-----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, S3KLe9bq5i2jMZe6/fuG9P/kxsrXx6auhLIvwK0JWLN3a3cP67woLh/itAQIXGui tZooeA7xO3gniHwXXYkIGQ== 0000950123-00-004470.txt : 20000505 0000950123-00-004470.hdr.sgml : 20000505 ACCESSION NUMBER: 0000950123-00-004470 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20000226 FILED AS OF DATE: 20000504 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-K SEC ACT: SEC FILE NUMBER: 001-11250 FILM NUMBER: 619436 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-K 1 GTECH HOLDINGS CORPORATION 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: February 26, 2000 Commission File No: 1-11250 GTECH HOLDINGS CORPORATION Delaware 05-0450121 (State or other jurisdiction (IRS Employer ID Number) of incorporation or organization) 55 Technology Way, West Greenwich, Rhode Island 02817 (401) 392-1000 (Address and telephone number of Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class: Common Stock $.01 par value Name of Each Exchange on which Registered: New York Stock Exchange 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 twelve 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. [X] Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the registrant's Common Stock (its only voting stock) held by non-affiliates of the registrant as of April 26, 2000 was $694,240,000 (Reference is made to Page 35 herein for a statement of the assumptions upon which this calculation is based.) On April 25, 2000, there were outstanding 34,814,976 shares of the registrant's Common Stock. Documents Incorporated By Reference: Certain portions of the registrant's 2000 definitive proxy statement relating to its scheduled August 2000 Annual Meeting of Shareholders (which proxy statement is expected to be filed with the Commission not later than 120 days after the end of the registrant's last fiscal year) are incorporated by reference into Part III of this report. 2 PART I ITEM 1. BUSINESS GENERAL GTECH Corporation ("GTECH") is the world's leading operator of computerized online lottery systems and the wholly owned subsidiary of GTECH Holdings Corporation ("Holdings"; collectively with its direct and indirect subsidiaries, including GTECH, the "Company"). The Company currently operates, or supplies equipment to, online lottery systems for 28 of the 38 online lottery authorities in the United States and has supplied, currently operates or has entered into contracts to operate in the future online lottery systems for 54 of the 94 international online lottery authorities. The Company, seeking to develop growth opportunities outside of the online lottery industry, is actively involved in the pursuit of other gaming and entertainment opportunities, such as venue-based gaming, video lottery and internet wagering. The Company also is considering expanding into other complimentary areas of business, especially those involving transaction processing. Since the establishment of the first online lottery in 1975, the online lottery industry has experienced substantial growth, as governments have increasingly relied on lotteries as a non-tax source of revenue. After a number of years of growth, the Company has witnessed over the past three years a downward trend in the sales generated by its United States lottery customers. During fiscal 2000 (which ended February 26, 2000), lottery sales by the Company's domestic customers declined approximately 4% from fiscal 1999 levels, contributing to a decline in the Company's domestic service revenues of 6.3%. Notwithstanding this, sales by the Company's international lottery customers increased approximately 14.6% in fiscal 2000 over fiscal 1999. See "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" below. The Company's core business consists of providing online lottery services and products to governmental lottery authorities and governmental licensees worldwide. The Company offers its customers a full range of lottery services, including the design, assembly, installation, operation, maintenance and marketing of online lottery systems and instant ticket support systems and services. The Company's lottery systems consist of numerous lottery terminals located in retail outlets, central computer systems, systems software and game software, and communications equipment which connects the terminals and the central computer systems. Historically, the majority of the Company's lottery customers in the United States have entered into long-term service contracts pursuant to which the Company provides, operates and maintains the customers' online lottery systems in return for a percentage of the gross lottery revenues. Many of the Company's international lottery customers have purchased their online lottery systems, although some, especially lottery authorities in Eastern Europe and Latin America, have entered into long-term service contracts with the Company. In recent years there has been, in general, an industry movement away from product sales in favor of long-term service contracts. In fiscal 1993, approximately 70% of the Company's lottery revenues were derived from its portfolio of long-term online lottery service contracts with substantially all of the remainder being derived from lottery product sales. In fiscal 2000, approximately 86% of 3 the Company's lottery revenues were derived from online lottery service contracts. Notwithstanding this general industry trend, anticipated product sales increased from $85.5 million in fiscal 1999 to $150.4 million in fiscal 2000, and the Company currently anticipates that product sales revenues for fiscal 2001 will exceed fiscal 2000 levels. In recent years, lottery authorities have recognized that by offering new games or products, they often are able to generate significant additional revenues. An important part of the Company's strategy is to develop new products and services for its customers in order to increase their lottery revenues. The Company's principal online products and services introduced in recent years consist of keno, instant ticket support systems and services and televised lottery programs such as BingoVision(TM). Keno, an online lottery game which features drawings as often as every five minutes, was first introduced by the Company and the Lotteries Commission of South Australia in 1990 and subsequently has been introduced successfully by the Company and lottery authorities in 20 additional jurisdictions on four continents. The Company currently provides instant ticket support services, products and systems in 24 domestic jurisdictions and 16 jurisdictions outside of the United States. In recent years, the Company has offered customers television lottery games. BingoVision(TM), the Company's best known television game, is a televised bingo-based lottery game which is played in nine jurisdictions. See "Certain Products and Services" below. During fiscal 1999, the Company announced that it had established a business unit, UWin!(TM), to provide Internet-based interactive games to international providers of government-sponsored lottery products and services. During fiscal 2000, the Company's UWin!(TM) subsidiary entered into contracts with two international lottery authorities for the provision of Internet-based wagering services. See "Certain Significant Developments Since the Start of Fiscal 2000" and "Certain Products and Services" below. In recent years, the Company also has broadened its product lines outside of its core business of providing online lottery services and products. In September 1995, the Company incorporated its Dreamport, Inc. ("Dreamport") subsidiary, to pursue gaming opportunities other than online lottery, including video lottery and venue-based gaming. Dreamport now provides a comprehensive array of creative management and technology solutions and development and strategic services to the gaming and entertainment markets, as well as video lottery systems and other gaming technology. Dreamport, through a joint venture with Full House Resorts, Inc., provides financing, gaming development and management services to the Midway Slots and Simulcast emporium at Harrington Raceway in Delaware, and currently independently provides machine gaming video lottery products and services to nine jurisdictions worldwide. During fiscal 2000, Dreamport, in equal partnership with Harrah's Entertainment, Inc. and Keeneland Association, completed the purchase of the assets of Turfway Park, a thoroughbred racecourse in Florence, Kentucky. See "Certain Significant Developments Since the Start of Fiscal 2000" below. GTECH was founded in 1980. Holdings acquired GTECH in a leveraged buy-out in February 1990, in which members of then-senior management of GTECH participated. 2 4 The Company's principal executive offices are located at 55 Technology Way, West Greenwich, Rhode Island 02817, and its telephone number is (401) 392-1000. CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE The future performance of the Company's business is subject to the factors set forth below, as well as the other considerations described elsewhere herein. Certain statements contained 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 engaged in or expects to be engaged in, (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, (iv) the existence or effects of possible latent Y2K, and (v) 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 that 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 below and elsewhere in this report and in the Company's press releases and its Forms 10-K, 10-Q, 8-K and other reports and filings with the Securities and Exchange Commission (the "SEC"). GOVERNMENTAL REGULATION In the United States, lotteries are not permitted in a particular jurisdiction unless expressly authorized by law in such jurisdiction. Once authorized, the ongoing operation of a lottery is highly regulated. Lottery authorities, which generally conduct an intensive investigation of the Company and its employees prior to and after the award of a lottery contract, may require the removal of any Company employees deemed to be unsuitable and are generally empowered to disqualify the Company from receiving a lottery contract or operating a lottery system as a result of any such investigation. Certain jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically 5% or more) of the Company's securities. The failure of such beneficial owners to submit to such background checks and provide such disclosure could jeopardize the award of a lottery contract to the Company or provide grounds for termination of an existing lottery contract. The international jurisdictions in which the Company markets its lottery systems also usually have legislation and regulations governing lottery operations. The regulation of lotteries in these international jurisdictions typically varies from the regulation of lotteries in the United States. In addition, restrictions are often imposed on foreign corporations seeking to do business in such jurisdictions. As a result, the Company has found it desirable in a number of instances to ally 3 5 itself as a subcontractor or joint venture partner with one or more local companies in seeking international lottery contracts. MAINTENANCE OF BUSINESS RELATIONSHIPS AND CERTAIN LEGAL MATTERS A significant portion of the Company's revenues and cash flow is derived from its portfolio of long-term online lottery service contracts. The Company's online lottery service contracts typically have an initial term of five years and usually provide the customer with options to extend the contract under the same terms and conditions for additional periods generally ranging from one to five years. The Company's customers have generally exercised some or all of the extension options under their contracts or negotiated extensions on different terms and conditions. Upon the expiration of a contract, lottery authorities may award new contracts through a competitive procurement process. There can be no assurance that, in the future, the Company's contracts will be extended or that it will be awarded new contracts as a result of competitive procurement processes. The Company's lottery contracts typically permit a lottery authority to terminate the contract at any time for failure to perform and other specified reasons, and many of such contracts permit the lottery authority to terminate the contract at will and do not specify the compensation, if any, to which the Company would be entitled were such termination to occur. The termination of or failure to renew one or more lottery contracts could, depending upon the circumstances, have a material adverse effect on the Company's business, financial condition and results and prospects. The Company regularly engages public affairs and governmental relations advisors, including lobbyists, in various jurisdictions to advise legislators, other governmental officials and the public in connection with lottery legislation, to monitor potential lottery legislation and to advise the Company in connection with the Company's lottery proposals. The Company also makes contributions to various political parties and associations but does not make contributions to individual candidates or their campaigns. As previously reported, J. David Smith, a former sales manager of the Company, was convicted in the New Jersey U.S. District Court in October of 1996 of receiving kickbacks for his personal benefit from consultants to the Company. In October 1998, Mr. Smith was sentenced to a prison term which he is currently serving, and he was fined and ordered to pay restitution to the Company. The charges brought against Mr. Smith did not allege any wrongdoing on the part of the Company. In November 1998, the New Jersey U.S. Attorney's Office, which had brought the charges against Mr. Smith, advised the Company that the Company was not then the subject or target of any ongoing grand jury investigation by that office. In a related matter the previously reported civil damages suit brought by Joseph LaPorta (one of the consultants who was indicted along with J. David Smith but was found not guilty) against GTECH and one of its former Co-Chairmen was dismissed by the court by summary judgement in September 1999. (Reference is made to Item 1, "Certain Factors Affecting Future Performance-Maintenance of Business Relationships and Certain Legal Matters" of the Company's fiscal 1999 10-K). 