IBC and exclusively licensed to BCNC and GPI. The plaintiffs seek a declaratory judgment that IBC is the owner of the patents and that the patents have been willfully infringed by the defendants; injunctive relief enjoining further alleged infringement; and actual and exemplary damages from the defendants respecting such alleged infringement. The Company and GTECH were served with the complaint on September 22, 1997, and filed their answer on October 14, 1997. In their answer, the Company and GTECH assert, among other defenses, that the plaintiff's complaint fails to state a proper claim and improperly names the Company as a party, and that the patents in suit are invalid and unenforceable. In addition, GTECH and the Company counterclaim for declaratory relief that the patents at issue are invalid, unenforceable and not infringed by the Company. While the Company intends to defend this lawsuit vigorously and believes that the patents at issue are invalid (and that, even if valid, the patents have not been infringed), there can be no assurance that the Company and GTECH will prevail. In addition to being liable for potential damages as described above, if GTECH is found to have infringed the patents at suit, the Company's ability to market bingo based games in Arizona and other jurisdictions could be adversely affected. For further information respecting legal proceedings and related matters, refer to: (i) Items 1 and 3 of, and Note H of Notes to Consolidated Financial Statements included in, the Company's fiscal 1997 Annual Report on Form 10-K; (ii) Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 1, Part II, "Legal Proceedings" of the Company's Quarterly Report on Form 10-Q for the period ending May 31, 1997; and (iii) Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," herein. Item 2. CHANGES IN SECURITIES (c) During the quarter, 4,851 shares of the Company's unregistered common stock vested under stock award plans. Pursuant to the terms of these plans the shares were issued with no cash consideration to the Company. Registration of such shares was not required because the transaction did not constitute a "sale" under Section 2 (3) of the Securities Act of 1933 or, alternatively, the transaction was exempt pursuant to the private offering provisions of the Act and the rules thereunder. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) and (c) The Company's Annual Meeting of Shareholders was held on July 14, 1997, and in connection therewith, proxies were solicited by management pursuant to Regulation 14 under the Securities Exchange Act of 1934. An aggregate of 42,024,810 shares of the Company's common stock ("Shares") were outstanding and entitled to vote at the meeting. At the meeting the following matters (not including ordinary procedural matters) were submitted to a vote of the holders of Shares, with the results indicated below: 1. Election of two directors to serve until the 2000 Annual Meeting. The following persons were elected. There was no solicitation in opposition to such nominees. The tabulation of votes was as follows: Withheld (including broker Nominee For nonvotes) Burnett W. Donoho 35,722,265 Shares 258,909 Shares Lt. Gen. (Ret.) Emmett Paige, Jr. 35,675,170 Shares 306,004 Shares 2. Approval of the Company's 1997 Stock Option Plan. The tabulation of votes was as follows: Abstentions For Against (including broker nonvotes) 20,010,700 Shares 9,907,955 Shares 6,062,519 Shares Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The exhibits to this report are as follows: 10.1 Amended and Restated Employment Agreement, dated September 9, 1997, by and between the Company and William Y. O'Connor 10.2 Agreement, dated July 15, 1997, by and between Michael R. Chambrello and the Company 10.3 Agreement, dated July 15, 1997, by and between Laurance W. Gay and the Company 10.4 Agreement, dated July 15, 1997, by and between Thomas J. Sauser and the Company 11. Computations of Earnings per Share 27. Financial Data Schedule (b) The Company did not file any reports on Form 8-K during the quarter to which this report relates. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GTECH HOLDINGS CORPORATION Date October 14, 1997 By /s/ Thomas J. Sauser ----------------- ----------------------------------------------- Thomas J. Sauser, Senior Vice President & Chief Financial Officer (Principal Financial Officer) Date October 14, 1997 By /s/ Robert J. Plourde ---------------- ----------------------------------------------- Robert J. Plourde, Vice President and Corporate Controller (Principal Accounting Officer) EX-10.1 2 O'CONNOR AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated September 19, 1997, effective as of July 14, 1997, by and between GTECH Holdings Corporation, a Delaware corporation (the "Company"), GTECH Corporation, a Delaware corporation (the "Subsidiary"), and William Y. O'Connor ("Executive"). WHEREAS, the Company and Executive are parties to an Employment Agreement dated October 27, 1994, as subsequently amended (the "1994 Agreement"); and WHEREAS, Executive, the Company, the Subsidiary and Executive now desire to amend and restate the 1994 Agreement to reflect certain changes in the terms and provisions thereof. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto hereby covenant and agree as follows: 1. Definitions. Capitalized terms used in this Agreement and not otherwise defined herein shall have the following meanings: "Affiliate" shall mean any joint venture or other entity in which the Company or any of its subsidiaries has an equity interest of at least 20%. "Base Salary" has the meaning set forth in Section 5(a) hereof. "Board" means the Board of Directors of the Company. "Cause" means any of the following: (i) any willful and continuing failure by Executive to substantially perform his employment duties which has a demonstrable, material adverse affect on the Company; (ii) any engaging by Executive in serious, willful and continuing misconduct which is demonstratably and materially injurious to the Company, its subsidiaries or Affiliates; (iii) any willful and continuing material breach by Executive of the terms of this Agreement, including, without limitation, Sections 11 and 12 hereof which has a demonstrable, material adverse affect on the Company; (iv) Executive's conviction of or pleading nolo contendere to a crime involving fraud or misrepresentation, a gambling-related offense or a felony where such crime or offense has a demonstrable, material adverse affect on the Company; or (v) Executive's abuse of illegal drugs or other controlled substances or his habitual intoxication; provided that in no event shall Executive's failure to perform the duties associated with his position caused by a mental or physical disability constitute Cause for his termination. "Change in Control" has the meaning set forth in Section 10(d) hereof. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" has the meaning set forth in Section 5(a) hereof. "Common Stock" means the Common Stock, par value $.01 per share, of the Company. "Company" means GTECH Holdings Corporation and any successor thereto. "Disability" means the inability (as determined by the Board in its sole discretion after affording Executive a reasonable opportunity to present his case) of Executive to render his agreed-upon, full-time services to the Company due to physical and/or mental infirmity. "Executive" means William Y. O'Connor. "Good Reason" means any of the following events: (i) the assignment to Executive of duties, responsibilities and/or reporting relationship that are inconsistent, in a material respect, with those associated with Executive's position as stated in Sections 4(a) and 4(b) hereof, excluding any interim relieving of Executive's duties pursuant to Section 8(b) hereof); (ii) the Company's failure to pay Executive any amounts otherwise vested and due hereunder or under any plan or policy of the Company; (iii) a reduction in the compensation or benefits payable to Executive hereunder (including without limitation any compensation provided for in the appendices hereto), or a material adverse change in the terms or conditions on which such compensation or benefits are payable; (iv) a reduction in the title of Executive from President and Chief Executive Officer of the Company or in the authority, duties or responsibilities of Executive; (v) if Executive's principal place of employment by the Company is relocated more than 50 miles from West Greenwich, Rhode Island, or Boca Raton, Florida, without the written consent of Executive; (vi) the events constituting Good Reason specified in Section 4(a) hereof; (vii) the failure by the Company to obtain an agreement in form and substance reasonably satisfactory to Executive from any successor to the business of the Company to assume and agree to perform this Agreement; or (viii) any material breach by the Company of the terms of this Agreement. "Life Insurance Coverage" has the meaning set forth in Section 9(c) hereof and as described in Section 6(b) hereof. "Medical Coverage" has the meaning set forth in Section 9(c) hereof and as described in Appendix B hereto. "Performance Bonus" has the meaning set forth in Section 5(b) hereof. "Retirement" means retirement from active employment with the Company with the express consent of the Board or in accordance with the retirement policies of the Company applicable to other senior executives generally. "Term" has the meaning set forth in Section 3 hereof. 2. Employment. The Company hereby agrees to employ and retain Executive, and Executive agrees to be employed and retained by the Company, to render services to the Company and its subsidiaries, Affiliates and divisions for the period, at the rate of compensation and upon the other terms and conditions hereinafter set forth. 3. Term. The term of Executive's employment hereunder shall commence on July 14, 1997, and shall continue in accordance with the terms of this Agreement until terminated in accordance herewith (the "Term"). 4. Position and Duties. (a) Position. During the Term, Executive shall be retained and shall serve as President and Chief Executive Officer of the Company, reporting directly to the Board. At such time as Guy B. Snowden steps down as Chairman of the Board of the Company (the "Chairman"), it is the expectation that the Board will consider Executive as a candidate for that position to succeed Mr. Snowden. However, whether Executive, in fact, will be elected by the Board to that position, and if so when, shall be in the sole discretion of the Board. If Executive is not elected Chairman when Mr. Snowden steps down, the failure so to elect him shall be deemed Good Reason for Executive to terminate his employment Term. During the Term, Executive also agrees to serve, if elected, as a senior executive officer and/or director of any subsidiary or Affiliate of the Company. (b) Duties. During the Term, Executive shall have the authority and power to perform such duties consistent with those of the President and Chief Executive Officer and shall not be required without his written consent to undertake responsibilities not commensurate with his position. If Executive becomes Chairman, then he also shall have the authority and power to perform the duties consistent with such position. Executive shall comply fully and promptly with the various policies, procedures and rules governing employees promulgated and/or as amended from time to time by the Company and any applicable subsidiary or Affiliate of the Company (including, without limitation, the Company's Ethical Conduct and Conflicts of Interest Policy and Government Relations Policy) and with any applicable disclosure and other requirements of any governmental authority and of any other entity with which the Company, its subsidiaries and Affiliates are doing or propose to do business. Except for illness, vacations, and holidays in accordance with then-current Company policy (or, if applicable, this Agreement), and (subject to the approval of the Board) reasonable leaves of absence, Executive shall devote his full business time, attention, skill, undivided loyalty and best efforts to the faithful performance of his duties hereunder; provided, however, that with the approval of the Board (which approval shall not unreasonably be withheld), from time to time, Executive may serve, or continue to serve, on the board of directors of, and hold any other offices or positions, in companies or organizations, which in the Board's judgment, will not present any conflict of interest with the Company, its subsidiaries or Affiliates, or materially adversely affect the performance of Executive's duties pursuant to this Agreement. (c) Principal Place of Employment. Executive's principal place of employment shall be at the Company's offices (in West Greenwich, Rhode Island, or in Boca Raton, Florida) or at such other location as the Company and Executive mutually may agree in writing. Executive agrees to reside within reasonable daily commuting distance by car of such principal place of employment. The Company shall not require Executive to travel away from Executive's principal place of employment for more than 21 consecutive days, nor for more than an aggregate of 180 days in any year during the Term. (d) Nomination as Director. Assuming the Term has not been terminated, the Board agrees to nominate Executive as a candidate for election to the Board at each of the Company's Annual Meetings of Shareholders at which Executive's term as a director is scheduled to expire, and Executive agrees (subject to Section 8(d) hereof) to continue to serve as a director if elected. 5. Compensation and Reimbursement of Expenses. (a) Base Salary. For all services rendered by Executive in all capacities with the Company, its subsidiaries and Affiliates during the Term, the Company shall pay or cause to be paid to Executive as compensation a salary at an annual rate of $550,000 (the "Base Salary"), payable in equal installments not less frequently than monthly. The Base Salary shall be increased on the first day of each fiscal year of the Company commencing with fiscal year 1999, and each annual anniversary thereof (the "Annual Adjustment Date") during the Term at a rate equal to the annual rate of increase, if any, in the All Cities Consumer Price Index for Urban Wage Earners and Clerical Workers ("CPI-W"), as published by the United States Department of Labor, Bureau of Labor Statistics, applicable for the calendar year immediately preceding the applicable Annual Adjustment Date. The Base Salary also shall be subject to possible further increase from time to time in the sole discretion of the Board or the Compensation Committee of the Board or another Committee of the Board designated for such purpose (the "Committee"). The Base Salary shall not be subject to decrease. (b) Performance Bonus. With respect to each fiscal year of the Company during the Term commencing with fiscal year 1998, Executive shall be eligible to earn a performance bonus of up to a maximum of four times Executive's Base Salary then in effect (the "Performance Bonus"). The amount of the Performance Bonus for a given fiscal year shall be determined using a matrix of selected reasonable quantitative metrics yet to be determined but which likely shall include Company stock price appreciation, profit growth, return on capital and the like. The matrix will provide for possible bonus values up to four times Base Salary. The criteria and attainment levels for the Performance Bonus shall be established each year by and in the discretion of the Committee, and may be changed each year in the good faith discretion of the Committee. Any Performance Bonus to which Executive is entitled shall be paid at the time executive bonuses customarily are paid by the Company, but in no event later than 120 days after the end of the fiscal year with respect to which such Performance Bonus is payable. (c) Increase of Compensation. All compensation payable to Executive hereunder shall be subject to possible further increase from time to time in the sole discretion of the Board or the Committee. (d) Certain Requirements. Notwithstanding anything contained in this Agreement to the contrary (including Sections 9 and 10 hereof), if Executive's employment hereunder has terminated for any reason, except by the Company for Cause or by the Executive voluntarily without Good Reason prior to the end of a given fiscal year, Executive shall receive a Performance Bonus in an amount determined by multiplying the average of the Performance Bonuses awarded to Executive for the preceding three years (or all years, if less than three years after the Term begins) by a fraction, the numerator of which is the number of complete months of such fiscal year during which Executive was employed with the Company, and the denominator of which is twelve. (e) Reimbursement of Expenses. Consistent with the Company's established policies, the Company shall pay or reimburse Executive for all reasonable and necessary travel and other expenses of Executive incurred by Executive in performing his duties hereunder upon receipt of written substantiation of such expenses. 6. Benefits. (a) Benefit Plans. The payments provided in Section 5 hereof are in addition to any benefits to which Executive may be, or may become, entitled under any benefit plan, program or arrangement (excluding any increase in salaries, generally) of the Company for which senior executives are or may become eligible, including any Supplemental Retirement Plan for Senior Executives ("SERP"). Further, except as otherwise expressly provided herein, Executive shall be entitled to receive, during the Term, benefits at least at the level provided generally to other senior executives under any such benefit plan, program or arrangement, subject, to Executive's meeting the eligibility requirements of such plans, programs or arrangements, and in the case of benefit plans, programs or arrangements providing for discretionary grants or awards, to the discretion of the Board or applicable Committee. (b) Term Life Insurance. During the Term, the Company shall provide Executive with and shall pay the premium on a policy of term life insurance in the face amount of 3.5 times his Base Salary, with the primary beneficiary to be Executive's wife, Denise Fields O'Connor. (c) Stock Options. Executive shall be eligible for annual grants of stock options under the Company's option plans for employees, any such grants to be in the discretion of the Committee based upon its evaluation of Executive's performance. The terms and provisions of the stock options provided for in Section 6(d) of the 1994 Agreement and any stock options granted to Executive hereafter are and shall be as set forth in Appendix A hereto. In addition, the Company expressly acknowledges that Executive has been granted Restricted Stock Rights pursuant to a certain agreement with the Company dated June 30, 1995. (For the purposes of that agreement "Cause" shall be conclusively defined as in this Agreement.) The Company shall use its best efforts to file, and cause to be effective under the Securities Act of 1933, as amended, a registration statement on Form S-8 (or a comparable form) with respect to the shares (or other rights) of equity issued as provided for or referenced by the foregoing provisions of this Section 6(c) or, if applicable, issuable upon exercise of rights so provided for or referenced. The Company will also use its best efforts to ensure that each grant provided for under Appendix A or referenced above shall meet the requirements for exemption under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (d) Certain Specific Benefits and Arrangements. Without limiting the generality of subsection (a) above (except as may otherwise be specified in Appendix B hereto), Executive shall be entitled to the specific benefits and arrangements set forth in Appendix B hereto. 7. Benefits Payable During Term Upon Disability. (a) Disability Benefits. In the event of Disability of Executive during the Term of his employment hereunder, the Company shall continue to pay Executive the compensation and extend to him the benefits provided in Sections 5 and 6 hereof during the period of Disability, subject to Section 9(f) hereof and to the extent permitted by applicable law, provided that in the event of Executive's Disability for an aggregate period of time exceeding 150 calendar days in any 12-consecutive-month period during the Term, the Company, at its election, may terminate the Term of Executive's employment in which event Executive shall receive the benefits provided in Section 9(c). (b) Services During Disability. During the Term, notwithstanding any Disability, Executive shall, to the extent that he is physically and mentally able to do so, furnish information and assistance to the Company, and, in addition, upon the reasonable request in writing on behalf of the Board, or a senior executive officer designated by the Board, from time to time, he shall make himself available to the Company, its subsidiaries and Affiliates to undertake reasonable assignments consistent with his position and his physical and mental health. During such period of service, he shall be responsible and report to, and shall be subject to the supervision of, the Board, or a senior executive officer designated by the Board, as to the method and manner in which he shall perform such assignments and shall keep the Board, or such senior executive officer, as the case may be, appropriately informed of his progress in each such assignment. 8. Termination of Employment. (a) Expiration and Earlier Termination. Executive's Term of employment shall terminate: (i) upon the death or Retirement of Executive; (ii) at the election of the Company in the event of Executive's Disability (as provided in Section 7(a) hereof); (iii) upon discharge of Executive by the Company for Cause or resignation of Executive other than for Good Reason; and (iv) upon discharge of Executive without Cause or Executive's resignation for Good Reason. (b) Certain Obligations of the Company. The Company shall give Executive not less than 60 days prior written notice of any intended termination of Executive's employment by the Company for Cause, without Cause or due to Executive's Disability. In the event of such a proposed termination for Cause, such notice shall specify the grounds for such termination, and the Company shall only be entitled to terminate Executive for such Cause if Executive shall have failed to cure the grounds for such termination within said 60-day notice period. However, after giving such notice, the Company may relieve Executive of his duties on an interim basis. Further, Cause shall in no event be deemed to exist except upon a finding reflected in a resolution of the Board approved by at least 75% of the members of the Board, whose finding shall not be binding upon or entitled to any deference by any court, arbitrator or other decision-maker ruling on this Agreement, at a meeting of which Executive shall have been given proper notice and at which Executive (and Executive's counsel) shall have a reasonable opportunity to present Executive's case. (c) Certain Obligations of Executive. Executive shall give the Company not less than 60 days prior written notice of any intended termination by Executive of Executive's employment whether for Good Reason or other than for Good Reason. In the event of a proposed termination for Good Reason, such notice shall specify the grounds for such termination, and Executive shall only be entitled to terminate his employment for Good Reason if the Company shall have failed to correct the specified grounds within said 60-day notice period. Executive shall not be entitled to terminate for Good Reason unless he has given notice to the Company of his intention so to terminate within 60 days following the occurrence of the event alleged to constitute such Good Reason, except that notice of Executive's intention to terminate for the reason set forth in Section 4(a) hereof may be given within six months of Mr. Snowden's stepping down as Chairman. After Executive provides such notice to the Company, the Company shall have 30 days from the date of receipt of such notice to effect a cure of the condition constituting Good Reason, and, upon cure thereof by the Company, such event shall no longer constitute Good Reason; provided that the Company shall only be permitted the opportunity to cure one time during the Term (except that the limitation to one such opportunity to cure shall not apply in the case of immaterial reallocation of benefits which are provided for under Section 6(a) hereof, (but not under Sections 6(b), (c), or (d)) from one type of benefit to another). Notwithstanding the foregoing, in the event that Executive has given the Company notice of his intention to resign for "Good Reason" or otherwise, the Board may elect to have such resignation become effective immediately or at such other date, not later than the effective date specified in the notice, as the Board may determine. (d) Upon termination of Executive's Term of employment, Executive (unless otherwise requested by the Board) concurrently shall resign any directorships which he holds with the Company, its subsidiaries and Affiliates. 9. Compensation, Benefits, etc. upon, and Effects of, Termination. (a) Death, Retirement, Discharge for Cause and Resignation for Other than for Good Reason. If the Term of Executive's employment is terminated by reason of his death, Retirement, discharge by the Company for Cause or resignation other than for Good Reason, the Company shall pay or cause to be paid to Executive or his estate or beneficiaries, as the case may be, at the time such payment is due (i) his Base Salary accrued through the effective date of such termination at the rate in effect immediately prior to such termination, and (ii) any other amounts to which Executive is entitled under the terms of Sections 5 and 6 hereof through the effective date of such termination. Executive also shall be entitled, to the extent not inconsistent with this Agreement, to receive such additional benefits, if any, as he may be entitled to under the express terms of the applicable benefit plans (other than bonus and severance plans) of the Company, its subsidiaries and Affiliates. (b) Retirement at or after 65. If the Term of Executive's employment is terminated by reason of Executive's Retirement on or after attaining the age of 65, in addition to the payments and benefits provided in subsection (a) above, the Company shall continue, at its expense, to provide until Executive's death (i) medical coverage (including, hospitalization, dental, orthodontic and optical) for executive and eligible family members at substantially the same level of the most comprehensive medical coverage as is provided, from time to time, to any senior executive of the Company, with such coverage to continue to be available after Executive's death to his spouse and family members at their expense at rates available to the Company except to the extent such continuation is prohibited by applicable federal or state law, and (ii) term life insurance as provided in Section 6(b) hereof. (c) Disability, Discharge Without Cause and Resignation for Good Reason. If the Term of Executive's employment is terminated by the Company by reason of Executive's Disability as provided in Section 7(a) hereof, by the Company without Cause or by reason of Executive's resignation for Good Reason, the Company shall pay or cause to be paid to Executive or his estate, as the case may be, (i) an amount equal to three times the average of each of Executive's Base Salary, Performance Bonus and payments under the Company's Executive Perquisites Program for the prior three full fiscal years, plus (ii) in consideration of Executive's obligations under Section 12 hereof, the sum of $1,500,000. The amounts specified in clauses (i) and (ii) above shall be paid within 45 days of the effective date of termination of Executive's employment pursuant to this subsection (c). Further, Executive shall be entitled to the compensation and benefits set forth in subsection (a) above, and the Company shall (i) for a period of three years following the effective date of such termination, or until Executive's earlier death, continue, at its expense, to provide the life insurance specified in Section 6(b) hereof in the amount in effect immediately prior to the effective date of such termination ("Life Insurance Coverage"), (ii) the Company shall provide Executive with out placement services through a bona fide out placement organization acceptable to Executive that, at a minimum, agrees to supply Executive with out placement counseling, a private office and administrative support, including telephone service until such time that Executive secures suitable employment, and (iii) for a period of three years following the effective date of such termination, or until Executive's earlier death, continue to provide the medical (including dental, orthodontic and optical) coverage specified in Appendix B ("Medical Coverage") and on the terms and conditions so specified at substantially the same level as provided to Executive and his spouse, and his dependents from time to time, at the effective date of such termination, and, thereafter, medical, prescription drug, vision, dental, orthodontic, etc., coverage under the medical, prescription drug, vision, dental, orthodontic, etc., plans applicable to senior executives of the Company on the same terms as the most comprehensive medical coverage available to any senior executive of the Company, with such coverage (together with the gross-up referred to in the last sentence of Section 4 of Appendix B hereto, if applicable) to continue for an additional year (or portion thereof) after such three-year period for every year (or portion thereof) Executive is employed by the Company after the date hereof (the "Continuation Period"). Following the expiration of the Continuation Period, Executive shall be entitled to whatever medical coverage, if any, as is required to be provided by applicable law. Further, upon such termination of Executive's employment, all restricted stock then held by Executive shall vest and become immediately transferable free of restrictions and Executive will become fully vested in the Company's SERP in existence as of the date hereof and in any other non-qualified, deferred compensation, incentive compensation or retirement plan currently in effect or adopted by the Company subsequent to the date hereof, and any successor plan or plans (together with the SERP, the "Non-qualified Plans"). Within 30 days after Executive's termination of employment, the Company shall pay to Executive the sum of (i) the present value of all benefits accrued under the Non-qualified Plans (as supplemented by any early retirement subsidies), using such actuarial assumptions as are then used to fund the Company's tax-qualified defined benefit pension plan (or, if there is no such plan, such actuarial factors as would reasonably be used by comparable companies in funding defined benefit pension plans (but including, in all events, an interest rate no greater than the rate that would then be used by the Pension Benefit Guaranty Corporation to value immediate annuities upon plan termination)), and (ii) an amount equal to three times the average benefit accrued (in the case of plans providing for accruals of identified future benefits) and Company contributions (in the case of other plans) made to the Company's tax-qualified defined benefit plan and profit-sharing and 401(k) retirement plan and the Non-qualified Plans over the previous three fiscal years (as supplemental by, in the case of accrued benefits, any early retirement subsidies). The Company shall also pay to Executive (i) any amount in Executive's account under the Company's profit sharing and 401(k) plan forfeited by the Executive due to his termination, and (ii) the present value of any accrued benefit (as supplemented by any early retirement subsidies) under any defined benefit plan of the Company forfeited by Executive due to his termination, determined using such actuarial assumptions as are then used to fund such plan. (d) Termination of Certain Benefits Upon Reemployment. In the event that, following termination of Executive's employment as a result of Executive's Retirement at or after age 65 or his Disability, by the Company without Cause or by Executive for Good Reason, Executive secures other employment (including employment as a consultant) during the period in which the Company is obligated to continue Life Insurance Coverage and/or medical coverage under subsections (b) and (c) above as applicable, the Company may offset such obligations by any life insurance coverage or medical coverage which Executive receives during the applicable continuation period from a successor employer, so long as the aggregate coverage (from the Company and the successor employer) is no less, as to each and every amount payable or other benefit, than the coverage otherwise applicable under such provisions of (b) and (c) above; provided that nothing contained herein shall limit any continuation of coverage required by law. However, subject to subsection (f) below, the securing of such other employment by Executive shall not affect the Company's obligations with respect to the continued payment to Executive of the other payments provided in this Section 9. Executive shall notify the Company promptly of his securing of any such employment (including employment as a consultant). (e) Consulting Services by Executive. If Executive's Term of employment is terminated by the Company for Disability, by the Company without Cause or by Executive for Good Reason, Executive, in consideration of the payments and benefits under Section 9(c) hereof, as applicable, shall provide for a period of three years following the effective date of termination of his employment hereunder, to the extent that he is physically and mentally able to do so, such reasonable consulting services to the Company as the Company may from time to time request; provided that, unless otherwise agreed to by Executive, such services (i) shall not require in excess of an aggregate of 60 hours during any fiscal quarter, (ii) may be rendered by telephone and shall not require Executive's presence in person, and (iii) subject to Sections 11(b) and 12 hereof, shall not preclude Executive from engaging in other employment or activities. Such services shall be at the direction and control of the Board or a senior executive officer designated by the Board. (f) Reductions, Forfeitures, etc. Notwithstanding the foregoing or Section 10 hereof, (i) any payments or benefits required to be paid or provided to Executive pursuant to Sections 7(a), 9(c) and 10(b) hereof on account of Executive's Disability shall be reduced to the extent that comparable payments or benefits are received by Executive for such Disability during such period under the Company's disability plan, as in effect from time to time, and (ii) except as otherwise expressly provided herein, the payments and benefits required by this Section 9 shall be made or provided at such times as they would have been paid or provided if Executive's employment had not been terminated. (g) Full Settlement. In the event of the termination of Executive's employment, the payments and other benefits provided for by this Agreement (and as otherwise provided under the express terms of any compensation or benefit plans of the Company, its subsidiaries or Affiliates, to the extent not inconsistent with this Agreement, or as may otherwise be required by applicable law) shall constitute the entire obligation of the Company, its subsidiaries and Affiliates to Executive for compensation and benefits and shall also constitute full and complete settlement of any claim under law or in equity that the Executive might otherwise assert against the Company, its subsidiaries or Affiliates, for compensation and benefits or any of its or their respective directors, officers or employees on account of such termination of employment. 10. Change in Control, Tax Gross-up; etc. (a) In the event of a Change in Control (as defined in subsection (d) below): (i) any and all restricted stock and restricted stock rights then held by Executive shall thereupon fully vest and become immediately transferable free of restrictions, other than restrictions imposed by applicable securities laws; (ii) (A) any and all outstanding unvested stock options and stock appreciation rights held by Executive shall thereupon vest and become immediately exercisable, (B) such options and rights shall otherwise be exercisable in accordance with their terms, and (C) notwithstanding anything to the contrary contained in clause (B), all options and stock appreciation rights held by Executive shall be exercisable for three years (one year (or less for incentive stock options) in the case of options granted under the Company's 1994 Stock Option Plan to the extent required by such Plan) after termination of employment (regardless of the party initiating the termination, for any reason or no reason (including without limitation by virtue of Cause, death or Disability)), except that this clause (C) shall not extend the generally applicable term of the options or rights which is measured from the date of grant thereof, nor shall it preclude earlier termination of options, to the extent required, in the event of a corporate transaction, in accordance with Section 3(b) of the 1994 and the 1997 Stock Option Plans; and (iii) any and all benefits accrued by Executive under the terms of any Non-qualified Plans shall thereupon fully vest and the Company shall immediately contribute to a rabbi trust for the benefit of Executive the full amount of all such accrued benefits (and the Company shall make additional contributions to such rabbi trust equal to the full amount of any additional benefits accrued by Executive pursuant to such plans). (b) In addition to the payments and benefits provided in subsection (a) above, in the event of any termination of Executive's employment for any of the reasons set forth in Section 9(c) hereof within the 24-month period following a Change in Control, or if Executive shall voluntarily terminate his employment at any time not earlier than six months nor later than one-year following a Change in Control, or if Executive's employment with the Company is terminated for any of the reasons set forth in 9(a) (except for Retirement) in the 12-month period following a Change in Control: (i) the Company shall pay or cause to be paid to Executive (or his estate, as the case may be) (A) his Base Salary accrued through the effective date of such termination, at the rate in effect immediately prior to such termination, (B) any other amounts to which Executive is entitled under the terms of Section 5 and 6 hereof through the effective date of such termination, and (C) such additional benefits, if any, as he may be entitled to under the express terms of the applicable benefit plans (other than severance plans) of the Company, its subsidiaries and Affiliates; (ii) the Company shall pay to Executive (or his estate, as the case may be) an amount equal to 2.99 times the sum of (A) Executive's Base Salary, at the rate in effect immediately prior to such termination, (B) the annual amount to which he then is entitled under the Company's Executive Perquisites Program, and (C) the most recent Performance Bonus awarded to Executive, or, if higher, the Performance Bonus most recently awarded to him before the Change in Control, such amount to be paid no later than three business days after such termination; (iii) the Company shall continue for a period of four years following the effective date of such termination, or until Executive's earlier death, to provide the Life Insurance Coverage specified in Section 6(b) hereof; (iv) the Company shall continue to provide for a period of four years following the effective date of such termination, the medical (including dental, orthodontic and optical) coverage specified in Appendix B hereto and on the terms and conditions so specified at substantially the same level as provided to Executive and his spouse and his eligible dependents from time to time, and following the four-year period, Executive and such other parties shall be entitled to (together with the gross-up referred to in the last sentence of Section 4 of Appendix B hereto, if applicable), lifetime medical, prescription drug, vision, dental, orthodontic, etc., coverage under the medical, prescription drug, vision, dental, orthodontic, etc., plans applicable to senior executives of the Company on the same terms as the most comprehensive medical coverage available to any senior executive of the Company; provided that the Company may offset its obligations under the foregoing provisions of this Section 10(b)(iv) by any health benefits which Executive receives during the applicable period from a successor employer, so long as the aggregate coverage (from the Company and the successor employer) is no less, as to each and every amount payable and other benefit, than the coverage otherwise applicable with respect to such period hereunder under the provisions of this Section 10(b)(iv) without regard to this proviso; (v) Executive will become fully vested in the Company's Non-qualified Plans and no later than 30 days after Executive's termination of employment, the Company shall pay to Executive the sum of (A) the present value of all benefits accrued under the Non-qualified Plans (as supplemented by any early retirement subsidies) using such actuarial assumptions as are then used to fund the Company's tax-qualified defined benefit pension plan (or, if there is no such plan, such actuarial factors as would reasonably be used by comparable companies in funding defined benefit pension plans (but including, in all events, an interest rate no greater than the rate that would then be used by the Pension Benefit Guaranty Corporation to value immediate annuities upon plan termination)); (B) an amount equal to four times the average benefit accrued (in the case of plans providing for accruals of identified future benefits) and Company contributions (in the case of other plans) made to the Company's tax-qualified defined benefit plan and profit-sharing and 401(k) retirement plan and the Non-qualified Plans over the previous three fiscal years (as supplemental by, in the case of accrued benefits, any early retirement subsidies); (C) any amount in Executive's account under the Company's profit sharing and 401(k) plan forfeited by the Executive due to his termination; and (D) the present value of any accrued benefit (as supplemented by any early retirement subsidies) under any defined benefit plan of the Company forfeited by Executive due to his termination, determined using such actuarial assumptions as are then used to fund such plan; and (vi) the Company shall provide Executive with out placement service through a bona fide out placement organization acceptable to,, Executive that, at a minimum, agrees to supply Executive with out placement counseling, a private office and administrative support including telephone service until such time that Executive secures suitable employment. (c) If all, or any portion, of the payments or other benefits provided under any section of this Agreement (including, without limitation, Sections 9 and 10 hereof), either alone or together with other payments and benefits which Executive receives or is entitled to receive from the Company or its Affiliates, would constitute an excess "parachute payment" within the meaning of Section 280G of the Code (whether or not under an existing plan, arrangement or