4 6 In 1995, the Texas U.S. Attorney's Office also issued grand jury document subpoenas to the Company, with which the Company has complied, and the Company has not received any further subpoenas or requests for information since that time. In February 1999, a witness appearing before the Moriarty Tribunal, an investigative body convened by the Irish Parliament and chaired by Mr. Justice Moriarty to investigate the business affairs generally of former Taoiseach (Prime Minister) of Ireland, Charles Haughey, testified that in February 1993 Guy B. Snowden, then Chief Executive Officer of the Company, had invested pounds sterling 67,000 (approximately $100,000) of his personal funds in a company owned by Mr. Haughey's son. Mr. Haughey had resigned as Taoiseach in February 1992. In July 1992, the An Post Irish National Lottery Company, the Irish lottery authority (the "NLC"), issued a Request for Proposals respecting online and instant ticket lottery goods and services, and in September 1992 the Company, which was the then the incumbent provider of lottery goods and services to the NLC under an agreement awarded to the Company in 1987, submitted a Proposal to the NLC in response to the NLC's Request for Proposals. In November 1992, the NLC selected the Company to provide online and instant ticket goods and services to the NLC under the terms of the competitive procurement and, following negotiations, a definitive agreement was entered into between the NLC and the Company in March 1993. The Tribunal has requested that the Company provide various documents regarding the Company's business in Ireland. The Company is cooperating with the Tribunal. In addition, the Company has made its own inquiry into the facts surrounding Mr. Snowden's investment and the extent, if any, of the Company's involvement in or knowledge of that investment. The Company's investigation has determined that no Company funds were used to make Mr. Snowden's investment, and there is no information to suggest that Mr. Snowden ever sought reimbursement for the investment from the Company. Further, there is no information to suggest that Mr. Snowden informed anyone else at the Company of his investment at the time or that his investment was related in any way to the renewal of the Company's contract to supply systems and support to the NLC. Mr. Snowden has advised the Company through his counsel that (i) his investment was a strictly personal one, (ii) the investment was made from his personal funds, (iii) he never sought reimbursement for any portion of his investment from the Company or any other entity, and (iv) his investment was not related to the NLC and was not intended to and did not influence the NLC's decision to renew the Company's contract. No charges of wrongdoing have ever been brought against the Company by any grand jury or other governmental authority. The Company does not believe that it has engaged in any wrongdoing in connection with these matters. However, since investigations are or may still be underway and, investigations of this type customarily are conducted in whole or in part in secret, the Company lacks sufficient information to determine with certainty their existence or 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. 5 7 Because the Company's reputation for integrity is an important factor in its business dealings with lottery and other governmental 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 also Item 3 - "Legal Proceedings" below. FLUCTUATION OF QUARTERLY OPERATING RESULTS The Company has experienced and may continue to experience significant fluctuations in operating results from quarter to quarter due to such factors as the amount and timing of product sales, the occurrence of large jackpots in lotteries (which increase the amount wagered and the Company's revenue) and expenses incurred in connection with lottery start-ups and other new ventures. LIQUIDATED DAMAGES UNDER CONTRACTS The Company's lottery contracts typically permit termination of the contract at any time for failure of the Company to perform and for other specified reasons and generally contain demanding implementation schedules and performance schedules. Failure to perform under such contracts may result in substantial monetary liquidated damages, as well as contract termination. Many of the Company's lottery contracts also permit the lottery authority to terminate the contract at will and do not specify the compensation, if any, to which the Company would be entitled should such termination occur. Certain of the Company's United States lottery contracts have contained provisions for up to $700,000 a day in liquidated damages for late system start-up and provide for up to $10,000 or more in penalties per minute for system downtime in excess of a stipulated grace period, and certain of the Company's international customers (most notably the United Kingdom's National Lottery) similarly reserve the right to assess substantial monetary damages in the event of contract termination or breach. Although such liquidated damages provisions are customary in the lottery industry and the actual liquidated damages imposed are generally subject to negotiation, such provisions in the Company's lottery contracts present an ongoing potential for substantial expense. Liquidated damages are generally deducted directly from revenues the Company has otherwise earned from the lottery authorities and are budgeted by the Company on an annual basis. Lottery contracts generally require the vendor (i.e., the Company) to post a performance bond, which in some cases may be substantial, securing the vendor's performance under such contracts. 6 8 Liquidated damages paid or incurred by the Company with respect to its contracts equaled 0.23%, 0.25%, 0.21%, 0.35% and .56% of annual revenues in each of the five fiscal years ending February 1996 through 2000, respectively. GAMING OPPOSITION While the Company believes that legalized gaming, especially lottery, generally enjoys widespread public support, gaming opponents have continued to persist in efforts to curtail the expansion of legalized gaming. For example, the National Gaming Impact Study Commission, a commission created by the U.S. Congress in 1997 to study the economic and social effects of legalized gambling, narrowly voted during fiscal 1999 to endorse a non-binding recommendation for a moratorium on the spread of casinos, lotteries and slot machines in the United States. In addition, during fiscal 2000, the voters of Alabama defeated a referendum to authorize the introduction of state lottery in Alabama. Moreover, on-line lottery sales in a number of U.S. jurisdictions have leveled off or have declined in recent years, a phenomenon which may reflect, in part, opposition to gaming. STRENGTHENING OF COMPETITION The online lottery industry is increasingly competitive in the United States and internationally, which increased competition could adversely affect the Company's ability to win renewals of contracts from its existing customers and to win contract awards from other lottery authorities. Such increased competition may affect the profitability of contracts which the Company does obtain. Through fiscal 2001 (which ends in February 2001), a number of the Company's larger contracts are expected to come up for renewal, including its contracts with the lottery authorities of Brazil (National Lottery) and the United Kingdom. See "Facilities Management Contracts" and "Competition" below. See also Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" below. ATTRACTING AND RETAINING EMPLOYEES As is the case with all technology companies, the Company's business prospects and future success depend upon its ability to attract and to retain qualified managerial, marketing and technical employees. Competition for such employees is sometimes intense, especially during times of general economic prosperity. If the Company is unable to continue to attract and retain the technical and managerial personnel it requires, its business, financial condition and operating results could be adversely affected. FOREIGN CURRENCY EXCHANGE RATES Foreign exchange exposures arise from current transactions and anticipated transactions denominated in a currency other than an entity's functional currency and from the translation of foreign currency balance sheet accounts into U.S. dollar balance sheet accounts. The Company employs a variety of strategies in its effort to manage its 7 9 substantial foreign currency exchange exposure. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" below. CERTAIN SIGNIFICANT DEVELOPMENTS SINCE THE START OF FISCAL 2000 LOTTERY CONTRACT AWARDS AND RELATED SIGNIFICANT DEVELOPMENTS Since the start of fiscal 2000 (which ended on February 26, 2000), the Company has received a number of service contract awards and extensions from lottery authorities. NEW ONLINE CUSTOMERS. During fiscal 2000, the Company received awards to install online lottery systems from six new online customers. In July 1999, the Company announced that Uthingo Management (Proprietary) Limited, a consortium in which GTECH is a 10 percent equity investor, was chosen to supply an online lottery system to the South African National Lottery following a competitive procurement. Under the terms of arrangements entered into between the Company and Uthingo, GTECH will provide the hardware and software needed to operate the lottery system, as well as provide support and training to the consortium. In August 1999, the Company announced that it had signed contracts with two new customers in Morocco, La Societe de Gestion de la Loterie Nationale and La Marocaine des Jeux et des Sports, to provide products and services for the online operation of lottery and sports betting games in Morocco. The facilities management agreement entered into with these Moroccan lottery authorities provides for GTECH to convert the lottery authorities' two off-line systems to a new, secure online lottery network including central system hardware and software and up to 2,000 GTECH Tiffany(TM) and Spectra(R) terminals, together with a variety of services, including instant tickets, telecommunications services, hardware and software installation and maintenance and training and marketing support. Also in August 1999, the Company announced that it had signed a product sales and services contract with Teseo S.r.l., a subsidiary of SNAI S.p.A., the largest sports betting supplier in Italy, pursuant to which GTECH will sell 2,000 Altura(TM) terminals and spare parts to Teseo S.r.l. In November 1999, the Company announced that it had been awarded a contract to provide new online lottery central system hardware and ProSys(R) software to La Francaise des Jeux, the operator of the French National Lottery. In December 1999, the Company announced that it had signed a facilities management contract with Empresa Colombiana de Recursos para la Salud, S.A. ("ECOSALUD"), the Colombian Lottery authority, to provide online lottery goods and services including central system hardware and software, up to 5,000 ISYS(TM) terminals and telecommunications services, for a National Lottery in Colombia. Under the terms of the Company's contract with ECOSALUD, GTECH is also to provide a variety of services including comprehensive marketing services. Online lottery sales commenced under the South African and Moroccan contracts in March and April 2000, respectively, and are scheduled to commence under the Colombian contract in July 2000. In April 2000 (after the close of fiscal 2000), the Company announced that it had been selected by the Portuguese lottery authority Santa Casa da Misericordia de Lisboa, following a competitive procurement, to replace the lottery authority's existing off-line systems with a full turn-key online lottery system, including central system hardware and software. OTHER NEW ONLINE CONTRACTS AND EXTENSIONS. Since the start of fiscal 2000, the Company also has been awarded online service contracts by, or has received contract extensions from, a number of its existing customers. In March 1999, the Company announced that it had signed a new contract to provide online lottery products and services for Loteria Electronica de Puerto Rico. In July 1999, Lottery 8 10 Technology Enterprises, a joint venture among GTECH and two local enterprises, signed a new online contract with the DC Lottery and Charitable Control Board, the DC Lottery authority. This contract, which followed a competitive procurement, is for a 10-year term. In December 1999, the Company announced that following a competitive procurement it had been selected by the New York lottery authority to supply, operate and maintain a new comprehensive online and instant ticket lottery system for New York. In December 1999, the Company also announced that it had been selected by the Illinois lottery authority to negotiate a five-year contract to supply a new, fully integrated online and instant ticket accounting system including new central system hardware and software. In December 1999, the Company entered into an agreement to provide online lottery hardware and software on an exclusive basis to Boldt SA, the operator of the Provincial Lottery of Buenos Aires, through October 2009. In addition, in March 2000, after the close of fiscal year 2000, the Company entered into a new contract to sell online lottery equipment, and to provide software and services to the Western Australia Lotteries Commission. Under the terms of this agreement, GTECH will replace the lottery authority's existing central system hardware, software and network communications equipment and will provide training, installations and software support services. Since the start of fiscal 2000, the lottery authorities of Argentina, Ireland, New York, Ohio, Trinidad and Tobago and Washington have extended the terms of their online contracts with the Company. The Company has also reported that during fiscal 2000 following competitive procurements, the lottery authorities of New Hampshire, Maine, Vermont and West Virginia, all of which are currently online customers of the Company, awarded contracts to provide equipment and services for new online lottery systems to competitors of the Company. In December 1999, the Company also reported that, following a competitive procurement, the New York lottery authority had selected another vendor to provide instant ticket and telemarketing services through February 2002. Previously, the Company had provided instant ticket services to the New York lottery authority under an agreement that terminated in January 2000. As noted above, however, the New York lottery authority subsequently awarded a new comprehensive online and (commencing in March 2002) instant ticket services contract to the Company. DREAMPORT AND NON-LOTTERY GAMING Since the start of fiscal 2000, there have been several significant developments respecting the Company's non-lottery gaming and entertainment business. In March 1999, Turfway Park LLC, a company the membership interests of which are owned equally by Keeneland Association, Inc., Dreamport and a wholly-owned subsidiary of