other agreement) (each such excess parachute payment, a "Parachute Payment"), and would result in the imposition on Executive of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which Executive is entitled under this Agreement, Executive shall be paid by the Company an amount in cash equal to the sum of the excise taxes payable by Executive by reason of receiving Parachute Payments plus a gross-up amount necessary to offset any and all applicable federal, state and local excise, income or other taxes incurred by Executive by reason of the Company's payment of the amount of such excise taxes or incurred by reason of the gross-up payments made pursuant to this Section 10(c). The amount of the payments under this Section 10(c) (the "Parachute Gross-up") shall be computed by Ernst & Young LLP or by another certified public accounting firm of national reputation mutually agreeable to the Company and Executive. If either the Company or Executive desires to dispute the computation rendered by such accounting firm, the disputing party may select an alternative certified public accounting firm of national reputation to perform the applicable computations. If the two accounting firms cannot agree upon the computations, Executive and the Company will jointly appoint a third certified public accounting firm of national reputation, reasonably acceptable to Executive and the Company, within 10 calendar days after the two conflicting computations have been rendered. Such third accounting firm shall be asked to determine within 30 calendar days the computation of the Parachute Gross-up to be paid to Executive, and payments shall be made accordingly. In any event, the Company will pay to Executive or pay on Executive's behalf the Parachute Gross-up as computed by the initial accounting firm by the time any taxes payable by Executive as a result of the Parachute Payments become due, with Executive agreeing promptly to return the excess amount of such payment over the final computation rendered from the process described in this Section 10(c). Executive and the Company will provide the accounting firms with all information which any such accounting firm reasonably deems necessary in computing the Parachute Gross-up to be paid to Executive. The costs and expenses of all of the accounting firms retained to perform the computations described above shall be borne by the Company. (d) For purposes of this Agreement, "Change in Control" shall mean the happening of any of the following: (i) the members of the Board at the beginning of any consecutive 24 calendar month period (the "Incumbent Directors") cease for any reason other than due to death to constitute at least a majority of the members of the Board, provided that any director whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the members of the Board then still in office who were members of the Board at the beginning of such 24 calendar month period, shall be deemed an Incumbent Director; (ii) any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act, but excluding the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; (iii) the stockholders of the Company shall approve a definitive agreement (A) for the merger or other business combination of the Company with or into another corporation if (1) a majority of directors of the surviving corporation were not directors of the Company immediately prior to the effective date of such merger or (2) the stockholders of the Company immediately prior to the effective date of such merger own less than 50% of the combined voting power in the then outstanding securities in such surviving corporation or (B) for the sale or other disposition of all or substantially all of the assets of the Company; or (iv) the purchase of Common Stock pursuant to any tender or exchange offer made by any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates, for 30% or more of the Common Stock of the Company. (e) If Executive's employment with the Company is terminated prior to the date on which a Change in Control occurs, and if it is reasonably demonstrated by Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then, for all purposes of this Agreement, such termination shall be treated as a termination following a Change in Control and shall be covered by this Section 10 accordingly. (f) It is the intention of the parties that the provisions of this Section 10 shall govern the determination of the payments and benefits to which Executive is entitled in the event of termination of his employment (in the circumstances specified in subsection (b) above) following a Change in Control (and in the circumstances specified in subsection (e) above), and in the event of any such specified terminations of employment the provisions of this Section 10 shall supersede the provisions of Sections 9(a), (b), (c), (d) and (e) hereof. 11. Certain Obligations of Executive. Executive further covenants with the Company as follows. As used in Sections 11 and 12 hereof, the term the "Company" shall include GTECH Holdings Corporation and its subsidiaries and Affiliates. (a) Assistance in Litigation. During the Term, and for a period of three years thereafter, Executive, upon reasonable notice, shall furnish such information and proper assistance to the Company as may reasonably be required in connection with any litigation in which the Company is, or may become, a party. If such information or assistance is required in the three-year period following the Term, Executive shall be reimbursed by the Company for any and all reasonable expenses incurred by him in providing such information and assistance and shall be compensated by the Company at a reasonable hourly rate to be agreed upon by the parties for the time he spends providing such information and assistance. (b) Confidential Information, Proprietary Rights, etc. (i) Executive shall not knowingly use for his own benefit or disclose or reveal to any unauthorized person, during or after the Term, except as appropriate in connection with Executive's performance of his duties, any trade secret or other confidential information relating to the Company, including any customer lists, customer needs, price and performance information, processes, specifications, hardware, software, firmware, programs, devices, supply sources and characteristics, business opportunities, marketing, promotional, pricing and financing techniques, or other information relating to the business of the Company; provided that such restriction on confidential information shall not apply to information which is (i) proven to be generally available in the industry, (ii) disclosed in published literature or (iii) obtained by Executive after the Term from a third party without binder of secrecy. Executive agrees that, except as otherwise agreed by the Company, he will return to the Company, promptly upon the request of the Board or any executive officer designated by the Board, any physical embodiment of such confidential information, except that in any event Executive may retain his rolodex. (ii) All rights, title and interest in and to any ideas, inventions, technology, processes, know-how, works, hardware, software, firmware, programs, devices, trade secrets, trade names, trademarks or service marks, which Executive may conceive, create, organize, prepare or produce during the period of his employment with the Company and which relate to the business of the Company, and all rights, title and interest in and to any patents, patent applications, copyright registrations and copyright applications resulting therefrom, shall be owned by the Company, and Executive agrees to execute instruments or documents, to provide evidence and testimony, and to otherwise assist the Company in establishing, enforcing and maintaining such rights, title and interest of the Company during the Term. Executive further agrees to provide reasonable assistance to the Company, including executing documents, providing evidence and testimony, in establishing, enforcing and maintaining such rights, title and interest of the Company after the Term; provided that the Executive shall be compensated at a reasonable hourly rate to be agreed upon by the parties and reimbursed for any and all reasonable expenses incurred as well as for any compensation from other sources that Executive can demonstrate was foregone by virtue of providing such assistance. (iii) Executive does hereby irrevocably constitute, authorize, empower and appoint the Company, or any of its officers, such Executive's true and lawful attorney (with full power of substitution and delegation) in Executive's name, and in Executive's place and stead, or in the Company's name, to take and do such action, and to make, sign, execute, acknowledge and deliver any and all instruments or documents which the Company, from time to time, may deem desirable or necessary to vest in the Company, its successors and assigns, any of the rights, title or interest granted pursuant to clause (ii) above for the use and benefit of the Company, its successors and assigns. 12. Non-Competition. (a) For a period of three years following termination of Executive's employment (irrespective of the reason for such termination), Executive shall not engage or propose to engage, directly or indirectly (which includes owning, managing, operating, controlling, being employed by, acting as a consultant to, giving financial assistance to, participating in or being connected in any material way with any business or person so engaged) anywhere in the United States, including its territories and possessions, or in any foreign country (the United States and any such foreign country being deemed to be a separate "Territory") in any business which competes or proposes to compete with any business (including, without limitation, the Lottery and Gaming Business, the EBT Business and network communications services) in which the Company was engaged or proposed to be engaged in such Territory at the time of the termination of Executive's employment; provided, that Executive's ownership as a passive investor of less than one percent of the issued and outstanding stock or equity, or $100,000 principal amount of any debt securities, of any corporation, partnership or other entity so engaged shall not by itself be deemed to constitute such engagement by Executive. As used herein, the "Lottery and Gaming Business" shall mean the provision of products or services of every nature relating to the operation of all manner of lotteries, non-lottery games of chance and parimutuel wagering however and wherever conducted, and "EBT Business" shall mean the provision of products or services of every nature relating to the distribution by electronic means of payments or payments in kind, and the conducting by electronic means of financial transactions, relating to governmental public assistance programs. The parties acknowledge that the business of the Company is subject to change and they agree periodically to update, by Addendum to this Agreement, the description of the business in which the Company is engaged and to which this subsection (a) relates to reflect accurately material changes which occur while the Executive is employed by the Company. (b) Further, for a period of three years following termination of Executive's employment (irrespective of the reason for such termination), Executive shall not (i) intentionally disturb or interfere with any business relationship between the Company and any of its employees, dealers, customers, suppliers or similar business associates, or (ii) solicit or cause to be solicited any officer or employee of the Company to terminate such person's relationship with the Company. 13. Tax Withholding. The Company may withhold from any benefits payable under this agreement all Federal, State, City, or other taxes as shall be required pursuant to any law or governmental regulations or ruling. 14. Effect of Prior Agreements. This Agreement, including the Appendices hereto, contains the entire understanding between the parties hereto with respect, to the matters covered herein and supersedes any prior agreement (including the 1994 Agreement), condition, practice, custom, usage and obligation with respect to such matters insofar as any such prior agreement, condition, practice, custom, usage or obligation might have given rise to any enforceable right. 15. General Provisions. (a) Indemnification; Liability Insurance. Executive shall, from time to time, be indemnified by the Company in connection with his performance of services hereunder, at the maximum level permitted by law. The Company shall cause Executive (together with other officers and directors) to be covered from time to time by directors and officers liability insurance substantially similar to that provided to the Company's directors and officers immediately before the beginning of the Term, but in no event shall such liability insurance provide less than $20,000,000 of coverage for all such directors and officers, including Executive. The Company shall continue to indemnify Executive as provided above, and maintain such liability insurance with coverage for Executive, after the Term has ended for any claims that may be made against Executive with respect to his service as a director or officer of the Company. (b) Non-assignability. Neither this Agreement nor any rights or interest hereunder shall be assignable by Executive, his beneficiaries, or legal representatives without the Company's prior written consent. In the event of any sale, transfer or other disposition of all or substantially all of the Company's assets or business, whether by merger, consolidation or otherwise to any entity or person other than the Company, this Agreement, and the rights and obligations of the Company under it, shall be transferred to such entity or person pursuant to an agreement in form and substance reasonably satisfactory to Executive from any successor to the business of the Company to assume and agree to perform this Agreement, but such assignment or transfer shall not limit the Company's liability under this Agreement to Executive. Notwithstanding the foregoing, in no event shall any such assignment of this Agreement adversely affect Executive's rights upon the occurrence of a Change in Control as provided for in Section 10 herein. (c) Binding Agreement. This Agreement shall be binding upon, and accrue to the benefit of, Executive and the Company and their respective heirs, executors, administrator, successors and permitted assigns, including, in the case of the Company, any person or entity acquiring all or substantially all of the Company's assets. (d) Amendment of Agreement. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (e) Disputes; Remedies etc.. Executive acknowledges and agrees that the possible restrictions on his activities which may occur as a result of his performance of his obligations under Sections 11(b) and 12 hereof are required for the reasonable protection of the Company, its subsidiaries and Affiliates, and Executive expressly acknowledges and agrees that such restrictions are fair and reasonable for that purpose. Executive further expressly acknowledges and agrees that damages alone will be an inadequate remedy for any breach or violation by him of this Agreement and that the Company, its subsidiaries and Affiliates, in addition to all other remedies at law or in equity, shall be entitled as a matter of right to injunctive relief, including specific performance, with respect to any such breach or violation, in any court of competent jurisdiction including, without limitation, any state or federal court in Rhode Island. If any of the provisions of such Sections are held to be in any respect an unreasonable or unlawful restriction upon Executive, then they shall be deemed to extend only over the maximum period of time, geographic area, and/or range of activities as to which they may be enforceable. The Company shall pay, at least monthly, all costs and expenses, including attorney's fees and disbursements, incurred by Executive in connection with any legal proceeding (including an arbitration), whether or not instituted by the Company or Executive, relating to any provisions of this Agreement, including but not limited to the interpretation, enforcement or reasonableness thereof; provided that, (i) if Executive instituted the proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that Executive has failed to prevail on all material issues, or (ii) if at issue is whether or not Executive was discharged by the Company for Cause and such judge or other decision-maker finds that Executive was properly so discharged for Cause in accordance with this Agreement (except that this clause (ii) shall not apply if Executive is seeking to enforce his rights to amounts or benefits to which he may be entitled hereunder as a result of his discharge for Cause), Executive shall pay his own costs and expenses (and, if applicable, return any amounts theretofore paid to Executive or on his behalf under this Section 15(e)). The parties further agree that, except as expressly otherwise provided in this Agreement, the state and federal courts of Rhode Island shall have exclusive jurisdiction over disputes arising with respect to this Agreement, and the parties hereby submit to such jurisdiction. (f) Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. (g) Severability. If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not so held invalid, and each such other provision shall to the full extent consistent with law continue in full force and effect. (h) Notices. For the purposes of this Agreement, notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when hand delivered or mailed by United States certified or registered express mail, return receipt requested, postage prepaid, if to Executive, addressed to the address set forth on the signature page of this Agreement, with a copy to Rogers & Wells, 200 Park Avenue, New York, New York 10166-0153, directed to the attention of Andrew L. Oringer, Esq.; if to the Company, addressed to GTECH Holdings Corporation, 55 Technology Way, West Greenwich, Rhode Island 02817 and directed to the attention of the Board with a copy to the Secretary of the Company; if to a member of the Board, addressed to each member at his respective address on file with the Secretary of the Company with a copy to the Company, or to such other address as either party may have furnished to the others in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (i) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (j) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. (k) Headings. The headings of Sections and paragraphs herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any of the provisions of this Agreement. (l) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. (m) Joint and Several Liability. Notwithstanding any other provision of this Agreement, each of the Company and Subsidiary, and their successors and assigns, shall be jointly and severally liable for all obligations of any of them to Executive hereunder. In the event that a substantial portion of the assets of the Company or the Subsidiary are transferred to any other direct or indirect subsidiary or other affiliate of the Company, whether in one transaction or a series of transactions, the Company or the Subsidiary, as applicable, shall cause (prior to or concurrently with each transfer) the transferee to become a signatory to this Agreement and to become jointly and severally liable for all obligations or any of them to Executive hereunder. IN WITNESS WHEREOF, GTECH Holdings Corporation and GTECH Corporation has caused this Agreement to be executed by their duly authorized officers, and Executive has signed this Agreement, all as of the day and year first above written. GTECH HOLDINGS CORPORATION Attest:/s/ Jacqueline Godbout By: /s/ Guy B. Snowden Name:Jacqueline Godbout Name: Guy B. Snowden Title:Exec. Assistant Title: Chairman of the Board GTECH CORPORATION Attest: /s/ Jacqueline Godbout By: /s/ Guy B. Snowden Name:Jacqueline Godbout Name:Guy B. Snowden Title:Exec. Assistant Title: Chairman of the Board Witness: /s/ Elena Chiaradio EXECUTIVE /s/ William Y. O'Connor William Y. O'Connor Address: 55 Technology Way West Greenwich, RI 02817 APPENDIX A Summary of Terms of Stock Options The stock options granted to Executive as provided in Section 6(d) of the 1994 Agreement were granted pursuant to the Company's 1994 Stock Option Plan and are subject to the terms and conditions of that Plan and the stock option agreements dated December 20, 1994, January 30, 1995, August 9, 1995 and January 2, 1996, governing such options (provided, however, that "Cause" and "Good Reason" for purposes thereof shall be exclusively as defined in this Agreement), as well as the provisions of Section 10(a) of this Agreement. Any future stock options granted to Executive shall have the following attributes: Nature of Options - Nonqualified unless otherwise determined by the Committee. Exercisability - Options shall become exercisable (i.e. vest) in four equal annual installments commencing one year from the dates of grant of the particular option and subject to acceleration under the terms of the applicable Plan. Option Price - Fair market value at the date of the grant of the particular option. Term - Ten years from the date of grant of the particular option, subject to earlier termination in certain circumstances under the terms of the applicable Plan. Termination of Employment - In the event Executive's employment is terminated: (i) by reason of death or Retirement, by the Company for Disability or without Cause, or by Executive's resignation for Good Reason, his outstanding options, whether or not they have vested on the date of such termination of employment, shall accelerate and become vested in full and shall remain exercisable for a period of one year; and (ii) for any reason