Harrah's Entertainment, closed on its $37 million acquisition of Turfway Park, a traditional racetrack located in Florence, Kentucky (in the Cincinnati, Ohio market) featuring thoroughbred racing and simulcast wagering and related assets which acquisition Dreamport had announced in fiscal 1999. In April 1999, Dreamport entered into a five-year exclusive original equipment manufacturing agreement with the Bally Gaming and Systems business unit of Alliance Gaming Corporation pursuant to which Bally Gaming will 9 11 manufacture gaming devices (including its GameMaker(TM) and GameMagic(TM) product lines), for video lottery markets exclusively for Dreamport. In December 1999, GTECH entered into a contract on behalf of Dreamport with Entitat Antonoma de Jocs Apostes ("EAJA"), the parent organization of Loto Catalunya, the Catalan lottery authority, to operate its SuperTOC bingo game. The SuperTOC game is a wide area bingo game that creates jackpots by linking together 70 bingo halls in Catalunya, Spain. See "Certain Products and Services-Non-Lottery Gaming Products and Services", below. UWIN! In May 1999, UWin! Corporation, the Company's Internet lottery subsidiary, entered into an agreement to provide UWin!'s proprietary Internet lottery gaming system to AnPost National Lottery Company for the Irish National Lottery. In November 1999, the Company announced that UWin! had entered into a five-year agreement with Dansk Tipstjeneste A/S, the operator of the National Lottery of Denmark, to provide UWin!'s proprietary Internet lottery gaming system and project management to Dansk Tipstjeneste. The Company currently anticipates that sales will begin on the Ireland and Denmark UWin! systems in, respectively, the second and third quarters of fiscal 2001. See "Certain Products and Services -- UWin!", below. OTHER NEW PRODUCTS AND SERVICES Since the start of fiscal 2000, the Company has made several announcements respecting other new products and services in addition to the Company's UWin! Internet products described immediately above. In July 1999, the Company announced that it had entered into a five-year agreement to provide, as subcontractor to OAO Corporation (a provider of aerospace and information technology services), network services to the District of Columbia lottery authority. Under this agreement, which is the Company's first stand-alone network communications contract, GTECH has installed and will maintain a secure, wireless communications network using the Company's private radio network technologies so as to permit real-time, two-way communications between the DC lottery authority's lottery terminals and its central system. In connection with implementation of the South Africa National Lottery, the Company acquired a minority interest in Wireless Business Solutions (Proprietary) Limited, a South African company and holder of a license to provide certain radio-based telecommunications services in South Africa. During fiscal 2000, the Company continued its efforts to broaden its offerings of high-volume transaction processing services outside its core business of providing online lottery products and services and its electronic benefits delivery business which it carries on through its subsidiary, Transactive Corporation. For example, recently, during fiscal 2000, the Company began offering Brazilian consumers the opportunity to pay their cellular phone bills and taxes via its national network in Brazil. MANAGEMENT DEVELOPMENTS Since the start of fiscal 2000, there have been several significant managerial developments. In March 1999, the Company named David J. Calabro as Senior Vice President with responsibility for the Company's worldwide facilities management business. In October 1999, the Company promoted William M. Pieri to Vice President and Treasurer and, in January 2000, the Company promoted Jaymin B. Patel to the position of Senior Vice President and Chief Financial Officer. The promotions of Messrs. Patel and Pieri filled the vacancies created by the October 1999 resignation 10 12 of Thomas J. Sauser, who had served as GTECH's Senior Vice President, Chief Financial Officer and Treasurer since February 1996. Finally, in March 2000 (after the close of fiscal 2000), the Company appointed Steven P. Nowick to the position of President of the Company. Mr. Nowick continues in his role as the Company's Chief Operating Officer. LOTTERY INDUSTRY Statements relating to the lottery industry contained in this report are based on information compiled by the Company, or derived from independent public sources which the Company believes to be reliable. No assurance can be given, however, regarding the accuracy of such statements. In general, there is less publicly-available information concerning the international lottery industry than the lottery industry in the United States. Lotteries are operated by state and foreign governmental authorities and their licensees in approximately 195 jurisdictions worldwide. Governments have authorized lotteries primarily as a means of generating non-tax revenues. In the United States, lottery revenues are frequently designated for particular purposes, such as education, economic development, conservation, transportation and aid to the elderly. Many states have become increasingly dependent on their lotteries as revenues from lottery ticket sales are often a significant source of funding for these programs. Although there are many types of lotteries in the world, it is possible to categorize government authorized lotteries into two principal groups: online lotteries and off-line lotteries. An online lottery is conducted through a computerized lottery system in which lottery terminals are connected to a central computer system, typically by dedicated telephone lines. An online lottery system is generally utilized for conducting games such as lotto, sports pools, keno and numbers, in which players make their own selections. Off-line lotteries feature lottery games which are not computerized, including traditional off-line lottery games and instant ticket games. Traditional off-line lottery games, in which players purchase tickets which are manually processed for a future drawing, generally are conducted only in international jurisdictions. Instant ticket games, in which players scratch off a coating from a pre-printed ticket to determine if it is a winning ticket, are conducted both internationally and in the United States. In general, online lotteries generate significantly greater revenues than both traditional off-line lottery games and instant ticket games. In addition, there are several other advantages to online lotteries as compared to traditional off-line lotteries. Unlike traditional off-line lottery games, wagers can be accepted and processed by an online lottery system until minutes before a drawing, thereby significantly increasing the lottery's revenue in cases in which a large prize has attracted substantial wagering interest. Online lottery systems also provide greater reliability and security, allow a wider variety of games to be offered and automate accounting and administrative procedures which are otherwise manually performed. Typically, approximately 50% of the gross revenues of an online lottery in the United States is returned to the public in the form of prizes. Approximately 35% is used by the state to support 11 13 specific public programs or as a contribution to the state's general funds. The remaining 15% is generally used to fund the operations of the lottery, including the cost of advertising, sales commissions to point-of-purchase retailers and service fees to vendors such as GTECH. From 1971 through 1999, total annual lottery ticket sales in the United States grew from approximately $147.5 million to approximately $34.1 billion, although the Company has witnessed, over the last three years, a downward trend in sales generated by its United States lottery customers. See "General" above. Historically, most of the growth in ticket sales has occurred in the online portion of the lottery business which accounted for approximately 56.6% of total lottery ticket sales in 1999. There are currently 38 jurisdictions operating online lotteries in the United States. Implementation of lotteries in other jurisdictions, will depend upon successful completion of legislative, regulatory and administrative processes. Outside the United States, government operated or licensed lotteries, many of which are off-line, have a long history. The international online lottery industry has experienced significant growth. Since 1977, when there were no online lotteries operating outside of the United States, 94 international jurisdictions have implemented online lottery systems. A number of other international jurisdictions, principally in Europe, Asia and Latin America, are currently considering the implementation of online lotteries. ONLINE LOTTERY CONTRACTS The Company generally conducts business under one of three types of contractual arrangements: Facilities Management Contracts, Operating Contracts and Product Sales Contracts. Under a typical Facilities Management Contract, the Company installs, operates and maintains a lottery system, while retaining ownership of the lottery system. These contracts generally provide for service fees directly from the lottery authority to the Company based on a percentage of online lottery ticket sales. Under an Operating Contract, the Company generally provides the same services as under a Facilities Management Contract, but sells the lottery system and licenses the computer software to the lottery authority. Ongoing service fees to the Company under an Operating Contract are usually based on a percentage of lottery ticket sales. Under a Product Sales Contract, the Company sells, delivers and installs a turnkey lottery system or lottery equipment and licenses the computer software for a fixed price, and the lottery authority subsequently operates and maintains the lottery system. The collection of lottery monies, the selection of winners, the financial responsibility for the payment of prizes and the qualification of retail sales agents are usually the sole responsibility of the lottery authority in each jurisdiction in which the Company operates a lottery. The United Kingdom's National Lottery and the South Africa National Lottery provide important exceptions to the general rule in that in each case a licensee operates all aspects of the respective National Lottery with the exception of proceeds allocation. 12 14 FACILITIES MANAGEMENT CONTRACTS The Company's Facilities Management Contracts generally require the Company to install, operate and maintain an online lottery system for an initial term, which is typically at least five years, and usually contain options permitting the lottery authority to extend the contract under the same terms and conditions for one or more additional periods, generally ranging from one to five years. In addition, the Company's customers occasionally renegotiate extensions on different terms and conditions. See also "Certain Factors That May Affect Future Performance- Liquidated Damages Under Contracts" above. The Company's revenues under Facilities Management Contracts are generally based upon a percentage of gross online lottery ticket sales. The level of lottery ticket sales within a given jurisdiction is determined by many factors, including population density, the types of games played and the games' design, the number of terminals, the size and frequency of prizes, the nature of the lottery's marketing efforts and the length of time the online lottery system has been in operation. Under its Facilities Management Contracts, the Company retains title to the lottery system and typically provides its customers with the services necessary to operate and manage the lottery system. The Company installs and commences operations of a lottery system after being awarded a Facilities Management Contract and, following the start-up of the lottery system, is responsible for all aspects of the system's operations. The Company typically operates lottery systems in each jurisdiction on a stand-alone basis through the installation of two or more dedicated central computer systems, although in a few instances several jurisdictions share the same central system. In addition, the Company employs a dedicated work force in each jurisdiction, consisting of a site director, marketing personnel, computer and hotline operators, communications specialists and customer service representatives who service and maintain the system. Under certain of the Company's Facilities Management Contracts the lottery authority has the right to purchase the Company's lottery system during the contract term at a predetermined price, which is calculated so that it exceeds the Company's net book value of the system at the time the right is exercisable. The Company's role with respect to the continued operation of a lottery system in the event of the exercise of such a purchase option generally is not specified in such contracts and thus would be subject to negotiation. Under many of the Company's Facilities Management Contracts, the lottery authority also has the option to require the Company to install additional terminals and/or add new lottery games. Such installations may require significant expenditures by the Company. However, since the Company's revenues under such contracts generally depend on the level of lottery ticket sales, such expenditures have generally been recovered through the revenues generated by the additional equipment or games and revenues from existing equipment. Under a number of the Company's lottery contracts (including the Georgia, Texas and United Kingdom contracts), in addition to providing, operating and maintaining the online lottery system in these jurisdictions, GTECH is providing a wide range of support services and equipment for the lottery's instant ticket games, such as marketing, distribution and automation of 13 15 validation, inventory and accounting systems, for which it receives fees based upon a percentage of the revenues of the instant ticket games. Revenues from Facilities Management Contracts are accounted for as service revenues in the Company's Income Statements. The table below sets forth the lottery authorities with which the Company had Facilities Management Contracts and fully installed, operational lottery systems as of April 1, 2000. Unless otherwise indicated, the Company is the sole supplier of central computers and terminals and services to each of the lottery authorities listed below. The table also sets forth information regarding the term of each contract and, as of April 1, 2000, the approximate number of terminals installed in each jurisdiction.