other than those listed in (i) above, Executive's outstanding options (i.e, options which have been granted but have not been exercised or terminated and have not expired), to the extent they are vested at the date of such termination, shall remain exercisable for a period of six months, provided that in no event shall any option be exercisable after the expiration of its term. Notwithstanding the foregoing, (i) the period of exercisability of options granted under the Company's 1994 and 1997 Stock Option Plans following termination of employment specified above is subject to possible reduction in certain circumstances to the extent required under the terms of Section 3(b) of the 1994 and 1997 Stock Option Plans, (ii) in the event of a Change in Control, the provisions of Section 10(a) of the Agreement shall be applicable to all Executive's stock options whether heretofore or hereafter granted, and (iii) in no event shall any option be exercisable after the expiration of its term. APPENDIX B Summary of Certain Benefits and Arrangements 1. Housing & Related Matters. (a) Possible Relocation. Executive currently owns a home in New Jersey and has the use of a condominium in Rhode Island. If Executive commits to relocate his primary residence within one year from the date of this Agreement to either the West Greenwich, Rhode Island, or Boca Raton, Florida, areas, the Company shall: (i) extend the due date of the Company's outstanding 6% $500,000 principal amount loan to Executive from November 1, 1999 to January 1, 2000 and forgive $125,000 of the principal of such loan in four installments, commencing August 1, 1997 and on January 1, 1998, 1999 and 2000; provided, however, that Executive shall remain responsible for making the interest payments on the outstanding balance of such loan and for any taxes arising from the forgiveness of principal; (ii) provide Executive with an unsecured $1,000,000 revolving line of credit for the purpose of facilitating the move to and/or renovating his new primary residence in the West Greenwich or Boca Raton area, any such line of credit loan to bear interest at the lowest Applicable Federal Rate established, from time to time, by the Internal Revenue Service, such line of credit to terminate and any loan outstanding thereunder to become payable in full on the earlier of ten days following the sale of Executive's home in New Jersey or July 14, 2002; and (iii) pay Executive's moving expenses to Florida or Rhode Island, as the case may be, and in the event that Executive incurs federal, state or local income taxes attributable to the Company's bearing such moving expenses, the Company shall pay Executive a gross-up payment sufficient to offset any such income taxes (excluding any interest or penalties) and any such income taxes imposed by reason of the gross-up payment. Notwithstanding the foregoing, the outstanding balances of the above loan and line of credit, if not earlier due, shall become due and payable 120 days after Executive's Term of employment has terminated for any reason, other than a termination by the Company without Cause or a termination by Executive for Good Reason. The above loan and line of credit shall be evidenced by such promissory notes and collateral documents as the Company may reasonably request. (b) During the Term, the Company, at its expense, shall provide Executive with the use of a suitable furnished condominium in whichever of the West Greenwich or Boca Raton area as to which he does not relocate his primary residence, or in one of such areas if he does not choose to relocate his primary residence to either such area. The Company shall pay Executive gross-up payments in the same manner as specified in subsection (a)(iii) above for any taxes attributable to the Company's bearing such condominium expenses or to the gross-up payment. (c) The benefits provided in this Section 1 are in lieu of any other benefits under the Company's relocation policy. 2. Vacation. During the Term, Executive shall be entitled to a paid vacation of four weeks per year. 3. Automobile. During the Term, the Company shall make available to Executive for his own use a passenger automobile, such as a BMW 750i or its equivalent, as Executive may select. Executive shall be entitled to select a new automobile once every three years. All expenses of operating, repairing, insuring, garaging and otherwise maintaining such automobile shall be borne by the Company. Further, in the event that Executive incurs federal, state or local income taxes attributable to the Company's providing such automobile and bearing such expenses, the Company shall pay Executive a gross-up payment sufficient to offset any such income taxes (excluding interest or penalties) and any such income taxes imposed by reason of the gross-up payment. 4. Medical. During the Term (and thereafter as and to the extent expressly provided in the Agreement), the Company shall bear the cost of all medical expenses reasonably incurred by Executive and his family (family eligibility to be determined in accordance with the Company's general policies concerning medical coverage), including hospitalization (private room), dental, orthodontic, optical and choice of physicians such coverage to be 100% of expenses and to be at no cost to Executive nor his family, including without limitation no premiums, no deductibles and no co-payments. Further, during the Term, the cost of Executive's annual physical examination also shall be borne by the Company. The Company shall pay Executive a gross-up payment sufficient to offset any income taxes as may arise by virtue of Section 105(h) of the Code and any such income taxes imposed by reason of the gross-up payment. 5. Spousal Travel. During the Term, the Company shall bear the expense of first class air travel and related travel living expenses for Executive and his spouse on Executive's business trips. Further, in the event that Executive incurs federal, state or local income taxes attributable to the Company's bearing such travel expenses for his wife, the Company shall pay Executive a gross-up payment sufficient to offset any such income taxes (excluding any interest or penalties) and any such income taxes imposed by reason of the gross-up payment. 6. Tax Preparation. During the Term, the Company shall bear the expense for annual tax preparation for Executive. The Company shall pay Executive gross-up payments in the same manner as set forth in Section 5 above for any taxes attributable to the Company's bearing such tax preparation expenses or to the gross-up payment. 7. Certain Fees. During the Term, the Company shall provide Executive with a reasonable allowance for health club, country club and other similar club memberships, for home security and for computer, facsimile and other similar equipment; and the Company shall pay Executive gross-up payments in the same manner as set forth in Section 5 above for any taxes attributable to such allowances or to the gross-up payment. 8. Perquisite Plan. During the Term, Executive shall be entitled to participate in the Company's Executive Perquisites Plan. Among the items which may be selected under the Plan (subject to the Plan's cap) are estate planning and other financial services. The Company shall pay Executive gross-up payments in the same manner as set forth in Section 5 above for any taxes attributable to items selected under the Executive Perquisites Plan or to the gross-up payment. Benefits specifically numbered above in this Appendix B shall not be deemed to be provided under the Plan or subject to the Plan's cap. 9. Professional Fees. The Company shall pay the reasonable professional fees of Executive in connection with the negotiation and preparation of this Agreement, including attorneys' fees, compensation consultants' fees and their related expenses and disbursements. EX-10.2 3 AGREEMENT BETWEEN M. CHAMBRELLO AND THE COMPANY AGREEMENT AGREEMENT, dated this 15th day of July, 1997, by and between MICHAEL R. CHAMBRELLO ("Executive") and GTECH HOLDINGS CORPORATION, a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company wishes to assure itself of continuity of management in the event of any actual or threatened "Change in Control" (as defined below) of the Company; and WHEREAS, the Company and the Executive desire to embody in a written agreement the terms and conditions under which the Executive shall be employed by the Company in the event of any actual or threatened Change in Control of the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto hereby agree as follows: Section 1. Definitions. 1.1 Act. "Act" means the Securities Exchange Act of 1934, as amended to date. 1.2. Affiliate. "Affiliate" means any corporation which is a subsidiary of the Company within the definition of "subsidiary corporation" under Section 424(f) of the Code. 1.3. Board. "Board" means the Board of Directors of the Company. 1.4. Cause. "Cause" means (i) the Executive's engaging in serious misconduct that is injurious to the Company, (ii) the Executive's having been convicted of, or entered a plea of nolo contendere to a crime that constitutes a felony, (iii) the breach by the Executive of any written covenant or agreement with the Company not to disclose any information pertaining to the Company or not to compete or interfere with the Company, or (iv) abuse of illegal drugs or other controlled substances, or habitual intoxication. 1.5. Change In Control. "Change in Control" means the happening of any of the following: (i) the members of the Board at the beginning of any consecutive twenty-four calendar month period (the "Incumbent Directors") cease for any reason other than due to death to constitute at least a majority of the members of the Board, provided that any director whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the members of the Board then still in office who were members of the Board at the beginning of such twenty-four calendar month period, shall be deemed an Incumbent Director; (ii) any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Act, but excluding the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Act), directly or indirectly, of securities of the Company representing the greater of 30% or more of the combined voting power of the Company's then outstanding securities; (iii) the stockholders of the Company shall approve a definitive agreement (1) for the merger or other business combination of the Company with or into another corporation if (A) a majority of the directors of the surviving corporation were not directors of the Company immediately prior to the effective date of such merger or (B) the stockholders of the Company immediately prior to the effective date of such merger own less than 50% of the combined voting power in the then outstanding securities in such surviving corporation or (2) for the sale or other disposition of all or substantially all of the assets of the Company; or (iv) the purchase of 30% or more of the Stock pursuant to any tender or exchange offer made by any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Act), other than the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates. 1.6. Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. 1.7. Effective Date. "Effective Date" means the date on which a Change in Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement, the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. 1.8 Executive Perquisite Program. "Executive Perquisite Program" means the Company's Executive Perquisite Program in effect on the date hereof, as the same may be amended from time to time. 1.9 Non-Qualified Plans. "Non-Qualified Plans" means the Company's Supplemental Retirement Plan in existence as of the date hereof, and any other unfunded, non-qualified, deferred compensation, incentive compensation or retirement plan adopted by the Company subsequent to the date hereof, and/or any successor plan or plans. 1.10. Option. "Option" means any option to purchase shares of Stock granted to Executive pursuant to the Company's 1994 Stock Option Plan, as amended from time to time, the Company's 1997 Stock Option Plan, as amended from time to time, or any other stock option plan adopted by the Company. 1.11 Retirement Plan. "Retirement Plan" means the Company's profit-sharing and 401(k) retirement plan which is qualified under Section 401(a) and 501(a) of the Code in existence as of the date hereof and any other such plan adopted by the Company subsequent to the date hereof and/or any successor plan or plans. 1.12. Stock. "Stock" means the Common Stock $.01 par value per share of the Company. 1.13. Term of Employment. "Term of Employment" means the period commencing on the Effective Date and ending on the earliest of: (a) Executive's death or "Total Disability" (as defined below); (b) Termination of the Term of Employment pursuant to Section 4 below; (c) Three (3) years from the Effective Date. Neither the expiration of the Term of Employment nor the termination of this Agreement will relieve the Company of the obligation to provide Executive, in accordance with the terms hereof, the payments, benefits and coverage to which he has become entitled under this Agreement. 1.14. Total Disability. "Total Disability" shall mean permanent and total disability as determined under the Company's long term disability program. Section 2. Employment. 2.1. Capacity and Situs of Employment. The Company agrees to employ Executive throughout the Term of Employment, during which (a) Executive's position (including reporting relationships, status, offices and titles), authority, duties and responsibilities shall be at least equal in all material respects with the highest position, authority, duties and responsibilities held by, exercised by and assigned to the Executive at any time during the six month period immediately preceding the Change in Control, and (b) Executive's situs of employment will be at the Company's executive headquarters in West Greenwich, Rhode Island or such other situs (the "Other Situs") to which Executive may be assigned prior to the Effective Date (the Company's executive headquarters or the Other Situs, whichever is applicable to the Executive, is herein referred to as the "Applicable Situs") or such other location within a fifty (50) mile radius of the Applicable Situs (hereinafter referred to as the "Area") to which the Applicable Situs be moved. 2.2. Services of the Executive. Executive agrees, subject to Sections 4.3 and 4.4 below, to remain in the Company's employ during the Term of Employment, on the terms described in Section 2.1. Excluding periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote substantially all of his attention, energy and time during normal business hours to the business and affairs of the Company and, to the extent necessary, to discharge responsibilities assigned to Executive hereunder, to use his best efforts to perform such responsibilities faithfully and efficiently. Executive may (a) serve on corporate, civic and charitable boards or committees, (b) deliver lectures and fulfill speaking engagements and (c) manage personal investments, so long as such activities do not interfere with the performance of Executive's responsibilities. To the extent that any such activities have been conducted by Executive prior to the Change in Control, such prior conduct, and any subsequent conduct similar in nature and scope, shall not be deemed to interfere with the performance of Executive's responsibilities. Section 3. Compensation and Benefits During the Term of Employment. 3.1. Compensation. The Company will pay as compensation to Executive for his services as an employee during the Term of Employment: (a) base annual salary at a rate equal to or greater than the rate of base salary in effect for Executive immediately prior to the Effective Date; plus (b) for the year in which a Change in Control occurs, the greater of (i) a bonus under the annual bonus plan(s) in effect as of the Change in Control, calculated on the basis of the Company's performance up to the Change in Control, and payable in accordance with such plan(s) or (ii) an amount equal to the bonus paid to Executive under the annual bonus plan(s) in effect for the year immediately preceding the year in which the Change in Control occurs, payable in accordance with the terms of such plan(s); (c) in years subsequent to the year in which the Change in Control occurs, an annual bonus which is equal to or greater than the annual bonus paid in the year preceding the year in which the Change in Control occurs, payable not later than provided for in the plan(s) in effect for such preceding year. 3.2. Benefits. In addition, for his services as an employee during the Term of Employment, Executive will receive all life, disability, accident and group health insurance benefits, retirement, profit-sharing and deferred compensation, and all other fringe benefits and payments under additional benefit plans including the Executive Perquisite Program, all in an amount or with a value at least equal to those benefits being provided by the Company to the Executive immediately prior to the Effective Date, including but not limited to the following: (a) Executive will participate fully in the Company's Retirement Plan and Non-Qualified Plans with benefit accruals and Company contributions for the benefit of Executive under all such plans, and all other material provisions of such plans, being at least the same as immediately prior to the Effective Date, or Company shall pay to Executive annual cash payments in advance, each at least being equal to the total value of such benefit accruals and Company contributions under such plans for the last fiscal year of the Company ending prior to the Effective Date; (b) At no additional cost to Executive, Company shall continue to provide coverage to Executive, together with his dependents and beneficiaries, in all life insurance plans, accident and health plans, Section 125 plans, and other welfare plans maintained or sponsored by the Company, at a level and subject to terms which are at least as favorable to Executive as the coverage provided immediately prior to the Effective Date, or the Company shall pay to Executive the full value thereof in cash annually in advance; (c) Executive will participate fully in additional benefit plans offered by the Company to executives immediately prior to or after the Effective Date; and (d) Executive will receive fringe benefits and job perquisites (which shall not include any benefit referred to elsewhere in this Section 3), including the Executive Perquisite Program, automobile in accordance with the Company's Fleet Policy for Vice Presidents and Corporate Officers as in effect as of the date hereof, paid vacation, club memberships, applicable class travel, tax and financial statement preparation assistance, paid financial assistance, executive physical examinations, office, office furnishings and equipment and support staff, at least equivalent to those provided to Executive immediately prior to the Effective Date, as well as reimbursement, upon proper accounting, of reasonable expenses and disbursements incurred by Executive in the course of his duties. 3.3. Funding of Deferred Compensation Benefits. Contemporaneous with the Change in Control, all benefits accrued by Executive under the terms of any of the Company's Non-Qualified Plans shall become fully vested and the Company shall immediately contribute to a rabbi trust for the benefit of the Executive the full amount of all such accrued benefits. Not less frequently than quarterly, the Company shall make additional contributions to the rabbi trust equal to the full amount of any additional benefits accrued by Executive pursuant to Section 3.2(a) hereof. 3.4. Acceleration of Vesting of Options. The Company hereby agrees that on or prior to the date of a Change in Control any and all options awarded to the Executive not previously exercisable and vested shall become fully vested and exercisable. In addition, in the event the Company decides to terminate any Options previously awarded to the Executive pursuant to the applicable provisions of any stock option plan adopted by the Company in connection with a corporate transaction (as that term is described in Section 424(a) of the Code), the Company will give the Executive not less than fourteen days' notice prior to any such termination and such notice shall not be given until any and all Options previously awarded to Executive shall have become fully vested and exercisable. Section 4. Termination of Employment 4.1. Compensation Prior To Termination. During the year in which either (i) the Executive's employment is terminated during the Term of Employment for any reason, or (ii) the Executive resigns during the Term of Employment in accordance with Section 4.3(b) below, notwithstanding any other provision of this Agreement, the Company and the Executive hereby agree that the Executive shall have the right to receive base salary, annual bonuses, contributions to Retirement Plans and Non-Qualified Plans, gross-up payments made to cover tax liabilities (to the extent provided in such plans), and all other compensation, benefits and payments earned or paid with respect to the period prior to the date of termination of employment, all such payments or contributions to be made at the times provided for in such plans or in accordance with Company policy as in effect immediately prior to the Effective Date, except as expressly provided below. For purposes of this Section 4.1, the amount of the annual bonuses earned and the amount of the contributions to the Retirement Plans and Non-Qualified Plans earned (i) shall be at least equal to the amounts paid to, or contributed on behalf of, the Executive for the year immediately preceding the year in which the termination of the Executive's employment occurs which amounts shall be prorated based on the number of days in the year in which the termination of the Executive's employment occurs which have passed prior to the date of the termination of the Executive's employment, and (ii) shall be paid or contributed on behalf of the Executive not later than 10 days after the date of termination of employment. Nothing in this Section 4.1 shall in any way alter the Executive's right to receive all the payments and rights and benefits described in Sections 4.2 and 4.3(a). 4.2. (a) Termination other than for Cause. In the event Executive's employment is terminated by the Company during the Term of Employment for any reason other than Cause, the Company will pay Executive, as liquidated damages, a lump sum cash payment, payable within ten (10) days of his termination, equal to two and ninety-nine hundredths (2.99) times the sum of (i) Executive's current annual base salary in effect at the date of termination (including in base salary for this purpose any elective salary reductions made by the Executive and contributed by the Company on his behalf to the Company's Retirement Plan, any Non-Qualified Plan, or a plan meeting the requirements of Section 125 of the Code), plus (ii) the total cash bonus received by the Executive from the Company during the most recent full fiscal year of the Company pursuant to the Company's annual bonus plan(s), plus (iii) the maximum amount allowable under the Executive Perquisite Program during the most recent calendar year of the Company. (b) Participation in Benefit Plans. In the event of a termination described in Section 4.2(a) above, Executive, together with his dependents and beneficiaries, will become fully vested in and continue following his termination to participate fully in, at no additional cost to Executive, all life insurance plans, accident and health plans and other welfare plans, maintained or sponsored by the Company immediately prior to the termination, at the same level and subject to terms at least as favorable to Executive as in effect immediately prior to termination (or the full value thereof in cash) from the Company, until the earlier of (a) the Executive's eligibility for comparable benefit plans with another employer and (b) the third anniversary of termination. Executive will also become fully vested in the Retirement Plan, and all Non-Qualified Plans, and within thirty (30) days of Executive's termination of employment, Company shall pay to Executive the sum of (i) all benefits accrued under the Non-Qualified Plans and (ii) an amount equal to 2.99 times the average benefit accrued and/or Company contributions made to the Retirement Plan and the Non-Qualified Plans over the last three fiscal years. In addition, the Company shall provide Executive with out-placement service through a bona fide out-placement organization acceptable to Executive that, at a minimum, agrees to supply Executive with out-placement counseling, a private office and administrative support including telephone service until such time that Executive secures suitable employment, not to be limited by Section 1.13 hereof. 4.3. Resignation By Executive - Constructive Termination. (a) If Executive resigns during the Term of Employment in accordance with Section 4.3(b) below, his employment will be deemed to have been terminated by the Company for reasons other than Cause (and he will be deemed to have offered to continue to provide services to the Company), and, notwithstanding any provision herein to the contrary, he will be entitled to all the payments and rights and benefits described in Sections 4.1 and 4.2, at the time provided for therein. (b) Executive may resign in accordance with this Section 4.3 upon the occurrence of any of the following events (in each case, "Good Reason"): (i) any reduction of, or failure to pay, Executive's base annual salary or annual bonus in breach of Section 3.1 above; (ii) any failure by the Company to provide the benefits required by Section 3.2 above or to make any contribution to a rabbi trust which might be due in accordance with Section 3.3 above; (iii) assignment to Executive of any duties inconsistent in any respect with his position (including the office to which he reports, status, offices, and titles), authority, duties or responsibilities as contemplated by Section 2.1 above or any other action by the Company which results in a diminution of such position, authority, duties or responsibilities; (iv) as a result of the Change in Control and a change in circumstances thereafter significantly affecting Executive's position, including, without limitation, a change in scope of the business or other activities for which he was responsible immediately prior to the Change in Control, he has been rendered substantially unable to carry out, or has been substantially hindered in the performance of, any of the authority, duties or responsibilities contemplated by Section 2.1 above; (v) the failure of the Company after a Change in Control to comply with and satisfy Section 7.1 or 7.2 below; (vi) relocation by the Company of its principal executive offices, or any event that causes Executive to have his principal location of work changed, to any location outside the Area; (vii) any requirement by the Company that Executive travel away from his office in the course of his duties significantly more than the number of consecutive days or aggregate days in any calendar year than was required of him prior to the Change in Control; or (viii) without limiting the generality or effect of the foregoing any material breach of this Agreement by the Company or any successor thereto or transferee of substantially all of the assets thereof. For purposes of this Agreement, any good faith determination of "Good Reason" made by the Executive shall be presumptively correct. (c) If Executive resigns during the Term of Employment in accordance with Section 4.3(b) above, the Company shall have the right to request that the Executive agree to remain as an employee of the Company during a transition period of up to three months (the "Transition Period") and the Executive hereby agrees that, if requested by the Company, he will remain as an employee of the Company during the Transition Period. During the Transition Period, the Company will continue to pay the Executive the Executive's base salary, annual bonus and all other compensation and benefits on the same basis as such items were paid to the Executive prior to his resignation. 4.4. Resignation by Executive. If Executive resigns during the Term of Employment without Good Reason, the Executive shall have the right to receive base salary, annual bonuses, contributions to Retirement Plans and all other compensation and benefits earned during the calendar year of his resignation up to the date of his resignation. For purposes of this Section 4.4, the amount of the annual bonuses and the amount of the contributions to the Retirement Plan shall be at least equal to the amounts paid to, or contributed on behalf of, the Executive for the year immediately preceding the year in which the resignation of the Executive occurs which amounts shall be prorated based on the number of days in the year in which such resignation occurs which have passed prior to the date of such resignation. In addition all vested Non-Qualified Plan benefits shall be paid within thirty (30) days of resignation. 4.5. Termination for Cause. If Executive is dismissed by the Company for Cause, he will not be entitled to the payments or benefits provided under Section 4.2 hereof. 4.6. Dispute Resolution. All disputes between the parties to this Agreement concerning the matters set forth herein shall be resolved exclusively pursuant to the dispute resolution procedures of this Section 4.6. In furtherance thereof, Executive or the Company, as the case may be, shall initiate binding arbitration in Rhode Island before the American Arbitration Association ("AAA") and under its rules by serving a notice to arbitrate upon the other party hereto and AAA within 90 days of the occurrence of any dispute hereunder that is unable to be resolved by negotiation between the parties. The parties shall bear their respective costs in any such dispute resolution, except that with respect to any such action initiated by the Executive, provided the Executive initiates such action in good faith, the Company agrees (i) to pay the costs and expenses (including fees of counsel to the Executive) of any such arbitration or judicial proceeding, and (ii) to pay interest to Executive on any amounts found to be due to Executive hereunder during any period of time that such amounts are withheld pending arbitration and/or judicial proceedings. Such interest will be at the base or prime rate most recently announced by Rhode Island Hospital Trust National Bank (or its successor) prior to the commencement of the arbitration or litigation. The Company and Executive agree that any arbitration award shall be binding and may be enforced by any court of competent jurisdiction. 4.7. Death or Total Disability of the Executive. (a) If Executive dies or suffers a Total Disability during the Term of Employment, then this Agreement shall terminate and the Company, its successors and assigns shall be relieved and discharged of any and all obligations whatsoever to make further payment to Executive pursuant to the terms of this Agreement after the date of death or Total Disability of Executive, except as to base salary earned for services actually rendered and vacation pay accrued prior to the date of death or Total Disability of Executive. (b) If Executive dies or suffers a Total Disability following a termination of employment which entitled him to payments and benefits under this Section 4 but prior to receipt of all such payments and benefits, his beneficiary (as designated to the Company in writing) or, if none, his estate, will be entitled to receive all unpaid amounts and benefits due under this Agreement. 4.8. Enforcement of Rights. Termination of Executive's employment, whether or not giving rise to payments or benefits under this Section 4, will not in any way prevent Executive from enforcing rights to payments or benefits under Section 3 relating to periods during which he was employed. Section 5. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. (b) Subject to the provisions of Section 5(c), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other nationally recognized certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 280G and Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determinative then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. Section 6. Payment of Fees, Costs and Expenses. It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action or arbitration proceeding because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if Executive determines in good faith that the Company has failed to comply with any of its obligations under this Agreement or if the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or arbitration proceeding designed to deny, or to recover from, the Executive the benefits intended to be provided to the Executive under Section 6 hereof, the Company will promptly, upon request of the Executive in the event of the likelihood of a Change in Control or upon a Change in Control, use its best efforts to secure an irrevocable standby letter of credit (the "Letter of Credit"), issued by Rhode Island Hospital Trust National Bank or another bank of comparable or greater size (the "Bank") for the benefit of the Executive providing that the fees and expenses of counsel selected from time to time by the Executive pursuant to this Section 6 or in proceedings contemplated by Section 4.6 shall be paid, or reimbursed to the Executive if paid by the Executive, on a regular, periodic basis upon presentation by the Executive to the Bank of a statement or statements prepared by such counsel in accordance with its customary practices. The Company shall pay all amounts and take all action necessary to maintain the Letter of Credit during the Term of Employment and for one (1) year thereafter and if, notwithstanding the Company's complete discharge of such obligations, such Letter of Credit shall be terminated or not renewed, the Company shall use its best efforts to obtain a replacement irrevocable letter of credit drawn upon a commercial bank selected by the Company and reasonably acceptable to the Executive, upon substantially the same terms and conditions as contained in the Letter of Credit, or any similar arrangement which, in any case, assures the Executive the benefits of this Agreement without incurring any cost or expense for enforcement against the Company or the defense thereof. Section 7. Merger or Acquisition. 7.1. Assumption of Obligations. If the Company is at any time before or after a Change in Control merged, consolidated or reorganized into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets of the Company are transferred to another corporation or other entity, the entity arising from such merger, consolidation or reorganization, or the acquirer of such assets, shall (by agreement in form and substance satisfactory to Executive) expressly assume the obligations of Company under this Agreement. 7.2. Executive's Rights to Benefits. In the event of any merger, consolidation, reorganization or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to or privilege of participation in any stock option or purchase plan or restricted stock plan or any bonus, profit sharing, savings, pension, group insurance, hospitalization or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation, acquiring such assets of the Company. 7.3. References. In the event of any merger, consolidation, reorganization or transfer of assets described above, references to the Company in this Agreement shall, unless the context suggests otherwise, be deemed to include the entity resulting from such merger or consolidation or the acquirer of such assets of the Company. Section 8. Change in Control Following Certain Circumstances. Notwithstanding any provision herein to the contrary, should a Change in Control occur subsequent to Executive's death, Total Disability or retirement from the Company, the remainder of any benefits owed under the terms of any stock plans or other non-qualified deferred compensation plan, including interest, shall be paid in full on the date of the Change in Control. Section 9. Termination of this Agreement. Either the Company or Executive may, by giving 60 days written notice to the other party, terminate this Agreement as of the third or any subsequent annual anniversary of the occurrence of a Change in Control. Section 10. Withholding of Taxes. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries or estate will be subject to the withholding on such amounts relating to tax and/or other payroll deductions as may be required by law. Section 11. Amendment. No amendment, change or modification of this Agreement may be made except in a writing, signed by or on behalf of both parties. Section 12. Miscellaneous. 12.1. Binding Effect. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors and assigns. 12.2. Governing Law. The validity, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island. 12.3. Severability. The invalidity or enforceability of any provision of this Agreement shall not affect the validity of any other provision. 12.4. No Set-Off. There shall be no right of setoff or counterclaim, in respect of any claim, debt or obligation, against any payments to Executive, his dependents, beneficiaries or estate provided for in this Agreement, and nothing in this Agreement shall relieve the Company of its obligations to Executive under any other agreement, plan, contract or arrangement. Subject to Section 12.6 hereof, no right, benefit or interest hereunder shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void and of no effect. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as otherwise provided in Section 4.2(b) hereof, such amounts shall not be reduced whether or not the Executive obtains other employment. Notwithstanding anything to the contrary in this Agreement, Executive shall forfeit all future payments and benefits hereunder in the event that Executive is determined, pursuant to procedures established in Section 4.6 hereof, to have materially breached any written covenant or agreement between the Executive and the Company prohibiting the disclosure of confidential information pertaining to the Company or respecting competition or interference with the Company, provided that the Company shall have given the Executive at least thirty (30) days prior written notice of such breach and such breach shall not have been cured by the end of such notice period. 12.5. Remedies. The Company and Executive agree that, because of the unique nature of this Agreement, failure of either party to carry out or abide by the obligations under this Agreement could cause irreparable injury; accordingly, the parties agree that, in addition to any other remedies available to either party, any such failure by either party to perform or abide by this Agreement shall be subject to appropriate equitable remedies, including specific performance and injunctive relief. 12.6. Assignability. No right or interest to or in any payments shall be assignable by the Executive; provided, however, that this provision shall not preclude him from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of the Executive's estate. 12.7. Counterparts; Headings; References. This Change in Control Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The headings of the sections of this Agreement are inserted for convenience only and shall not constitute a part hereof. References to the masculine or feminine gender (or to the singular or plural number) herein shall mean the other such gender (or number), as appropriate. 12.8. Entire Agreement. This instrument contains the entire agreement of the parties pertaining to the subject matter contained herein and supersedes and is in lieu of any and all other arrangements pertaining to the subject matter contained herein having effect as of the effective date. 12.9. Notices. All notices given hereunder shall be in writing and shall be delivered personally or sent by prepaid registered or certified mail, return receipt requested, addressed as follows or to such other address as may be provided by any party hereto to the other party: If to the Company: GTECH Holdings Corporation 55 Technology Way West Greenwich, RI 02817 Attention: If to the Executive: Michael R. Chambrello 20 Kettle Court North Kingstown, RI 02852 All notices shall be deemed to be given on the date received at the address of the addressee, or if delivered personally, on the date delivered. IN WITNESS WHEREOF, the Company and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. ATTEST: GTECH HOLDINGS CORPORATION /s/ Kathleen J. Carson By:/s/ Stephen A. Davidson Title: Senior Vice President WITNESS: /s/ Kathleen J. Carson /s/ Michael R. Chambrello Michael R. Chambrello EX-10.3 4 AGREEMENT BETWEEN L. GAY AND THE COMPANY AGREEMENT AGREEMENT, dated this 15th day of July, 1997, by and between LAURANCE W. GAY ("Executive") and GTECH HOLDINGS CORPORATION, a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company wishes to assure itself of continuity of management in the event of any actual or threatened "Change in Control" (as defined below) of the Company; and WHEREAS, the Company and the Executive desire to embody in a written agreement the terms and conditions under which the Executive shall be employed by the Company in the event of any actual or threatened Change in Control of the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto hereby agree as follows: Section 1. Definitions. 1.1 Act. "Act" means the Securities Exchange Act of 1934, as amended to date. 1.2. Affiliate. "Affiliate" means any corporation which is a subsidiary of the Company within the definition of "subsidiary corporation" under Section 424(f) of the Code. 1.3. Board. "Board" means the Board of Directors of the Company. 1.4. Cause. "Cause" means (i) the Executive's engaging in serious misconduct that is injurious to the Company, (ii) the Executive's having been convicted of, or entered a plea of nolo contendere to a crime that constitutes a felony, (iii) the breach by the Executive of any written covenant or agreement with the Company not to disclose any information pertaining to the Company or not to compete or interfere with the Company, or (iv) abuse of illegal drugs or other controlled substances, or habitual intoxication. 1.5. Change In Control. "Change in Control" means the happening of any of the following: (i) the members of the Board at the beginning of any consecutive twenty-four calendar month period (the "Incumbent Directors") cease for any reason other than due to death to constitute at least a majority of the members of the Board, provided that any director whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the members of the Board then still in office who were members of the Board at the beginning of such twenty-four calendar month period, shall be deemed an Incumbent Director; (ii) any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Act, but excluding the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Act), directly or indirectly, of securities of the Company representing the greater of 30% or more of the combined voting power of the Company's then outstanding securities; (iii) the stockholders of the Company shall approve a definitive agreement (1) for the merger or other business combination of the Company with or into another corporation if (A) a majority of the directors of the surviving corporation were not directors of the Company immediately prior to the effective date of such merger or (B) the stockholders of the Company immediately prior to the effective date of such merger own less than 50% of the combined voting power in the then outstanding securities in such surviving corporation or (2) for the sale or other disposition of all or substantially all of the assets of the Company; or (iv) the purchase of 30% or more of the Stock pursuant to any tender or exchange offer made by any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Act), other than the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates. 1.6. Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. 1.7. Effective Date. "Effective Date" means the date on which a Change in Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement, the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. 1.8 Executive Perquisite Program. "Executive Perquisite Program" means the Company's Executive Perquisite Program in effect on the date hereof, as the same may be amended from time to time. 1.9 Non-Qualified Plans. "Non-Qualified Plans" means the Company's Supplemental Retirement Plan in existence as of the date hereof, and any other unfunded, non-qualified, deferred compensation, incentive compensation or retirement plan adopted by the Company subsequent to the date hereof, and/or any successor plan or plans. 1.10. Option. "Option" means any option to purchase shares of Stock granted to Executive pursuant to the Company's 1994 Stock Option Plan, as amended from time to time, the Company's 1997 Stock Option Plan, as amended from time to time, or any other stock option plan adopted by the Company. 1.11 Retirement Plan. "Retirement Plan" means the Company's profit-sharing and 401(k) retirement plan which is qualified under Section 401(a) and 501(a) of the Code in existence as of the date hereof and any other such plan adopted by the Company subsequent to the date hereof and/or any successor plan or plans. 1.12. Stock. "Stock" means the Common Stock $.01 par value per share of the Company. 1.13. Term of Employment. "Term of Employment" means the period commencing on the Effective Date and ending on the earliest of: (a) Executive's death or "Total Disability" (as defined below); (b) Termination of the Term of Employment pursuant to Section 4 below; (c) Three (3) years from the Effective Date. Neither the expiration of the Term of Employment nor the termination of this Agreement will relieve the Company of the obligation to provide Executive, in accordance with the terms hereof, the payments, benefits and coverage to which he has become entitled under this Agreement. 1.14. Total Disability. "Total Disability" shall mean permanent and total disability as determined under the Company's long term disability program. Section 2. Employment. 2.1. Capacity and Situs of Employment. The Company agrees to employ Executive throughout the Term of Employment, during which (a) Executive's position (including reporting relationships, status, offices and titles), authority, duties and responsibilities shall be at least equal in all material respects with the highest position, authority, duties and responsibilities held by, exercised by and assigned to the Executive at any time during the six month period immediately preceding the Change in Control, and (b) Executive's situs of employment will be at the Company's executive headquarters in West Greenwich, Rhode Island or such other situs (the "Other Situs") to which Executive may be assigned prior to the Effective Date (the Company's executive headquarters or the Other Situs, whichever is applicable to the Executive, is herein referred to as the "Applicable Situs") or such other location within a fifty (50) mile radius of the Applicable Situs (hereinafter referred to as the "Area") to which the Applicable Situs be moved. 2.2. Services of the Executive. Executive agrees, subject to Sections 4.3 and 4.4 below, to remain in the Company's employ during the Term of Employment, on the terms described in Section 2.1. Excluding periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote substantially all of his attention, energy and time during normal business hours to the business and affairs of the Company and, to the extent necessary, to discharge responsibilities assigned to Executive hereunder, to use his best efforts to perform such responsibilities faithfully and efficiently. Executive may (a) serve on corporate, civic and charitable boards or committees, (b) deliver lectures and fulfill speaking engagements and (c) manage personal investments, so long as such activities do not interfere with the performance of Executive's responsibilities. To the extent that any such activities have been conducted by Executive prior to the Change in Control, such prior conduct, and any subsequent conduct similar in nature and scope, shall not be deemed to interfere with the performance of Executive's responsibilities. Section 3. Compensation and Benefits During the Term of Employment. 3.1. Compensation. The Company will pay as compensation to Executive for his services as an employee during the Term of Employment: (a) base annual salary at a rate equal to or greater than the rate of base salary in effect for Executive immediately prior to the Effective Date; plus (b) for the year in which a Change in Control occurs, the greater of (i) a bonus under the annual bonus plan(s) in effect as of the Change in Control, calculated on the basis of the Company's performance up to the Change in Control, and payable in accordance with such plan(s) or (ii) an amount equal to the bonus paid to Executive under the annual bonus plan(s) in effect for the year immediately preceding the year in which the Change in Control occurs, payable in accordance with the terms of such plan(s), provided that such bonus shall be equal to 100% of the Executive's base salary in effect immediately prior to the Effective Date. (c) in years subsequent to the year in which the Change in Control occurs, an annual bonus which is equal to or greater than the annual bonus paid in the year preceding the year in which the Change in Control occurs, but shall be equal to 100% of Executive's base salary in effect immediately prior to the Effective Date, payable not later than provided for in the plan(s) in effect for such preceding year. 3.2. Benefits. In addition, for his services as an employee during the Term of Employment, Executive will receive all life, disability, accident and group health insurance benefits, retirement, profit-sharing and deferred compensation, and all other fringe benefits and payments under additional benefit plans including the Executive Perquisite Program, all in an amount or with a value at least equal to those benefits being provided by the Company to the Executive immediately prior to the Effective Date, including but not limited to the following: (a) Executive will participate fully in the Company's Retirement Plan and Non-Qualified Plans with benefit accruals and Company contributions for the benefit of Executive under all such plans, and all other material provisions of such plans, being at least the same as immediately prior to the Effective Date, or Company shall pay to Executive annual cash payments in advance, each at least being equal to the total value of such benefit accruals and Company contributions under such plans for the last fiscal year of the Company ending prior to the Effective Date; (b) At no additional cost to Executive, Company shall continue to provide coverage to Executive, together with his dependents and beneficiaries, in all life insurance plans, accident and health plans, Section 125 plans, and other welfare plans maintained or sponsored by the Company, at a level and subject to terms which are at least as favorable to Executive as the coverage provided immediately prior to the Effective Date, or the Company shall pay to Executive the full value thereof in cash annually in advance; (c) Executive will participate fully in additional benefit plans offered by the Company to executives immediately prior to or after the Effective Date; and (d) Executive will receive fringe benefits and job perquisites (which shall not include any benefit referred to elsewhere in this Section 3), including the Executive Perquisite Program, automobile in accordance with the Company's Fleet Policy for Vice Presidents and Corporate Officers as in effect as of the date hereof, paid vacation, club memberships, applicable class travel, tax and financial statement preparation assistance, paid financial assistance, executive physical examinations, office, office furnishings and equipment and support staff, at least equivalent to those provided to Executive immediately prior to the Effective Date, as well as reimbursement, upon proper accounting, of reasonable expenses and disbursements incurred by Executive in the course of his duties. 3.3. Funding of Deferred Compensation Benefits. Contemporaneous with the Change in Control, all benefits accrued by Executive under the terms of any of the Company's Non-Qualified Plans shall become fully vested and the Company shall immediately contribute to a rabbi trust for the benefit of the Executive the full amount of all such accrued benefits. Not less frequently than quarterly, the Company shall make additional contributions to the rabbi trust equal to the full amount of any additional benefits accrued by Executive pursuant to Section 3.2(a) hereof. 3.4. Acceleration of Vesting of Options. The Company hereby agrees that on or prior to the date of a Change in Control any and all options awarded to the Executive not previously exercisable and vested shall become fully vested and exercisable. In addition, in the event the Company decides to terminate any Options previously awarded to the Executive pursuant to the applicable provisions of any stock option plan adopted by the Company in connection with a corporate transaction (as that term is described in Section 424(a) of the Code), the Company will give the Executive not less than fourteen days' notice prior to any such termination and such notice shall not be given until any and all Options previously awarded to Executive shall have become fully vested and exercisable. Section 4. Termination of Employment 4.1. Compensation Prior To Termination. During the year in which either (i) the Executive's employment is terminated during the Term of Employment for any reason, or (ii) the Executive resigns during the Term of Employment in accordance with Section 4.3(b) below, notwithstanding any other provision of this Agreement, the Company and the Executive hereby agree that the Executive shall have the right to receive base salary, annual bonuses, contributions to Retirement Plans and Non-Qualified Plans, gross-up payments made to cover tax liabilities (to the extent provided in such plans), and all other compensation, benefits and payments earned or paid with respect to the period prior to the date of termination of employment, all such payments or contributions to be made at the times provided for in such plans or in accordance with Company policy as in effect immediately prior to the Effective Date, except as expressly provided below. For purposes of this Section 4.1, the amount of the annual bonuses earned and the amount of the contributions to the Retirement Plans and Non-Qualified Plans earned (i) shall be at least equal to the amounts paid to, or contributed on behalf of, the Executive for the year immediately preceding the year in which the termination of the Executive's employment occurs which amounts shall be prorated based on the number of days in the year in which the termination of the Executive's employment occurs which have passed prior to the date of the termination of the Executive's employment, and (ii) shall be paid or contributed on behalf of the Executive not later than 10 days after the date of termination of employment. Nothing in this Section 4.1 shall in any way alter the Executive's right to receive all the payments and rights and benefits described in Sections 4.2 and 4.3(a). 4.2. (a) Termination other than for Cause. In the event Executive's employment is terminated by the Company during the Term of Employment for any reason other than Cause, the Company will pay Executive, as liquidated damages, a lump sum cash payment, payable within ten (10) days of his termination, equal to two and ninety-nine hundredths (2.99) times the sum of (i) Executive's current annual base salary in effect at the date of termination (including in base salary for this purpose any elective salary reductions made by the Executive and contributed by the Company on his behalf to the Company's Retirement Plan, any Non-Qualified Plan, or a plan meeting the requirements of Section 125 of the Code), plus (ii) the total cash bonus received by the Executive from the Company during the most recent full fiscal year of the Company pursuant to the Company's annual bonus plan(s) but shall be equal to 100% of Executive's base salary in effect at the date of termination, plus (iii) the maximum amount allowable under the Executive Perquisite Program during the most recent calendar year of the Company. (b) Participation in Benefit Plans. In the event of a termination described in Section 4.2(a) above, Executive, together with his dependents and beneficiaries, will become fully vested in and continue following his termination to participate fully in, at no additional cost to Executive, all life insurance plans, accident and health plans and other welfare plans, maintained or sponsored by the Company immediately prior to the termination, at the same level and subject to terms at least as favorable to Executive as in effect immediately prior to termination (or the full value thereof in cash) from the Company, until the earlier of (a) the Executive's eligibility for comparable benefit plans with another employer and (b) the third anniversary of termination. Executive will also become fully vested in the Retirement Plan, and all Non-Qualified Plans, and within thirty (30) days of Executive's termination of employment, Company shall pay to Executive the sum of (i) all benefits accrued under the Non-Qualified Plans and (ii) an amount equal to 2.99 times the average benefit accrued and/or Company contributions made to the Retirement Plan and the Non-Qualified Plans over the last three fiscal years. In addition, the Company shall provide Executive with out-placement service through a bona fide out-placement organization acceptable to Executive that, at a minimum, agrees to supply Executive with out-placement counseling, a private office and administrative support including telephone service until such time that Executive secures suitable employment, not to be limited by Section 1.13 hereof. 4.3. Resignation By Executive - Constructive Termination. (a) If Executive resigns during the Term of Employment in accordance with Section 4.3(b) below, his employment will be deemed to have been terminated by the Company for reasons other than Cause (and he will be deemed to have offered to continue to provide services to the Company), and, notwithstanding any provision herein to the contrary, he will be entitled to all the payments and rights and benefits described in Sections 4.1 and 4.2, at the time provided for therein. (b) Executive may resign in accordance with this Section 4.3 upon the occurrence of any of the following events (in each case, "Good Reason"): (i) any reduction of, or failure to pay, Executive's base annual salary or annual bonus in breach of Section 3.1 above; (ii) any failure by the Company to provide the benefits required by Section 3.2 above or to make any contribution to a rabbi trust which might be due in accordance with Section 3.3 above; (iii) assignment to Executive of any duties inconsistent in any respect with his position (including the office to which he reports, status, offices, and titles), authority, duties or responsibilities as contemplated by Section 2.1 above or any other action by the Company which results in a diminution of such position, authority, duties or responsibilities; (iv) as a result of the Change in Control and a change in circumstances thereafter significantly affecting Executive's position, including, without limitation, a change in scope of the business or other activities for which he was responsible immediately prior to the Change in Control, he has been rendered substantially unable to carry out, or has been substantially hindered in the performance of, any of the authority, duties or responsibilities contemplated by Section 2.1 above; (v) the failure of the Company after a Change in Control to comply with and satisfy Section 7.1 or 7.2 below; (vi) relocation by the Company of its principal executive offices, or any event that causes Executive to have his principal location of work changed, to any location outside the Area; (vii) any requirement by the Company that Executive travel away from his office in the course of his duties significantly more than the number of consecutive days or aggregate days in any calendar year than was required of him prior to the Change in Control; or (viii) without limiting the generality or effect of the foregoing any material breach of this Agreement by the Company or any successor thereto or transferee of substantially all of the assets thereof. For purposes of this Agreement, any good faith determination of "Good Reason" made by the Executive shall be presumptively correct. (c) If Executive resigns during the Term of Employment in accordance with Section 4.3(b) above, the Company shall have the right to request that the Executive agree to remain as an employee of the Company during a transition period of up to three months (the "Transition Period") and the Executive hereby agrees that, if requested by the Company, he will remain as an employee of the Company during the Transition Period. During the Transition Period, the Company will continue to pay the Executive the Executive's base salary, annual bonus and all other compensation and benefits on the same basis as such items were paid to the Executive prior to his resignation. 4.4. Resignation by Executive. If Executive resigns during the Term of Employment without Good Reason, the Executive shall have the right to receive base salary, annual bonuses, contributions to Retirement Plans and all other compensation and benefits earned during the calendar year of his resignation up to the date of his resignation. For purposes of this Section 4.4, the amount of the annual bonuses and the amount of the contributions to the Retirement Plan shall be at least equal to the amounts paid to, or contributed on behalf of, the Executive for the year immediately preceding the year in which the resignation of the Executive occurs which amounts shall be prorated based on the number of days in the year in which such resignation occurs which have passed prior to the date of such resignation. In addition all vested Non-Qualified Plan benefits shall be paid within thirty (30) days of resignation. 4.5. Termination for Cause. If Executive is dismissed by the Company for Cause, he will not be entitled to the payments or benefits provided under Section 4.2. 4.6. Dispute Resolution. All disputes between the parties to this Agreement concerning the matters set forth herein shall be resolved exclusively pursuant to the dispute resolution procedures of this Section 4.6. In furtherance thereof, Executive or the Company, as the case may be, shall initiate binding arbitration in Rhode Island before the American Arbitration Association ("AAA") and under its rules by serving a notice to arbitrate upon the other party hereto and AAA within 90 days of the occurrence of any dispute hereunder that is unable to be resolved by negotiation between the parties. The parties shall bear their respective costs in any such dispute resolution, except that with respect to any such action initiated by the Executive, provided the Executive initiates such action in good faith, the Company agrees (i) to pay the costs and expenses (including fees of counsel to the Executive) of any such arbitration or judicial proceeding, and (ii) to pay interest to Executive on any amounts found to be due to Executive hereunder during any period of time that such amounts are withheld pending arbitration and/or judicial proceedings. Such interest will be at the base or prime rate most recently announced by Rhode Island Hospital Trust National Bank (or its successor) prior to the commencement of the arbitration or litigation. The Company and Executive agree that any arbitration award shall be binding and may be enforced by any court of competent jurisdiction. 4.7. Death or Total Disability of the Executive. (a) If Executive dies or suffers a Total Disability during the Term of Employment, then this Agreement shall terminate and the Company, its successors and assigns shall be relieved and discharged of any and all obligations whatsoever to make further payment to Executive pursuant to the terms of this Agreement after the date of death or Total Disability of Executive, except as to base salary earned for services actually rendered and vacation pay accrued prior to the date of death or Total Disability of Executive. (b) If Executive dies or suffers a Total Disability following a termination of employment which entitled him to payments and benefits under this Section 4 but prior to receipt of all such payments and benefits, his beneficiary (as designated to the Company in writing) or, if none, his estate, will be entitled to receive all unpaid amounts and benefits due under this Agreement. 4.8. Enforcement of Rights. Termination of Executive's employment, whether or not giving rise to payments or benefits under this Section 4, will not in any way prevent Executive from enforcing rights to payments or benefits under Section 3 relating to periods during which he was employed. Section 5. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. (b) Subject to the provisions of Section 5(c), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other nationally recognized certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 280G and Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determinative then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. Section 6. Payment of Fees, Costs and Expenses. It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action or arbitration proceeding because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if Executive determines in good faith that the Company has failed to comply with any of its obligations under this Agreement or if the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or arbitration proceeding designed to deny, or to recover from, the Executive the benefits intended to be provided to the Executive under Section 6 hereof, the Company will promptly, upon request of the Executive in the event of the likelihood of a Change in Control or upon a Change in Control, use its best efforts to secure an irrevocable standby letter of credit (the "Letter of Credit"), issued by Rhode Island Hospital Trust National Bank or another bank of comparable or greater size (the "Bank") for the benefit of the Executive providing that the fees and expenses of counsel selected from time to time by the Executive pursuant to this Section 6 or in proceedings contemplated by Section 4.6 shall be paid, or reimbursed to the Executive if paid by the Executive, on a regular, periodic basis upon presentation by the Executive to the Bank of a statement or statements prepared by such counsel in accordance with its customary practices. The Company shall pay all amounts and take all action necessary to maintain the Letter of Credit during the Term of Employment and for one (1) year thereafter and if, notwithstanding the Company's complete discharge of such obligations, such Letter of Credit shall be terminated or not renewed, the Company shall use its best efforts to obtain a replacement irrevocable letter of credit drawn upon a commercial bank selected by the Company and reasonably acceptable to the Executive, upon substantially the same terms and conditions as contained in the Letter of Credit, or any similar arrangement which, in any case, assures the Executive the benefits of this Agreement without incurring any cost or expense for enforcement against the Company or the defense thereof. Section 7. Merger or Acquisition. 7.1. Assumption of Obligations. If the Company is at any time before or after a Change in Control merged, consolidated or reorganized into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets of the Company are transferred to another corporation or other entity, the entity arising from such merger, consolidation or reorganization, or the acquirer of such assets, shall (by agreement in form and substance satisfactory to Executive) expressly assume the obligations of Company under this Agreement. 7.2. Executive's Rights to Benefits. In the event of any merger, consolidation, reorganization or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to or privilege of participation in any stock option or purchase plan or restricted stock plan or any bonus, profit sharing, savings, pension, group insurance, hospitalization or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation, acquiring such assets of the Company. 7.3. References. In the event of any merger, consolidation, reorganization or transfer of assets described above, references to the Company in this Agreement shall, unless the context suggests otherwise, be deemed to include the entity resulting from such merger or consolidation or the acquirer of such assets of the Company. Section 8. Change in Control Following Certain Circumstances. Notwithstanding any provision herein to the contrary, should a Change in Control occur subsequent to Executive's death, Total Disability or retirement from the Company, the remainder of any benefits owed under the terms of any stock plans or other non-qualified deferred compensation plan, including interest, shall be paid in full on the date of the Change in Control. Section 9. Termination of this Agreement. Either the Company or Executive may, by giving 60 days written notice to the other party, terminate this Agreement as of the third or any subsequent annual anniversary of the occurrence of a Change in Control. Section 10. Withholding of Taxes. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries or estate will be subject to the withholding on such amounts relating to tax and/or other payroll deductions as may be required by law. Section 11. Amendment. No amendment, change or modification of this Agreement may be made except in a writing, signed by or on behalf of both parties. Section 12. Miscellaneous. 12.1. Binding Effect. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors and assigns. 12.2. Governing Law. The validity, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island. 12.3. Severability. The invalidity or enforceability of any provision of this Agreement shall not affect the validity of any other provision. 12.4. No Set-Off. There shall be no right of setoff or counterclaim, in respect of any claim, debt or obligation, against any payments to Executive, his dependents, beneficiaries or estate provided for in this Agreement, and nothing in this Agreement shall relieve the Company of its obligations to Executive under any other agreement, plan, contract or arrangement. Subject to Section 12.6 hereof, no right, benefit or interest hereunder shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void and of no effect. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as otherwise provided in Section 4.2(b) hereof, such amounts shall not be reduced whether or not the Executive obtains other employment. Notwithstanding anything to the contrary in this Agreement, Executive shall forfeit all future payments and benefits hereunder in the event that Executive is determined, pursuant to procedures established in Section 4.6 hereof, to have materially breached any written covenant or agreement between the Executive and the Company prohibiting the disclosure of confidential information pertaining to the Company or respecting competition or interference with the Company, provided that the Company shall have given the Executive at least thirty (30) days prior written notice of such breach and such breach shall not have been cured by the end of such notice period. 12.5. Remedies. The Company and Executive agree that, because of the unique nature of this Agreement, failure of either party to carry out or abide by the obligations under this Agreement could cause irreparable injury; accordingly, the parties agree that, in addition to any other remedies available to either party, any such failure by either party to perform or abide by this Agreement shall be subject to appropriate equitable remedies, including specific performance and injunctive relief. 12.6. Assignability. No right or interest to or in any payments shall be assignable by the Executive; provided, however, that this provision shall not preclude him from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of the Executive's estate. 12.7. Counterparts; Headings; References. This Change in Control Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The headings of the sections of this Agreement are inserted for convenience only and shall not constitute a part hereof. References to the masculine or feminine gender (or to the singular or plural number) herein shall mean the other such gender (or number) as appropriate. 12.8. Entire Agreement. This instrument contains the entire agreement of the parties pertaining to the subject matter contained herein and supersedes and is in lieu of any and all other arrangements pertaining to the subject matter contained herein having effect as of the effective date. 12.9. Notices. All notices given hereunder shall be in writing and shall be delivered personally or sent by prepaid registered or certified mail, return receipt requested, addressed as follows or to such other address as may be provided by any party hereto to the other: If to the Company: GTECH Holdings Corporation 55 Technology Way West Greenwich, RI 02817 Attention: If to the Executive: Laurance W. Gay 143 East Canaan Road East Canaan, CT 06024 All notices shall be deemed to be given on the date received at the address of the addressee, or if delivered personally, on the date delivered. IN WITNESS WHEREOF, the Company and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. ATTEST: GTECH HOLDINGS CORPORATION /s/ Kathleen J. Carson By:/s/ Stephen A. Davidson Title: Senior Vice President WITNESS: /s/ Kathleen J. Carson /s/ Laurance W. Gay Laurance W. Gay EX-10.4 5 AGREEMENT BETWEEN T. SAUSER AND THE COMPANY AGREEMENT AGREEMENT, dated this 15th day of July, 1997, by and between THOMAS J. SAUSER ("Executive") and GTECH HOLDINGS CORPORATION, a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company wishes to assure itself of continuity of management in the event of any actual or threatened "Change in Control" (as defined below) of the Company; and WHEREAS, the Company and the Executive desire to embody in a written agreement the terms and conditions under which the Executive shall be employed by the Company in the event of any actual or threatened Change in Control of the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto hereby agree as follows: Section 1. Definitions. 1.1 Act. "Act" means the Securities Exchange Act of 1934, as amended to date. 1.2. Affiliate. "Affiliate" means any corporation which is a subsidiary of the Company within the definition of "subsidiary corporation" under Section 424(f) of the Code. 1.3. Board. "Board" means the Board of Directors of the Company. 1.4. Cause. "Cause" means (i) the Executive's engaging in serious misconduct that is injurious to the Company, (ii) the Executive's having been convicted of, or entered a plea of nolo contendere to a crime that constitutes a felony, (iii) the breach by the Executive of any written covenant or agreement with the Company not to disclose any information pertaining to the Company or not to compete or interfere with the Company, or (iv) abuse of illegal drugs or other controlled substances, or habitual intoxication. 1.5. Change In Control. "Change in Control" means the happening of any of the following: (i) the members of the Board at the beginning of any consecutive twenty-four calendar month period (the "Incumbent Directors") cease for any reason other than due to death to constitute at least a majority of the members of the Board, provided that any director whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the members of the Board then still in office who were members of the Board at the beginning of such twenty-four calendar month period, shall be deemed an Incumbent Director; (ii) any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Act, but excluding the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Act), directly or indirectly, of securities of the Company representing the greater of 30% or more of the combined voting power of the Company's then outstanding securities; (iii) the stockholders of the Company shall approve a definitive agreement (1) for the merger or other business combination of the Company with or into another corporation if (A) a majority of the directors of the surviving corporation were not directors of the Company immediately prior to the effective date of such merger or (B) the stockholders of the Company immediately prior to the effective date of such merger own less than 50% of the combined voting power in the then outstanding securities in such surviving corporation or (2) for the sale or other disposition of all or substantially all of the assets of the Company; or (iv) the purchase of 30% or more of the Stock pursuant to any tender or exchange offer made by any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Act), other than the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates. 1.6. Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. 1.7. Effective Date. "Effective Date" means the date on which a Change in Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement, the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. 1.8 Executive Perquisite Program. "Executive Perquisite Program" means the Company's Executive Perquisite Program in effect on the date hereof, as the same may be amended from time to time. 1.9 Non-Qualified Plans. "Non-Qualified Plans" means the Company's Supplemental Retirement Plan in existence as of the date hereof, and any other unfunded, non-qualified, deferred compensation, incentive compensation or retirement plan adopted by the Company subsequent to the date hereof, and/or any successor plan or plans. 1.10. Option. "Option" means any option to purchase shares of Stock granted to Executive pursuant to the Company's 1994 Stock Option Plan, as amended from time to time, the Company's 1997 Stock Option Plan, as amended from time to time, or any other stock option plan adopted by the Company. 1.11 Retirement Plan. "Retirement Plan" means the Company's profit-sharing and 401(k) retirement plan which is qualified under Section 401(a) and 501(a) of the Code in existence as of the date hereof and any other such plan adopted by the Company subsequent to the date hereof and/or any successor plan or plans. 1.12. Stock. "Stock" means the Common Stock $.01 par value per share of the Company. 1.13. Term of Employment. "Term of Employment" means the period commencing on the Effective Date and ending on the earliest of: (a) Executive's death or "Total Disability" (as defined below); (b) Termination of the Term of Employment pursuant to Section 4 below; (c) Three (3) years from the Effective Date. Neither the expiration of the Term of Employment nor the termination of this Agreement will relieve the Company of the obligation to provide Executive, in accordance with the terms hereof, the payments, benefits and coverage to which he has become entitled under this Agreement. 1.14. Total Disability. "Total Disability" shall mean permanent and total disability as determined under the Company's long term disability program. Section 2. Employment. 2.1. Capacity and Situs of Employment. The Company agrees to employ Executive throughout the Term of Employment, during which (a) Executive's position (including reporting relationships, status, offices and titles), authority, duties and responsibilities shall be at least equal in all material respects with the highest position, authority, duties and responsibilities held by, exercised by and assigned to the Executive at any time during the six month period immediately preceding the Change in Control, and (b) Executive's situs of employment will be at the Company's executive headquarters in West Greenwich, Rhode Island or such other situs (the "Other Situs") to which Executive may be assigned prior to the Effective Date (the Company's executive headquarters or the Other Situs, whichever is applicable to the Executive, is herein referred to as the "Applicable Situs") or such other location within a fifty (50) mile radius of the Applicable Situs (hereinafter referred to as the "Area") to which the Applicable Situs be moved. 2.2. Services of the Executive. Executive agrees, subject to Sections 4.3 and 4.4 below, to remain in the Company's employ during the Term of Employment, on the terms described in Section 2.1. Excluding periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote substantially all of his attention, energy and time during normal business hours to the business and affairs of the Company and, to the extent necessary, to discharge responsibilities assigned to Executive hereunder, to use his best efforts to perform such responsibilities faithfully and efficiently. Executive may (a) serve on corporate, civic and charitable boards or committees, (b) deliver lectures and fulfill speaking engagements and (c) manage personal investments, so long as such activities do not interfere with the performance of Executive's responsibilities. To the extent that any such activities have been conducted by Executive prior to the Change in Control, such prior conduct, and any subsequent conduct similar in nature and scope, shall not be deemed to interfere with the performance of Executive's responsibilities. Section 3. Compensation and Benefits During the Term of Employment. 3.1. Compensation. The Company will pay as compensation to Executive for his services as an employee during the Term of Employment: (a) base annual salary at a rate equal to or greater than the rate of base salary in effect for Executive immediately prior to the Effective Date; plus (b) for the year in which a Change in Control occurs, the greater of (i) a bonus under the annual bonus plan(s) in effect as of the Change in Control, calculated on the basis of the Company's performance up to the Change in Control, and payable in accordance with such plan(s) or (ii) an amount equal to the bonus paid to Executive under the annual bonus plan(s) in effect for the year immediately preceding the year in which the Change in Control occurs, payable in accordance with the terms of such plan(s); (c) in years subsequent to the year in which the Change in Control occurs, an annual bonus which is equal to or greater than the annual bonus paid in the year preceding the year in which the Change in Control occurs, payable not later than provided for in the plan(s) in effect for such preceding year. 3.2. Benefits. In addition, for his services as an employee during the Term of Employment, Executive will receive all life, disability, accident and group health insurance benefits, retirement, profit-sharing and deferred compensation, and all other fringe benefits and payments under additional benefit plans including the Executive Perquisite Program, all in an amount or with a value at least equal to those benefits being provided by the Company to the Executive immediately prior to the Effective Date, including but not limited to the following: (a) Executive will participate fully in the Company's Retirement Plan and Non-Qualified Plans with benefit accruals and Company contributions for the benefit of Executive under all such plans, and all other material provisions of such plans, being at least the same as immediately prior to the Effective Date, or Company shall pay to Executive annual cash payments in advance, each at least being equal to the total value of such benefit accruals and Company contributions under such plans for the last fiscal year of the Company ending prior to the Effective Date; (b) At no additional cost to Executive, Company shall continue to provide coverage to Executive, together with his dependents and beneficiaries, in all life insurance plans, accident and health plans, Section 125 plans, and other welfare plans maintained or sponsored by the Company, at a level and subject to terms which are at least as favorable to Executive as the coverage provided immediately prior to the Effective Date, or the Company shall pay to Executive the full value thereof in cash annually in advance; (c) Executive will participate fully in additional benefit plans offered by the Company to executives immediately prior to or after the Effective Date; and (d) Executive will receive fringe benefits and job perquisites (which shall not include any benefit referred to elsewhere in this Section 3), including the Executive Perquisite Program, automobile in accordance with the Company's Fleet Policy for Vice Presidents and Corporate Officers as in effect as of the date hereof, paid vacation, club memberships, applicable class travel, tax and financial statement preparation assistance, paid financial assistance, executive physical examinations, office, office furnishings and equipment and support staff, at least equivalent to those provided to Executive immediately prior to the Effective Date, as well as reimbursement, upon proper accounting, of reasonable expenses and disbursements incurred by Executive in the course of his duties. 3.3. Funding of Deferred Compensation Benefits. Contemporaneous with the Change in Control, all benefits accrued by Executive under the terms of any of the Company's Non-Qualified Plans shall become fully vested and the Company shall immediately contribute to a rabbi trust for the benefit of the Executive the full amount of all such accrued benefits. Not less frequently than quarterly, the Company shall make additional contributions to the rabbi trust equal to the full amount of any additional benefits accrued by Executive pursuant to Section 3.2(a) hereof. 3.4. Acceleration of Vesting of Options. The Company hereby agrees that on or prior to the date of a Change in Control any and all options awarded to the Executive not previously exercisable and vested shall become fully vested and exercisable. In addition, in the event the Company decides to terminate any Options previously awarded to the Executive pursuant to the applicable provisions of any stock option plan adopted by the Company in connection with a corporate transaction (as that term is described in Section 424(a) of the Code), the Company will give the Executive not less than fourteen days' notice prior to any such termination and such notice shall not be given until any and all Options previously awarded to Executive shall have become fully vested and exercisable. Section 4. Termination of Employment 4.1. Compensation Prior To Termination. During the year in which either (i) the Executive's employment is terminated during the Term of Employment for any reason, or (ii) the Executive resigns during the Term of Employment in accordance with Section 4.3(b) below, notwithstanding any other provision of this Agreement, the Company and the Executive hereby agree that the Executive shall have the right to receive base salary, annual bonuses, contributions to Retirement Plans and Non-Qualified Plans, gross-up payments made to cover tax liabilities (to the extent provided in such plans), and all other compensation, benefits and payments earned or paid with respect to the period prior to the date of termination of employment, all such payments or contributions to be made at the times provided for in such plans or in accordance with Company policy as in effect immediately prior to the Effective Date, except as expressly provided below. For purposes of this Section 4.1, the amount of the annual bonuses earned and the amount of the contributions to the Retirement Plans and Non-Qualified Plans earned (i) shall be at least equal to the amounts paid to, or contributed on behalf of, the Executive for the year immediately preceding the year in which the termination of the Executive's employment occurs which amounts shall be prorated based on the number of days in the year in which the termination of the Executive's employment occurs which have passed prior to the date of the termination of the Executive's employment, and (ii) shall be paid or contributed on behalf of the Executive not later than 10 days after the date of termination of employment. Nothing in this Section 4.1 shall in any way alter the Executive's right to receive all the payments and rights and benefits described in Sections 4.2 and 4.3(a). 