CURRENT NUMBER OF LOTTERY DATE OF COMMENCEMENT OF DATE OF EXPIRATION OF EXTENSION JURISDICTION TERMINALS INSTALLED(1) CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS* UNITED STATES: Arizona 2,503 9/99 9/04 2 one-year California (2) 20,184 10/93 10/03 -- Colorado 2,241 3/95 10/04 -- D.C. (3) 576 6/99 11/09 -- Georgia 6,817 4/93 9/03 -- Illinois (4) 6,957 2/89 10/00 -- Iowa 1,503 4/91 6/01 1 two-year Kansas 1,826 7/97 6/02 1 three-year 1 two-year Kentucky 2,888 4/97 6/03 5 one-year Louisiana 2,764 6/97 6/05 5 one- year Maine (5) 993 7/90 6/00 -- Michigan 6,554 1/98 1/06 3 one-year Missouri 2,778 7/96 7/01 1 two-year Nebraska 1,127 4/94 6/04 -- New Hampshire (5) 996 7/90 6/00 -- New Jersey 6,005 6/96 6/01 5 years New Mexico 1,215 6/96 11/03 5 one-year New York 14,068 2/93 2/02 -- Ohio 6,396 10/93 6/01 -- Oregon 2,757 12/96 10/04 3 one-year
14 16
CURRENT NUMBER OF LOTTERY DATE OF COMMENCEMENT OF DATE OF EXPIRATION OF EXTENSION JURISDICTION TERMINALS INSTALLED(1) CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS* Rhode Island 809 1/97 7/02 5 one-year Texas 15,589 3/92 8/02 -- Vermont (5) 477 7/90 6/00 -- Washington State 2,493 9/95 6/04 -- West Virginia (6) 1,414 2/92 6/00 (6) Wisconsin 3,136 6/97 6/02 2 one-year INTERNATIONAL: Barbados 199 10/94 11/04 -- - -T.L. Lotteries Brazil (7) - -National Lottery (7) 12,486 1/97 1/01 (7) - -Minas Gerais 904 10/94 10/00 (7) - -Parana 818 9/99 9/03 (7) - -Santa Caterina 200 5/95 7/00 (7) - -Goias 112 7/97 7/01 (7) Chile - -Polla Chilena de 1,619 12/93 8/02 -- Beneficencia S.A. Czech Republic (8) - -SAZKA 5,269 10/92 (8) (8) Ireland (9) - -An Post Nat'l 2,054 3/93 3/01 (9) Lottery Company Lithuania (10) - -OLIFEJA 789 12/94 12/09 (10) Morocco (11) 8/99 8/08 -- - -La Societe de Gestion de la Loterie Nationale (11) 8/99 8/08 -- - -La Marocaine des Jeux et Les Sports Poland (12) 5,779 3/91 10/01 (12) - -Totalizator Sportowy Puerto Rico 2,053 3/99 3/05 1 three-year - -Loteria Electronica de Puerto Rico Slovak Republic 1,150 3/96 10/04 -- - -TIPOS a.s.
15 17
CURRENT NUMBER OF LOTTERY DATE OF COMMENCEMENT OF DATE OF EXPIRATION OF EXTENSION JURISDICTION TERMINALS INSTALLED(1) CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS* South Africa (13) 4,900 7/99 7/09 -- - -National Lottery Spain - -L'Entitat 2,488 10/97 10/03 1 six-month Autonomade Jocs I Apostes de la Generalitat de Catalunya Trinidad & Tobago - -National Lotteries 641 12/93 7/06 1 three Control Board United Kingdom - -The National 24,865 7/94 9/01 -- Lottery (14)
* Reflects extensions available to the lottery authority under the same terms as the current contract. Lottery authorities occasionally negotiate extensions on different terms and conditions. (1) Total does not include instant ticket validation terminals. (2) In addition, the Company is a subcontractor to High Integrity Systems, Inc. ("HISI"), which has a contract with the California lottery authority to install and maintain 6,309 terminals using HISI's proprietary dial-up technology for online and instant ticket sales and validation. (3) Operated by Lottery Technology Enterprises, a joint venture in which the Company has a 40% interest. (4) In December 1999, the Illinois lottery authority selected the company to provide a new on-line system subject to the successful conclusion of negotiations. (5) The Maine, New Hampshire and Vermont lottery authorities share a central computer system. During fiscal 2000, the lottery authorities of New Hampshire, Maine and Vermont awarded online contracts to competitors of the Company. (6) In November 1999, the West Virginia lottery authority awarded the new online contract to a competitor of the Company. (7) Operated by GTECH Brasil Holdings, S.A., a Brazilian company in which the Company owns all voting stock. Each of the Brazilian agreements may be extended, at the option of the respective lottery authority, for one or more extension terms not to exceed, in aggregate, the duration of the base term. (8) The contract with the Czech Republic lottery authority provides that it runs until seven years after the installation of the 3,000th terminal or three years after the installation of any terminals after the 3,000th terminal, whichever is later. The Company currently estimates that its contract with the Czech lottery authority will terminate in August 2002. (9) The contracts with the Ireland licensee may either be extended for any period mutually acceptable to the Company and the lottery authority or continue indefinitely until termination by the licensee. (10) The Company's contract with the Lithuania lottery authority automatically extends from year-to-year unless either party gives timely notice of non-renewal. (11) Sales began under the Morocco online contract on April 10, 2000. 16 18 (12) The term of the Company's contract with the Poland lottery authority automatically renews for an indefinite number of one-year extension periods unless either party gives timely notice of non-renewal. (13) Operated by Uthingo consortium, in which GTECH is a 10 percent equity owner. (14) Operated by Camelot Group plc, a consortium of which the Company was, until April 1998, a member, on a facilities management basis. The Company will continue to sell equipment to Camelot Group plc for use by The National Lottery. 17 19 OPERATING CONTRACTS Under an Operating Contract, the Company generally operates and maintains the lottery system and provides on-going software support services in the same manner as under a Facilities Management Contract, except that the Company sells the lottery system and licenses the software to the lottery authority at the beginning of the contract rather than retaining ownership of the system. Ongoing service fees to the Company under its Operating Contracts are usually based on a percentage of lottery ticket sales. The initial contract term, extensions, rebidding processes and termination rights for Operating Contracts are generally substantially the same as those under Facilities Management Contracts. Revenues from sales of lottery systems and equipment under Operating Contracts are accounted for as product sales revenue, and services provided under such contracts are accounted for as service revenues in the Company's Income Statements. The table below sets forth the lottery authorities with which the Company had Operating Contracts as of April 1, 2000. Unless otherwise indicated, the Company is the sole supplier of lottery equipment and services to each of the lottery authorities listed below. The table also sets forth information regarding the term of each contract and, as of April 1, 2000, the approximate number of terminals installed in each jurisdiction. OPERATING CONTRACTS
NUMBER OF DATE OF EXPIRATION OF CURRENT LOTTERY TERMINALS DATE OF COMMENCEMENT OF CURRENT CONTRACT TERM EXTENSION JURISDICTION INSTALLED(1) CURRENT CONTRACT OPTIONS* UNITED STATES: Idaho 672 2/99 2/03 4 one-year INTERNATIONAL: Argentina - -Loteria National Sociedad 802 11/93 4/03 -- del Estado Turkey - -Turkish National Lottery 3,825 2/96 11/01 (2)
________________________ * Reflects extensions available to the lottery authority under the same terms as the current contract. Lottery authorities occasionally negotiate extensions on different terms and conditions. (1) Total does not include instant ticket validation terminals. (2) The term of the contract with the Turkey lottery authority automatically renews for successive one-year extension terms unless either party gives timely notice of non-renewal. In addition, the Turkey lottery authority has the option to assume responsibility for the provision of certain lottery services at any time after the second anniversary of system start-up. 18 20 PRODUCT SALES CONTRACTS The Company sells, delivers and installs online lottery systems for a fixed price under Product Sales Contracts. The Company also sells additional terminals and central computers to expand existing systems and/or replace existing equipment under Product Sales Contracts. In connection with its Product Sales Contracts, the Company generally designs the lottery system, trains the lottery authority's personnel and provides other services required to make and keep the system operational. The Company also generally licenses its software to its customers for a fixed additional fee. Historically, product sales revenues have been derived from the installation of new online lottery systems and the sales of lottery terminals and equipment in connection with the expansion of existing lottery systems. The size and timing of these transactions at times has resulted in variability in product sales revenues from quarter to quarter. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The table below lists certain of the Company's direct and indirect customers that have purchased or as to which they have agreed to purchase lottery terminals and other online lottery equipment from the Company since March 1, 1991. The Company has found the size and timing of product sales often difficult to predict and has experienced variability in product sales revenues from period to period. Argentina --National Lottery of Argentina Argentina --Provincial Lottery of Buenos Aires Australia --Lotteries Commission of New South Wales Australia --Lotteries Commission of South Australia Australia --Tattersall Sweep Consultation Australia --Lotteries Commission of West Australia Austria --Osterreichische Lotto Toto Gesmbh Belgium --Loterie Nationale de Belgique Canada --Atlantic Lottery Corporation Canada --British Columbia Lottery Corporation Canada --Loto-Quebec Canada --Ontario Lottery Corporation Canada --Saskatchewan Gaming Commission Canada --Western Canada Lottery Corporation Denmark --Dansk Tipstjanst Finland --Oy Veikkaus AB France --La Francaise des Jeux Germany --Sachsiche Lotto-GmbH 19 21 Germany --Lotterie Treuhandgesellschaft Mbh Thuringen Iceland --Islensk Getspa Iceland --Islenskar Getraunir Israel --Mifal Hapayis Italy --Teseo S.r.l Malaysia --Pan Malaysian Pools Malaysia --Lotteries Corporation (Sabah) Sdn. Bhd. Malaysia --Sports Toto Malaysia Bhd. Massachusetts --Massachusetts State Lottery Commission Netherlands --Stichting de Nationale Sport Totalisator New Zealand --New Zealand Lotteries Commission Philippines --Philippines Charity Sweepstake Office Singapore --Singapore Pools (Pte) Ltd. South Africa --Uthingo Spain --Sistemas Tecnicos de Loterias del Estado Sweden --AB Svenska Spel Switzerland --Sport-Toto Gesellschaft Switzerland --Loterie de la Suisse Romande Turkey --Spor Toto Teskilat Mudurlugu United Kingdom --The National Lottery CONTRACT AWARD PROCESS In the United States, lottery authorities generally commence the contract award process by issuing a request for proposals inviting proposals from various lottery vendors. The request for proposals usually indicates certain requirements specific to the jurisdiction, such as particular games which will be required, particular pricing mechanisms, the experience required of the vendor and the amount of any performance bonds that must be furnished. After the bids have been evaluated and a particular vendor's bid has been accepted, the lottery authority and the vendor generally negotiate a contract in more detailed terms. Once the contract has been finalized, the vendor begins to install the lottery system. After the expiration of the initial or extended contract term, a lottery authority in the United States generally may either seek to negotiate further extensions or commence a new competitive bidding process. Internationally, lottery authorities do not typically utilize as formal a bidding process, but rather negotiate proposals with one or more potential vendors. The Company's marketing efforts for its lottery products and services frequently involve top management in addition to the Company's professional marketing staff. These efforts consist 20 22 primarily of marketing presentations to the lottery authorities of jurisdictions in which requests for proposals have been issued. Marketing of the Company's lottery products and services to lottery authorities outside of the United States is often performed in conjunction with licensees and consultants with whom the Company contracts for representation in specific market areas. Although generally neither a condition of their contracts with the Company nor a condition of their contracts with lottery authorities, such licensees and consultants often agree with the Company to provide on-site services after installation of the online lottery system. Pursuant to a 1990 Distributorship and License Agreement (the "D&L Agreement") between the Company and CGK Computer Gesellschaft Konstanz GmbH ("CGK"), a subsidiary of Siemens AG, the Company granted to CGK the exclusive right to distribute, service, sell