4.2. (a) Termination other than for Cause. In the event Executive's employment is terminated by the Company during the Term of Employment for any reason other than Cause, the Company will pay Executive, as liquidated damages, a lump sum cash payment, payable within ten (10) days of his termination, equal to two and ninety-nine hundredths (2.99) times the sum of (i) Executive's current annual base salary in effect at the date of termination (including in base salary for this purpose any elective salary reductions made by the Executive and contributed by the Company on his behalf to the Company's Retirement Plan, any Non-Qualified Plan, or a plan meeting the requirements of Section 125 of the Code), plus (ii) the total cash bonus received by the Executive from the Company during the most recent full fiscal year of the Company pursuant to the Company's annual bonus plan(s), plus (iii) the maximum amount allowable under the Executive Perquisite Program during the most recent calendar year of the Company. (b) Participation in Benefit Plans. In the event of a termination described in Section 4.2(a) above, Executive, together with his dependents and beneficiaries, will become fully vested in and continue following his termination to participate fully in, at no additional cost to Executive, all life insurance plans, accident and health plans and other welfare plans, maintained or sponsored by the Company immediately prior to the termination, at the same level and subject to terms at least as favorable to Executive as in effect immediately prior to termination (or the full value thereof in cash) from the Company, until the earlier of (a) the Executive's eligibility for comparable benefit plans with another employer and (b) the third anniversary of termination. Executive will also become fully vested in the Retirement Plan, and all Non-Qualified Plans, and within thirty (30) days of Executive's termination of employment, Company shall pay to Executive the sum of (i) all benefits accrued under the Non-Qualified Plans and (ii) an amount equal to 2.99 times the average benefit accrued and/or Company contributions made to the Retirement Plan and the Non-Qualified Plans over the last three fiscal years. In addition, the Company shall provide Executive with out-placement service through a bona fide out-placement organization acceptable to Executive that, at a minimum, agrees to supply Executive with out-placement counseling, a private office and administrative support including telephone service until such time that Executive secures suitable employment, not to be limited by Section 1.13 hereof. 4.3. Resignation By Executive - Constructive Termination. (a) If Executive resigns during the Term of Employment in accordance with Section 4.3(b) below, his employment will be deemed to have been terminated by the Company for reasons other than Cause (and he will be deemed to have offered to continue to provide services to the Company), and, notwithstanding any provision herein to the contrary, he will be entitled to all the payments and rights and benefits described in Sections 4.1 and 4.2, at the time provided for therein. (b) Executive may resign in accordance with this Section 4.3 upon the occurrence of any of the following events (in each case, "Good Reason"): (i) any reduction of, or failure to pay, Executive's base annual salary or annual bonus in breach of Section 3.1 above; (ii) any failure by the Company to provide the benefits required by Section 3.2 above or to make any contribution to a rabbi trust which might be due in accordance with Section 3.3 above; (iii) assignment to Executive of any duties inconsistent in any respect with his position (including the office to which he reports, status, offices, and titles), authority, duties or responsibilities as contemplated by Section 2.1 above or any other action by the Company which results in a diminution of such position, authority, duties or responsibilities; (iv) as a result of the Change in Control and a change in circumstances thereafter significantly affecting Executive's position, including, without limitation, a change in scope of the business or other activities for which he was responsible immediately prior to the Change in Control, he has been rendered substantially unable to carry out, or has been substantially hindered in the performance of, any of the authority, duties or responsibilities contemplated by Section 2.1 above; (v) the failure of the Company after a Change in Control to comply with and satisfy Section 7.1 or 7.2 below; (vi) relocation by the Company of its principal executive offices, or any event that causes Executive to have his principal location of work changed, to any location outside the Area; (vii) any requirement by the Company that Executive travel away from his office in the course of his duties significantly more than the number of consecutive days or aggregate days in any calendar year than was required of him prior to the Change in Control; or (viii) without limiting the generality or effect of the foregoing any material breach of this Agreement by the Company or any successor thereto or transferee of substantially all of the assets thereof. For purposes of this Agreement, any good faith determination of "Good Reason" made by the Executive shall be presumptively correct. (c) If Executive resigns during the Term of Employment in accordance with Section 4.3(b) above, the Company shall have the right to request that the Executive agree to remain as an employee of the Company during a transition period of up to three months (the "Transition Period") and the Executive hereby agrees that, if requested by the Company, he will remain as an employee of the Company during the Transition Period. During the Transition Period, the Company will continue to pay the Executive the Executive's base salary, annual bonus and all other compensation and benefits on the same basis as such items were paid to the Executive prior to his resignation. 4.4. Resignation by Executive. If Executive resigns during the Term of Employment without Good Reason, the Executive shall have the right to receive base salary, annual bonuses, contributions to Retirement Plans and all other compensation and benefits earned during the calendar year of his resignation up to the date of his resignation. For purposes of this Section 4.4, the amount of the annual bonuses and the amount of the contributions to the Retirement Plan shall be at least equal to the amounts paid to, or contributed on behalf of, the Executive for the year immediately preceding the year in which the resignation of the Executive occurs which amounts shall be prorated based on the number of days in the year in which such resignation occurs which have passed prior to the date of such resignation. In addition all vested Non-Qualified Plan benefits shall be paid within thirty (30) days of resignation. 4.5. Termination for Cause. If Executive is dismissed by the Company for Cause, he will not be entitled to the payments or benefits provided under Section 4.2 hereof. 4.6. Dispute Resolution. All disputes between the parties to this Agreement concerning the matters set forth herein shall be resolved exclusively pursuant to the dispute resolution procedures of this Section 4.6. In furtherance thereof, Executive or the Company, as the case may be, shall initiate binding arbitration in Rhode Island before the American Arbitration Association ("AAA") and under its rules by serving a notice to arbitrate upon the other party hereto and AAA within 90 days of the occurrence of any dispute hereunder that is unable to be resolved by negotiation between the parties. The parties shall bear their respective costs in any such dispute resolution, except that with respect to any such action initiated by the Executive, provided the Executive initiates such action in good faith, the Company agrees (i) to pay the costs and expenses (including fees of counsel to the Executive) of any such arbitration or judicial proceeding, and (ii) to pay interest to Executive on any amounts found to be due to Executive hereunder during any period of time that such amounts are withheld pending arbitration and/or judicial proceedings. Such interest will be at the base or prime rate most recently announced by Rhode Island Hospital Trust National Bank (or its successor) prior to the commencement of the arbitration or litigation. The Company and Executive agree that any arbitration award shall be binding and may be enforced by any court of competent jurisdiction. 4.7. Death or Total Disability of the Executive. (a) If Executive dies or suffers a Total Disability during the Term of Employment, then this Agreement shall terminate and the Company, its successors and assigns shall be relieved and discharged of any and all obligations whatsoever to make further payment to Executive pursuant to the terms of this Agreement after the date of death or Total Disability of Executive, except as to base salary earned for services actually rendered and vacation pay accrued prior to the date of death or Total Disability of Executive. (b) If Executive dies or suffers a Total Disability following a termination of employment which entitled him to payments and benefits under this Section 4 but prior to receipt of all such payments and benefits, his beneficiary (as designated to the Company in writing) or, if none, his estate, will be entitled to receive all unpaid amounts and benefits due under this Agreement. 4.8. Enforcement of Rights. Termination of Executive's employment, whether or not giving rise to payments or benefits under this Section 4, will not in any way prevent Executive from enforcing rights to payments or benefits under Section 3 relating to periods during which he was employed. Section 5. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. (b) Subject to the provisions of Section 5(c), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other nationally recognized certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 280G and Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determinative then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. Section 6. Payment of Fees, Costs and Expenses. It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action or arbitration proceeding because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if Executive determines in good faith that the Company has failed to comply with any of its obligations under this Agreement or if the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or arbitration proceeding designed to deny, or to recover from, the Executive the benefits intended to be provided to the Executive under Section 6 hereof, the Company will promptly, upon request of the Executive in the event of the likelihood of a Change in Control or upon a Change in Control, use its best efforts to secure an irrevocable standby letter of credit (the "Letter of Credit"), issued by Rhode Island Hospital Trust National Bank or another bank of comparable or greater size (the "Bank") for the benefit of the Executive providing that the fees and expenses of counsel selected from time to time by the Executive pursuant to this Section 6 or in proceedings contemplated by Section 4.6 shall be paid, or reimbursed to the Executive if paid by the Executive, on a regular, periodic basis upon presentation by the Executive to the Bank of a statement or statements prepared by such counsel in accordance with its customary practices. The Company shall pay all amounts and take all action necessary to maintain the Letter of Credit during the Term of Employment and for one (1) year thereafter and if, notwithstanding the Company's complete discharge of such obligations, such Letter of Credit shall be terminated or not renewed, the Company shall use its best efforts to obtain a replacement irrevocable letter of credit drawn upon a commercial bank selected by the Company and reasonably acceptable to the Executive, upon substantially the same terms and conditions as contained in the Letter of Credit, or any similar arrangement which, in any case, assures the Executive the benefits of this Agreement without incurring any cost or expense for enforcement against the Company or the defense thereof. Section 7. Merger or Acquisition. 7.1. Assumption of Obligations. If the Company is at any time before or after a Change in Control merged, consolidated or reorganized into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets of the Company are transferred to another corporation or other entity, the entity arising from such merger, consolidation or reorganization, or the acquirer of such assets, shall (by agreement in form and substance satisfactory to Executive) expressly assume the obligations of Company under this Agreement. 7.2. Executive's Rights to Benefits. In the event of any merger, consolidation, reorganization or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to or privilege of participation in any stock option or purchase plan or restricted stock plan or any bonus, profit sharing, savings, pension, group insurance, hospitalization or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation, acquiring such assets of the Company. 7.3. References. In the event of any merger, consolidation, reorganization or transfer of assets described above, references to the Company in this Agreement shall, unless the context suggests otherwise, be deemed to include the entity resulting from such merger or consolidation or the acquirer of such assets of the Company. Section 8. Change in Control Following Certain Circumstances. Notwithstanding any provision herein to the contrary, should a Change in Control occur subsequent to Executive's death, Total Disability or retirement from the Company, the remainder of any benefits owed under the terms of any stock plans or other non-qualified deferred compensation plan, including interest, shall be paid in full on the date of the Change in Control. Section 9. Termination of this Agreement. Either the Company or Executive may, by giving 60 days written notice to the other party, terminate this Agreement as of the third or any subsequent annual anniversary of the occurrence of a Change in Control. Section 10. Withholding of Taxes. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries or estate will be subject to the withholding on such amounts relating to tax and/or other payroll deductions as may be required by law. Section 11. Amendment. No amendment, change or modification of this Agreement may be made except in a writing, signed by or on behalf of both parties. Section 12. Miscellaneous. 12.1. Binding Effect. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors and assigns. 12.2. Governing Law. The validity, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island. 12.3. Severability. The invalidity or enforceability of any provision of this Agreement shall not affect the validity of any other provision. 12.4. No Set-Off. There shall be no right of setoff or counterclaim, in respect of any claim, debt or obligation, against any payments to Executive, his dependents, beneficiaries or estate provided for in this Agreement, and nothing in this Agreement shall relieve the Company of its obligations to Executive under any other agreement, plan, contract or arrangement. Subject to Section 12.6 hereof, no right, benefit or interest hereunder shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void and of no effect. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as otherwise provided in Section 4.2(b) hereof, such amounts shall not be reduced whether or not the Executive obtains other employment. Notwithstanding anything to the contrary in this Agreement, Executive shall forfeit all future payments and benefits hereunder in the event that Executive is determined, pursuant to procedures established in Section 4.6 hereof, to have materially breached any written covenant or agreement between the Executive and the Company prohibiting the disclosure of confidential information pertaining to the Company or respecting competition or interference with the Company, provided that the Company shall have given the Executive at least thirty (30) days prior written notice of such breach and such breach shall not have been cured by the end of such notice period. 12.5. Remedies. The Company and Executive agree that, because of the unique nature of this Agreement, failure of either party to carry out or abide by the obligations under this Agreement could cause irreparable injury; accordingly, the parties agree that, in addition to any other remedies available to either party, any such failure by either party to perform or abide by this Agreement shall be subject to appropriate equitable remedies, including specific performance and injunctive relief. 12.6. Assignability. No right or interest to or in any payments shall be assignable by the Executive; provided, however, that this provision shall not preclude him from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of the Executive's estate. 12.7. Counterparts; Headings; References. This Change in Control Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The headings of the sections of this Agreement are inserted for convenience only and shall not constitute a part hereof. References to the masculine or feminine gender (or to the singular or plural number) herein shall mean the other such gender (or number), as appropriate. 12.8. Entire Agreement. This instrument contains the entire agreement of the parties pertaining to the subject matter contained herein and supersedes and is in lieu of any and all other arrangements pertaining to the subject matter contained herein having effect as of the effective date. 12.9. Notices. All notices given hereunder shall be in writing and shall be delivered personally or sent by prepaid registered or certified mail, return receipt requested, addressed as follows or to such other address as may be provided by any party hereto to the other party: If to the Company: GTECH Holdings Corporation 55 Technology Way West Greenwich, RI 02817 Attention: If to the Executive: Thomas J. Sauser 5 Cedar Rock Meadows East Greenwich, RI 02818 All notices shall be deemed to be given on the date received at the address of the addressee, or if delivered personally, on the date delivered. IN WITNESS WHEREOF, the Company and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. ATTEST: GTECH HOLDINGS CORPORATION /s/ Kathleen J. Carson By:/s/ Stephen A. Davidson Title: Senior Vice President WITNESS: /s/ Alicia E. Rodzen /s/ Thomas J. Sauser Thomas J. Sauser EX-11 6 THREE AND SIX MONTHS ENDED 8-30-97 AND 8-24-96 EXHIBIT 11--COMPUTATIONS OF EARNINGS PER SHARE GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Three Months Ended Six Months Ended --------------------- --------------------- August 30, August 24, August 30, August 24, 1997 1996 1997 1996 --------- --------- --------- --------- (In thousands, except per share amounts) Primary: (1) Net income ....................................... $ 20,225 $ 17,501 $ 39,545 $ 35,704 ========= ========= ========= ========= Weighted average common shares outstanding ....... 42,046 43,087 42,065 43,087 Net effect of dilutive stock options--based on the treasury stock method using the average market price for the period ............................ 667 270 642 300 --------- --------- --------- --------- Totals ........................................... 42,713 43,357 42,707 43,387 ========= ========= ========= ========= Earnings per common share ........................ $ .47 $ .40 $ .93 $ .82 ========= ========= ========= ========= Fully diluted: (1) Net income ....................................... $ 20,225 $ 17,501 $ 39,545 $ 35,704 ========= ========= ========= ========= Weighted average common shares outstanding ....... 42,046 43,087 42,065 43,087 Net effect of dilutive stock options--based on the treasury stock method using the quarter-end market price which is higher than the average market price .................................... 667 270 642 300 --------- --------- --------- --------- Totals ........................................... 42,713 43,357 42,707 43,387 ========= ========= ========= ========= Earnings per common share ........................ $ .47 $ .40 $ .93 $ .82 ========= ========= ========= ========= (1) The primary and fully diluted earnings per share were not presented on the face of the Consolidated Income Statements because the resulting amounts were not materially dilutive.
EX-27 7 8/30/97 FINANCIALS
5 1,000 6-mos Feb-28-1998 Feb-23-1997 Aug-30-1997 11,943 0 99,124 0 43,912 191,629 1,305,490 682,379 1,041,567 158,407 459,889 0 0 439 380,945 1,041,567 36,912 471,981 20,497 320,760 0 0 14,592 64,828 25,283 39,545 0 0 0 39,545 .94 .94
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