and market the Company's online lottery systems and components in selected European jurisdictions under separately negotiated Memoranda of Understanding ("MOUs"). Although the D&L Agreement terminated during fiscal 1996, CGK and the Company continue to fulfill their respective obligations under certain MOUs and related agreements entered into under the D&L Agreement. From time to time, there are challenges or other proceedings relating to the awarding of lottery contracts. PRODUCTS AND SERVICES The Company's lottery systems consist of lottery terminals, central computer systems, systems and communications software and game software, and communications equipment which connects the terminals and the central computer systems. The systems' terminals are typically located in high-traffic retail outlets, such as newsstands, convenience stores, food stores, tobacco shops and liquor stores. The Company's online lottery systems control and perform the following functions: entry of wagers using a terminal's keyboard or a fully-integrated optical mark recognition reader; automatic editing of each wager for correctness by the originating terminal; encryption and transmission of the wager and related data to the central computer installation(s); processing of each wager by the central computers, including entry of the wager into redundant data bases; transmission of authorization for the originating terminal to accept the wager and print a receipt or ticket, winning ticket identification and validation; and administrative functions, including determination of prize pools and generation of management information reports. The Company's systems are capable of handling in excess of 100,000 transactions per minute, which rate is in excess of the requirements of any of its customers. The basic functions listed above, as well as various optional or custom-designed functions, are performed under internal controls designed for maximum security and minimum processing time. Security is provided through an integrated system of techniques, procedures and controls supported by hardware, software and human resources. Individual systems generally have redundant capacity at multiple levels and sophisticated software to ensure continuous service to the customer. 21 23 TERMINALS The Company designs, manufactures and provides the point-of-sale terminals used in its online lottery systems. Currently, approximately 149,000 of its model GT-101 FX terminals, introduced in 1983, its model GT-101TF terminals, introduced in 1985, and its model GT-401/OI terminals, introduced in 1989, are installed in numerous jurisdictions. All of these terminals use advanced microprocessors and software programs to provide the increased transaction processing performance levels and communications interfaces required in the online lottery industry. These terminals are designed to allow customization of application functions to each lottery's specifications, including optical mark recognition, ticket graphics printing, user and customer display options and other application functions. The terminals' hardware facilitates independent development of applications programs by the Company. The Company's Spectra(R) terminal series (GT-401/OM, 402/OM, and 403 O/M), first introduced in 1989, is distinguished by its modular internal and external architecture. The modular design provides an enhanced level of flexibility to lottery jurisdictions by permitting them to choose among a variety of options and terminal subsystem configurations, including readers, printers, keyboards, displays, and communications interfaces. As of February 26, 2000, a total of approximately 60,800 Spectra(R) terminals were installed in numerous international jurisdictions. The Company's ISYS terminal series, (GT-501, 502 and 503), introduced during fiscal 1996, is an integral, single-unit terminal which features modular subassemblies, high performance ticket printer and playslip reader subassemblies, an easy-to-use design, and a host of new features and technologies. As of February 26, 2000, approximately 68,700 ISYS terminals were installed in numerous lottery jurisdictions. During fiscal 1999, the Company announced its agreement to provide to the Colorado lottery its new terminal, Player's Express(TM), which was designed specifically for large retail environments, such as grocery stores, with numerous checkout lanes. The Company has subsequently entered into agreements with the Nebraska, Ohio, Washington, California, Israel, Loto-Quebec and New Zealand lottery authorities to supply PlayerExpress(TM) terminals. As of February 26, 2000, approximately 760 PlayerExpress(TM) terminals were installed. During fiscal 1999, the Company also announced the launch of its Altura(TM) family of terminals. While as of February 26, 2000, the Company had yet to install an Altura(TM) terminal, during fiscal 2000, the Company had entered into a contract with Teseo S.r.l., a subsidiary of SNAI S.p.a, the National Association of Sports Betting Shops, Italy's largest sports betting supplier to provide 2,000 Altura(TM) terminals and the Company is actively marketing the Altura(TM) terminal to other customers. See "Certain Products and Services" below. SOFTWARE The Company designs and provides all applications software for its lottery systems. The Company's highly sophisticated and specialized software is designed to provide the following system characteristics: rapid processing, storage and retrieval of transaction data in high volumes and in multiple applications; the ability to down-line load (i.e., to reprogram the lottery terminals from the central computer installation via the communications system to add new games); a high degree of security and redundancy to guard against unauthorized access and tampering and to 22 24 ensure continued operations without data loss; and a comprehensive management information and control system. In addition to featuring the aforementioned characteristics, the Company's latest generation software system, PRO:SYS(TM), is based on client server architecture and provides open interfaces which allow for the integration and support of third-party and commercial modules and applications. See "Certain Products and Services" below. CENTRAL COMPUTERS Each of the Company's lottery systems contains one or more central computer sites to which the lottery terminals are connected. The Company's central computer systems are manufactured by Compaq Computer Corporation (formerly Digital Equipment Corporation) and Stratus Computer, Inc. The specifications for the configuration of the Company's central computer installations are designed to provide continuous availability, a high throughput rate and maximum security. Central computer installations typically include: redundant mainframe computers, various peripheral devices (such as magnetic storage devices, management terminals and hard copy printers), and various safety, environmental control and security subsystems (including a back-up power supply), which are all manufactured by third parties, and a microcomputer-based communication and switching subsystem. In addition, the Company supplies management information systems that provide lottery personnel access to important financial and operational data without compromising the security of the online system. COMMUNICATIONS The Company's lottery terminals are typically connected to the central computer installations by dedicated telephone lines owned or leased by the jurisdiction in which the system is located. Due to the varying nature of telecommunications services available in lottery jurisdictions, the Company has developed the capability to interface with a wide range of communications technologies, including UHF Radio capability (narrow-band and Spread Spectrum), GSAT/VSAT, Microwave, Integrated Services Digital Networking (ISDN), Data Over Voice (DOV), fiber optic and cellular telephone. In Argentina, Barbados, Brazil, the Spanish province of Catalunya, Chile, the Czech Republic, Estonia, Lithuania, Mexico, Morocco, New Mexico, Poland, Puerto Rico, Slovakia, and Trinidad and Tobago, the Company utilizes UHF Radio Data-Link Communications system in lieu of telephone lines to provide a data communications pathway between the lottery terminals and the central computers. The Company also uses this technology in the United States to supplement the existing telephone networks in New Mexico, Ohio, Oregon, Rhode Island, Texas, Washington and the District of Columbia. The Company's GSAT satellite technology makes it feasible to serve large market areas where telephone lines are either unavailable, unreliable or too costly. GSAT currently operates in the United States in remote areas of Colorado, New Mexico, Texas and Washington, and internationally in Argentina, the Czech Republic, Brazil, Chile, Poland, South Africa and the United Kingdom. The Company has also implemented UHF radio in conjunction with GSAT to further enhance reliability and cost savings in remote areas. During fiscal year 2000, in connection with implementation of the South Africa National Lottery, the Company acquired a minority interest in Wireless Business Solutions (Proprietary) Limited, a South African company and holder of a license to provide certain radio-based telecommunications services in South Africa. 23 25 GAMES An important factor in maintaining and increasing public interest in lottery games is innovation in game design. The Company's GameScape(TM) group, in conjunction with lottery authorities, utilizes principles of demographics, sociology, psychology, mathematics and computer technology to design customized lottery games which are intended to appeal to the populations served by its lottery systems. The principal characteristics of game design include: frequency of drawing, size of pool, cost per play and setting of appropriate odds. The Company believes that its expertise in game design has enhanced the marketing of its lottery systems and has contributed to increases in the revenues of the Company's customers. The Company's GameScape(TM) group currently has a substantial number of variations of lottery games in its software library and several promising new games under development. The Company believes that this game library and the "know how" and experience accumulated by its professionals since the Company's inception make it possible for the Company to meet the requirements of its customers for specifically tailored games on a timely and comprehensive basis. During fiscal 1999, the Company augmented its game design expertise by acquiring Europrint Holdings Limited (which is among the world's largest providers of media promotional games) and its wholly-owned subsidiaries including Interactive Games international, Inc. (which has pioneered the development of interactive, televised lottery games including BingoVision(TM), SplitLevel(TM) and DoubleChance(TM)). MARKETING In United States jurisdictions in which the Company has been awarded a lottery contract, the Company is frequently asked to assist the lottery authority in the marketing of lottery games to the public. Such assistance generally includes advice with respect to game design, and promotion and development and distribution of terminals and advertising programs. As part of such assistance, the Company developed "GMark," a computerized marketing analysis system used to determine favorable locations for new lottery terminals. The lottery authorities of California, Georgia, Illinois, Missouri, New Jersey, New York, Ohio, Rhode Island, Texas and Washington currently utilize GMark systems, and many customers contact the Market Research Group at GameScape(TM) from time to time to obtain GMark services. WARRANTY Because the Company retains title to the system under a Facilities Management Contract, no warranty is provided on the Company's products supplied under such contracts. The Company does repair or replace such products as necessary to fulfill its obligations under such contract. There is no standard warranty on products manufactured by the Company. A typical warranty provides that the Company will repair or replace defective products for a period of time (usually one year) from the date a product is delivered and tested. Product warranty expenses for the fiscal years 2000, 1999 and 1998 were not material. The Company typically does not provide a 24 26 warranty on products it sells that are manufactured by third parties, but attempts to pass the manufacturer's warranty, if any, on to the customer. With respect to computer software, the Company typically modifies its software as necessary so that the software conforms to the specifications of the contract with the customer. CERTAIN PRODUCTS AND SERVICES ONLINE LOTTERY Lottery authorities for years have recognized that by offering new games or products, the lotteries are often able to generate significant additional revenues. An important part of the Company's strategy is to develop new products and services for its customers in order to increase their lottery revenues. The Company's principal online lottery products and services introduced in recent years are keno, instant ticket support services and televised lottery games, such as BingoVision(TM). In addition, the Company has recently launched its Altura(TM) series terminals, Players Express(TM) terminal and ProSys(R) software system to enhance the functionality and appeal of its existing software and terminal lines. KENO. While new online jurisdictions offer growth by providing access to new players, more mature markets, such as the United States, rely principally upon the introduction of new games to provide growth. One such game introduced by the Company is keno. In keno, players typically choose up to 10 numbers from a field of 80 and attempt to match their numbers against any 20 numbers which are randomly selected by a central computer system. Alternatively, the player may choose up to 10 numbers and wager that none of such numbers will match the 20 numbers randomly selected. This game combines the multiple prize payouts of a lotto-type game with the immediacy of an instant scratch-off lottery game. It is also unique in its play-style and distribution, which decreases the risk that the game will cannibalize existing online lottery revenues. Keno is more interactive than typical online lottery games and is designed to be played in the company of others. While most lotto and numbers games are found in convenience stores and supermarkets, places visited frequently and often individually, keno outlets are often located in restaurants, taverns and bowling alleys and other social settings which tend to be visited by groups of people. The Company introduced in April 1990 the first online keno game for the Lotteries Commission of South Australia and currently assists lottery authorities in Australia (Lotteries Commission of South Australia), Brazil (Parana, Minas Gerais, Santa Caterina and Goias), California, Georgia, Kansas, Lithuania, Massachusetts, New York, Oregon, Rhode Island, Catalunya (Spain), Switzerland (La Societe de la Loterie de la Suisse Romande), Trinidad and Tobago, and West Virginia in implementing and operating online keno games. Keno illustrates the impact that new games can have on lottery revenues. Since the United States introduction of keno in 1991, United States keno revenues have grown significantly, exceeding $1.99 billion and accounting for more than 4.7% of total United States online lottery revenues in 1998. The popularity of keno has led the Company to explore the development of new games based upon keno. Most notably, the Company developed in recent years Keno Plus(TM), a new 25 27 product that combines expanded keno game characteristics with new hardware and enhanced product support. Keno has been the subject of legal challenges in recent years. Most notably, in June 1996, the California Supreme Court in Western Telecon, Inc. et al v. California State Lottery unexpectedly reversed trial and appellate court decisions and found the California keno game to be a banked game rather than a lottery because it provides for a fixed prize that is not dependent upon the size of the prize pool. Accordingly, the Court concluded that the keno game was not authorized by the California lottery law, and the California State Lottery suspended operation of the keno game in June 1996. In September 1996, the Company launched a parimutuel monitor game designed by the Company and the California State Lottery as a replacement for the suspended game. Although the new game, like keno, features frequent drawings, its payouts are based upon a prize pool determined by sales rather than by predetermined or fixed amounts. Keno was also the subject of an unsuccessful legal challenge in New York which began in August 1995. There can be no assurances that legal challenges to keno will not be brought in the future in these or other jurisdictions, nor can there be any assurances respecting the results of such legal challenges, if any, upon the operations of keno in jurisdictions serviced by the Company. In March 1999, the Company announced that Quick Draw, the keno-style lottery game operated in New York State provided by the Company, would terminate effective April 1, 1999, and the game did terminate as announced, due to the failure by the New York State legislature to extend the legislation authorizing the game. In August 1999, the New York legislature extended the legislation authorizing the game through March 2001, and sales of Quick Draw resumed. See Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations" below. INSTANT TICKET SUPPORT SERVICES. The Company provides certain products, systems and services to the instant ticket lottery industry. The Company's online support systems for the instant ticket lottery business provide comprehensive functionality, including: instant ticket validation; retailer accounting; inventory control and tracking; ticket stock distribution; electronic funds transfer; finance and sales tracking reports; and marketing support. In order to automate and increase the security of instant ticket lotteries, the Company developed the GTECH Validation Terminal ("GVT"), a point-of-sale device that facilitates instant ticket validation and provides access to the Company's online instant ticket support systems for instant ticket agents who are not part of a lottery's online lottery system. The Company also offers add-on validation terminals which attach to its online lottery terminals and provide the same functionality as the GVT, while using the existing communications network. The Company is providing or has contracted to provide marketing, distribution, online validation, inventory control and accounting support services and equipment (but not the printing of the instant tickets) for the Texas lottery's instant ticket games. In addition, the Company currently provides instant ticket support services to lottery authorities in Arizona, California, Colorado, District of Columbia, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Michigan, Missouri, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Vermont, Washington, West Virginia and Wisconsin. Internationally, the Company currently supplies lottery authorities in Australia (New South Wales and South Australia), Belgium, Brazil, Denmark, Finland, Israel, 26 28 Mexico, Morocco, Netherlands, New Zealand, Portugal, South Africa, Spain (Catalunya), Sweden, Turkey and the United Kingdom with instant ticket support services. TELEVISION LOTTERY GAMES. The Company in recent years has offered a product line of televised lottery games. Players buy tickets from online lottery retailers and mark them while following a live, televised game show which includes a draw of numbers. Through the use of proprietary game-tracking software, the Company is able to display, live, how many at-home players are winners or about to become winners, with each new numbers draw. The Company has implemented BingoVision(TM), a television lottery game featuring a bingo draw, in Estonia, Lithuania, New Zealand, Slovakia, Belgium, and five German states; has implemented SplitLevel(TM), a televised game featuring displayed boards of numbers with winners determined by the number of matches from these boards in Lithuania; and is actively marketing these and other games to other lottery authorities. THE ProSys(R) SOFTWARE SYSTEM. ProSys(R) is the Company's latest software system. Employing a user friendly interface, lotteries can use PRO:SYS(TM) to manage all aspects of their gaming environment, including online, instant ticket sales and accounting and video games. Features such as promotions management and information analysis allow lottery authorities to tailor the system to their individual needs. ProSys(R) was first installed in September 1994 for Societe de la Loterie de la Suisse Romande, Switzerland. Since that time, the Company has installed ProSys(R) in systems used by the lottery authorities of Arizona, Washington, D.C.; Colorado; Idaho; Ontario, Canada; Leipzig, Germany; Washington State; Missouri; Denmark; New Mexico; Massachusetts; New Jersey; Thuringen, Germany; Kansas; Kentucky; Ohio; Oregon; Rhode Island; Wisconsin; New Zealand; Belgium; Sweden; Switzerland; Michigan; Texas; Mexico; Netherlands; Israel; South Africa; and South Australia and is in the process of installing ProSys(R) in five additional jurisdictions. THE ISYS(TM) TERMINAL SERIES. During fiscal 1996, the Company introduced its ISYS(TM) terminal series. ISYS(TM) is an integral, single-unit terminal which features modular subassemblies, high performance ticket printer and playslip reader subassemblies, an easy-to-use design, and a host of new features and technologies. The Company believes that ISYS(TM) improves upon previous terminal designs by featuring simplified wager entry via intuitive keyboard and screen formats, improved system status monitoring and the latest instant ticket validator technology. The Company has installed ISYS(TM) in systems used by lottery authorities in Brazil, Massachusetts, Missouri, New Jersey, New Mexico, Turkey, Washington State, District of Columbia, Wisconsin and W. Australia, Kansas, and Rhode Island. See "Products and Services--Terminals" above. THE PLAYER EXPRESS(TM) TERMINAL. During fiscal 1999, the Company announced the introduction of its new terminal, the Player Express(TM). Player Express(TM), which had its inaugural installation under the Company's contract with the Colorado lottery authority, was designed as part of the Company's attempt to provide a total solution for selling lottery tickets in large retail environments with numerous checkout lanes. Player Express(TM) allows consumers to conveniently play lottery at the checkout area of retail stores as part of their regular shopping. 27 29 THE ALTURA(TM) TERMINAL. During fiscal 1999, the Company announced the launch of its Altura(TM) family of terminals. Altura(TM), which represents the initial offering of the Company's ninth generation of online lottery terminals, permits applications to be written in the Java programming language enabling the rapid development of a wide variety of games that are compatible with numerous software environments. VIDEOSITE(TM). During fiscal 1998, the Company acquired VideoSite, Inc., a leading provider of multimedia broadcasting software. Since its acquisition by the Company, VideoSite has been in the process of developing lottery and retail advertising and promotional products which will use its broadcasting software to complement the Company's video-based gaming software products. During fiscal 2000, VideoSite launched NextVision(TM), which brings new lottery-animation, high quality graphics and full-motion video to monitor games and began selling advertising over Rhode Island's keno network. NON-LOTTERY GAMING PRODUCTS AND SERVICES In September 1995, the Company incorporated Dreamport, Inc. to pursue gaming opportunities other than online lottery including video lottery and venue-based gaming. Dreamport provides a comprehensive array of creative management and technology solutions, and development and strategic services to the gaming and entertainment markets as well as video lottery systems and other gaming technology. Dreamport's video lottery machine gaming systems combine the security and integrity of the Company's traditional online lottery systems with entertainment-based video games. These video lottery machine gaming systems include a controlling central computer system, video lottery terminal gaming machines (which the Company acquires through an exclusive OEM manufacturing relationship with Bally Gaming Systems, Inc.), the Company's ticket validation terminals, and a self-diagnostic communications network. Games offered by these video lottery machine gaming systems include poker, blackjack, keno, bingo, reel games and electronic instant lottery games. The Company entered the video lottery machine gaming business during fiscal 1991 and currently provides machine gaming video lottery products and services to lottery jurisdictions in Minas Gerais, Santa Catarina and Parana, Brazil; Switzerland; Alberta, British Columbia, Saskatchewan, Canada; Oregon; and Rhode Island. Through a joint venture with Full House Resorts, Inc., the Company also provides financing, gaming development and management services to the Midway Slots and Simulcast Emporium at Harrington Raceway in Delaware, the Coquille Indian Tribe of North Bend, Oregon and is under contract to provide financing and services to the Huron Potawatomi Tribe in Battle Creek, Michigan and the Torres Martinez Tribe in Palm Desert, California. 28 30 In March 1999, the Company, in equal partnership with Harrah's Entertainment, Inc. and Keeneland Association, completed its purchase of the assets of Turfway Park, a thoroughbred racecourse located in Florence, Kentucky (in the Cincinnati, Ohio market) featuring thoroughbred racing and simulcast wagering. Included with the purchased assets was a 24% ownership interest in, and management contract for, Kentucky Downs, a thoroughbred racetrack and simulcast center on the Kentucky border in close proximity to the Nashville, Tennessee market. In December 1999, GTECH entered into a contract on behalf of Dreamport with Loto Catalunya, the Catalan lottery authority, to operate its SuperTOC bingo game in bingo halls throughout Catalunya, Spain. See "Certain Significant Developments Since the Start of Fiscal 2000 - Dreamport and Non-Lottery Gaming" above. UWin! During fiscal 1999, the Company established UWin!(TM) to provide Internet-based interactive games to international providers of government-sponsored lottery products and services. UWin!s(TM) gaming platform features a robust architecture designed to permit international lottery authorities to offer to their customers via the Internet interactive games within a secure and government-authorized environment. During fiscal 2000, UWin!(TM) entered into contracts with two international lottery authorities for the provision of Internet-based wagering services. The Company currently anticipates that sales will begin under these contracts in the second and third quarters, respectively, of fiscal 2001. The Company continues to actively market its UWin!(TM) offering to additional international lottery authorities. See "Certain Significant Developments Since the Start of Fiscal 2000--UWin(TM)" above. PRODUCT DEVELOPMENT The Company devotes substantial resources in order to enhance its present products and systems and develop new products. In fiscal 2000, the Company spent approximately $46.1 million on research and development, as compared to $40.2 million in fiscal 1999 and $36.5 million in fiscal 1998. INTELLECTUAL PROPERTY Although the Company occasionally seeks patent protection on certain technological developments, the Company generally has not sought to obtain patents on its products, and it is doubtful whether patents could be obtained in many instances. The Company believes that its technical "know-how," trade secrets and the creative skills of its personnel are of substantially more importance to the success of the Company than the benefit which patent protection ordinarily would afford. The Company typically requires customers, employees, licensees, subcontractors and joint venture partners who have access to proprietary information concerning the Company's products to sign non-disclosure agreements, and the Company relies on such agreements, other security measures and trade secret law to protect such proprietary information. PRODUCTION, ASSEMBLY AND COMPONENTS The Company purchases most of the parts, components and subassemblies (some of which are designed by the Company) necessary for its terminals and other products from outside sources and assembles them into finished products. The Company offers central systems manufactured by Compaq Computer Corporation (formerly Digital Equipment Corporation) and Stratus Computer, Inc. for its lottery systems. BACKLOG The backlog of the Company's orders for sales of its products believed by the Company to be firm amounted to approximately $101.8 million as of February 26, 2000, as compared to a backlog of approximately $99.9 million as of February 27, 1999. Approximately $32.9 million, or 32.3% of the backlog at February 26, 2000, is not expected to be filled during fiscal 2001. 29 31 COMPETITION The online lottery business is highly competitive in the United States and internationally. Both in the United States and internationally, price is an important, but usually not the sole criterion for selection. Other significant factors that influence the award of lottery contracts are: the ability to optimize lottery revenues through technical capability and applications knowledge; the quality, dependability and upgrade capability of the system; the marketing and gaming experience, financial condition and reputation of the vendor; and the satisfaction of other requirements and qualifications that the lottery authority may impose. During fiscal 2000, the Company's principal competitors in the online lottery business (and the number of online lottery jurisdictions currently serviced or under contract worldwide by such competitors) are as follows: Automated Wagering International, Inc. ("AWI"), a subsidiary of Anchor Gaming (by virtue of its merger, described below, with Powerhouse Technologies, Inc., the prior corporate parent of AWI) (10); Autotote Corporation (5) ("Autotote"); Scientific Games Holdings Corporation (which acquired Telecontrol, the European lottery operation formerly owned by Autotote, during fiscal year 1998, as described below) (8); International Totalizator Systems, Inc. (6); and Essnet/Alcatel (14). Two additional competitors for European online lottery business have emerged in recent years. During fiscal 1996, CGK Computer Gesellschaft Konstanz mbH ("CGK"), a subsidiary of Siemens AG, and the Company agreed to terminate their 1990 Distributorship and License Agreement pursuant to which CGK had exclusive right to distribute, service, sell and market the Company's online lottery systems and components in specified European jurisdictions. Subsequent to August 1995, the effective date of this termination, CGK has been a direct competitor of the Company in Europe and, more recently, in Asia. Further, in April 1997, Scientific Games Holdings Corporation completed the purchase of TeleControl, as mentioned above. Under the terms of the acquisition agreement, Scientific Games has the right to license and purchase Autotote's wagering terminals for use in lottery applications. During fiscal 2000, Anchor Gaming, an operator and developer of gaming machines and casinos, and Powerhouse Technologies, Inc. merged. The merger of these two companies is likely to provide Automated Wagering International, Inc., the Company's leading competitor in the U.S. and a subsidiary of Powerhouse Technologies, Inc., with enhanced financial resources. Dreamport faces competition from numerous companies that seek to finance, develop and manage destination gaming facilities, on and off of Native American lands, as well as from technology providers. The principal competitors providing video lottery technology in competition with the Company include Anchor Gaming (formerly, Powerhouse Technologies, Inc.), Autotote Systems, Inc., Spielo Manufacturing, Inc., WMS Gaming, Inc. and International 30 32 Game Technology, Inc. some of which have supplied substantially more systems and terminals than the Company. PERSONNEL As of April 15, 2000, the Company had approximately 4,800 full-time employees worldwide. The Company's employees are not represented by any labor union. The Company believes that its relationship with its employees is satisfactory. ITEM 2. PROPERTIES The Company's corporate headquarters and research and development and main production facility are located in its approximately 260,000 square foot building located on approximately 26 acres in West Greenwich, Rhode Island, which the Company leases from West Greenwich Technology Associates Limited Partnership. The Company is a limited partner in, and owns 50% of, this partnership. The Company's lease term runs until August 26, 2013 with two five-year options to extend the term and also grants the Company an option to purchase the property. The Company owns approximately 24 acres adjoining its headquarters in West Greenwich, Rhode Island. The Company also owns an approximately 23,000 square foot office building in Coventry, Rhode Island, which it uses for its game design and UWin! operations, as well as an approximately 140,000 square foot manufacturing and central storage facility in Coventry, Rhode Island. In addition, the Company leases approximately 22,650 square feet of an office building in Warwick, Rhode Island which it uses to house its finance and external training departments. The Company holds two leases, of approximately 22,650 and 43,000 square feet respectively, in Boca Raton, Florida which supports the Company's Dreamport operations, Latin American marketing efforts and national call center operations. The first of these leases (for approximately 22,650 square feet) expires in 2009 while the other lease expires in 2003 with provision for one or more extension options thereafter. In addition, except in New York State, where the Company owns its back-up data center facility, and in Austin, Texas, where the Company owns an approximately 39,000 square foot facility which is used by Transactive Corporation, the Company's benefits delivery subsidiary, the Company leases, or is supplied by the relevant state authorities with, its data center facilities in the various jurisdictions. The Company also leases office, depot maintenance and warehouse space in various other locations. The Company leases facilities in Watford and London, England from which it bases its European sales efforts. The Company also maintains an office in Brussels, Belgium which provides a base of additional support for its European operations. The Company's facilities are in good condition and are adequate for its present needs. 31 33 ITEM 3. LEGAL PROCEEDINGS The Company monitors, and occasionally affirmatively becomes involved in, litigation involving Indian gaming in states where such litigation may, directly or indirectly, concern or call into question the legal rights and operations of state lotteries to which the Company provides contract services. The purpose of this effort is to protect state lottery interests, and thus the Company's revenue streams, from service contracts. As previously publicly reported, one such piece of litigation is Rumsey Indian Rancheria v. Wilson, currently pending in the Ninth Circuit Court of Appeals on appeal from the U.S. District Court for the Eastern District of California, which involves a suit by several California Indian tribes against the State and Governor of California under the federal Indian Gaming Regulatory Act ("IGRA"). The Indian Tribes claimed in the District Court that certain elements of the California State Lottery (which is a customer of the Company) ("CSL") and the equipment on which it is run involve the operation of slot machines and, therefore, under IGRA, the tribes also must be permitted to operate slot machines. The State of California argued at times that the CSL does not involve the operation of slot machines; however, the State at times appeared to be taking the position that, if and to the extent the CSL does involve the operation of slot machines, it must be terminated because the CSL is not exempt from the California law prohibiting the operation of slot machines. The Company filed amicus curiae briefs in the District Court arguing that the CSL does not involve the operation of slot machines and that even if it does, the CSL is exempt from the State law prohibition on slot machines. In September 1998, the District Court entered summary judgment for the defendants, without addressing whether or not the CSL operates slot machines. In October 1998, the Indian tribes appealed the District Court's decision to the Ninth Circuit Court of Appeals. Since March 1999, the Ninth Circuit has stayed briefing in the case, first pending the outcome of legal action challenging California's first Indian gaming initiative, Proposition 5, and then pending the outcome of another Indian gaming initiative, Proposition 1A, which was designed to eliminate the state constitutional problem that the state Supreme Court found in Proposition 5. Proposition 1A has now passed, it appears that no legal challenges to it have been filed, and briefing in Rumsey remains stayed. Proposition 1A effectively legalizes the operation by Indian tribes of various forms of gaming that are otherwise illegal in California, subject to certain conditions that appear agreeable to most or all tribes. If Proposition 1A is not challenged, or if it survives any challenge, it appears likely that the Rumsey case will not again become active and may be voluntarily dismissed by the tribes, thus eliminating any need for the Company to intervene in the case. There can be no assurance that this will be the case, however, and the Company intends to continue to monitor developments and may seek to intervene in this litigation, if the Company deems it to be appropriate under the circumstances. In April 1999, the Company was served with a lawsuit entitled Pantaleon Arellano, et. al. and Estelle Arellano v. The California State Lottery, et. al. in California Superior Court (Orange County), which was filed in March, 1999. In this action, plaintiffs are a brother and sister who claim to have purchased a winning ticket in the California State Lottery's ("CSL's") April 8, 1998 Super Lotto drawing. That drawing resulted in the award of a $102 million jackpot, which was split evenly among three holders of tickets bearing the winning numbers. Plaintiffs here claim to have purchased a ticket for that drawing with the same winning numbers; the computer 32 34 records of the Company and the CSL reveal that the ticket plaintiffs hold was purchased after the close of sales for that drawing, and after the winning numbers were announced. If plaintiffs had purchased a winning ticket in the relevant drawing, they would have a claim against the CSL for one-fourth of that jackpot amount, i.e., approximately $25.5 million. In their complaint, they attempt to state a claim against both the CSL (and its Commission and the State of California) and the Company for $104 million, apparently their approximation of the full amount of the jackpot. They also seek to have this amount trebled, alleging that the defendants' conduct in denying plaintiffs' claim to the jackpot was racially motivated, and they seek various other amounts, including emotional distress damages and attorney fees. The Company believes that this complaint, and the allegations underlying the complaint, are wholly without merit. The Company intends to defend itself vigorously in these proceedings. For information respecting certain other legal proceedings, refer to Item 1, "Certain Factors Affecting Future Performance - Maintenance of Business Relationships and Certain Legal Matters" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this report, and Note G of Notes to Consolidated Financial Statements included in this report. The Company also is subject to certain legal proceedings and claims which management believes, on the basis of information presently available to it, will not materially adversely affect the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Holding's security holders during the last quarter of fiscal 2000. 33 35 ADDITIONAL INFORMATION The following information is furnished in this Part I pursuant to Instruction 3 to Item 401(b) of Regulation S-K: EXECUTIVE OFFICERS OF THE COMPANY The Executive Officers of Holdings as of April 28, 2000 are:
Name Age Position William Y. O'Connor 55 Chairman (since February 1998), Chief Executive Officer (since July 1997), President (from December 1994 until March 2000) and director (since July 1995). Mr. O'Connor also served as Chief Operating Officer from December 1994 until March 1998. Previously, Mr. O'Connor was the President and Chief Executive Officer of Ascom Timeplex, a telecommunications company, from 1992 to 1994 and prior to that was Corporate Senior Vice President and President of the Broadband Communications Group of Scientific-Atlanta, Inc. from 1987 to 1992. Steven P. Nowick 46 Chief Operating Officer (since March 1998) and President (since March 2000) and Senior Vice President (from July 1997 until March 2000). Previously, Mr. Nowick was President, Corporate Product Management, of Ameritech Corporation, a telecommunications company, from 1994 to 1997 and Practice Leader with respect to telecommunications and related areas of practice with Booz, Allen & Hamilton, a consultancy, from 1992 to 1994. David J. Calabro 50 Senior Vice President, with responsibility for the Company's worldwide facilities management business, since March 1999. Previously, Mr. Calabro was employed by Unisys Corporation, a leading provider of information technology, from May 1995 through February 1999 as its Vice President and General Manager of the United States and Canada Public Sector Market Group, and prior to that, was Director of Business Operations (Government Systems Group) from August 1987 through April 1995 for Digital Equipment Corporation, a leading supplier of computer goods and services.
34 36
Jean-Pierre Desbiens 49 Senior Vice President, with responsibility for product sales and business development, since August 1998. Previously, Mr. Desbiens was employed by BABN Technologies Inc., one of the world's largest printers of lottery tickets, in a series of increasingly responsible positions over the course of 16 years including, from September 1990 until January 1998, as its President and Chief Executive Officer. Jaymin B. Patel 32 Senior Vice President and Chief Financial Officer since January 2000. Previously, Mr. Patel was employed by the Company in a series of increasingly responsible positions including, from April 1998 until January 2000, as GTECH's Vice President, Financial Planning and Business Evaluation. Donald L. Stanford 49 Senior Vice President, with responsibility for technology, for more than five years. Donald R. Sweitzer 52 Senior Vice President - Government Relations since July 1998. Previously, Mr. Sweitzer was President of the Dorset Resource and Strategy Group, a government affairs consultancy, from November 1996 through June 1998, and President and Managing Partner of Politics Inc., a political consulting firm, from January 1995 through August 1996. Mr. Sweitzer also served as Kentucky State Director of Clinton/Gore 1996 Inc., President Clinton and Vice President Gore's 1996 political campaign vehicle, from August 1996 through November 1996, and as Political Director of the Democratic National Committee from April 1994 through January 1995.
Executive officers and other officers are elected or appointed by, and serve at the pleasure of, the Board of Directors. Some are party to employment contracts with the Company. The information set forth above reflects positions held with Holdings except as expressly provided to the contrary. --------------------- For the purposes of calculating the aggregate market value of the shares of Common Stock of Holdings held by nonaffiliates, as shown on the cover page of this report, it has been assumed that all the outstanding shares were held by nonaffiliates except for the shares beneficially owned by: directors, officers, and employees of and consultants to Holdings and GTECH. However, this should not be deemed to constitute an admission that all such persons or entities are, in fact, affiliates of Holdings, or that there are not other persons who may be deemed to be affiliates of Holdings. Further information concerning shareholdings of officers, directors and principal shareholders of Holdings will be included in Holdings' definitive proxy statement relating to its scheduled August 2000 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission. 35 37 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal United States market on which Holdings' Common Stock is traded is the New York Stock Exchange where it is traded under the symbol "GTK." The following table sets forth on a per share basis the high and low sale prices of Common Stock for the fiscal quarters indicated, as reported on the New York Stock Exchange Composite Tape.
FISCAL 1999 HIGH LOW First Quarter (March 1 - May 30, 1998) $40 5/8 $31 Second Quarter (May 31- August 29, 1998) $35 9/16 $27 Third Quarter (August 30 - November 28, 1998) $28 13/16 $21 3/4 Fourth Quarter (November 29 - February 27, 1999) $27 9/16 $20 5/16
FISCAL 2000 HIGH LOW First Quarter (February 28 - May 29, 1999) $28 3/16 $22 1/8 Second Quarter (May 30 - August 28, 1999) $25 11/16 $22 5/8 Third Quarter (August 29 - November 27, 1999) $25 15/16 $19 3/8 Fourth Quarter (November 28, 1999 - February 26, 2000) $23 1/8 $19 3/8
The closing price of the Common Stock on the New York Stock Exchange on April 26, 2000 was $20. As of April 26, 2000, there were approximately 960 holders of record of the Common Stock. Holdings has never paid cash dividends on its Common Stock and has no current plan to do so. The current policy of Holdings' Board of Directors is to reinvest earnings in the operation and expansion of the Company's business. Further, Holdings is a holding company and the operations of the Company are conducted through Holdings' subsidiaries. Accordingly, the ability of Holdings to pay dividends on its Common Stock would be dependent on the earnings and cash flow of its subsidiaries and the availability of such cash flow to Holdings. 36 38 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data below should be read in conjunction with Item 7--"Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and the other financial information included in this report. The operating, balance sheet and per share data in the table are derived from the consolidated financial statements of the Company which were audited by independent auditors. 37 39 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended ------------------------------------------------------------------------------ February 26, February 27, February 28, February 22, February 24, 2000 1999 1998 (a) 1997 1996 ------------ ------------- ------------- ------------ ------------ (Dollars in thousands, except per share amounts) OPERATING DATA: Revenues: Services $ 860,419 $ 887,395 $ 868,522 $ 789,534 $ 686,043 Sales of products 150,379 85,528 122,045 114,738 58,047 ---------- ---------- ---------- ---------- ---------- Total 1,010,798 972,923 990,567 904,272 744,090 Gross Profit: Services 303,089 295,608 265,038 237,872 244,139 Sales of products 48,426 25,703 48,230 47,297 13,595 ---------- ---------- ---------- ---------- --------- Total 351,515 321,311 313,268 285,169 257,734 Operating income 180,000 141,720 (b) 44,104 (c) 127,091 117,983 Interest expense, net of interest income 25,523 23,326 24,578 16,388 12,107 Net income 93,585 89,063 27,214 77,803 66,627 PER SHARE DATA: Basic $ 2.58 $ 2.17 $ .65 $ 1.81 $ 1.54 Diluted 2.58 2.16 .64 1.80 1.53 OTHER DATA: Earnings before depreciation, amortization, interest, taxes and other noncash charges $ 361,126 $ 376,158 $ 347,099 $ 326,054 $ 273,570 Cumulative number of lottery terminals shipped (d) 408,906 377,857 360,202 316,614 280,897 Number of lottery terminals sold 13,293 4,921 11,963 13,609 3,658 Number of lottery customers at year-end 82 81 78 79 74 BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 28,253 $ 3,755 $ 27,371 $ 36,914 $ 21,414 Total assets 891,023 874,215 1,023,812 956,541 859,380 Long-term debt, less current portion 349,400 319,078 453,587 382,499 382,930 Shareholders' equity 296,576 283,906 345,210 358,133 296,725
(a) 53-week year (b) Includes a special charge of $15.0 million, or $.22 per basic share; $.21 per diluted share. See Note P to the Consolidated Financial Statements. (c) Includes a special charge of $99.4 million, or $1.45 per basic share; $1.44 per diluted share. See Note P to the Consolidated Financial Statements. (d) Terminals shipped represents lottery terminals sold under product sale contracts and lottery terminals supplied under service contracts. 40 Item 7. 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 engaged in or expects to be engaged in, (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, (iv) the existence or effects of possible latent Y2K problems, and (v) 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 that 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 below and elsewhere in this report and in the Company's press releases and its subsequent Forms 10-Q and other reports 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 online lottery systems and components to government-authorized lotteries. Service revenues have been derived primarily from lottery service contracts. These contracts are typically at least five years in duration, and are generally based upon a percentage of a lottery's gross online lottery sales. These percentages vary depending on the size of the lottery and the scope of services provided to the lottery. Product sale revenues have been derived primarily from the installation of new online lottery systems, installation of new software and sales of lottery terminals and equipment in connection with the expansion of existing lottery systems. The size and timing of these transactions have resulted in variability in product sale revenues from period to period. The Company currently anticipates that product sales during fiscal 2001 will be in a range of $180.0 million to $200.0 million. The Company has taken steps to broaden its offerings of high-volume transaction processing services outside of its core business of providing online lottery services. For example, the Company's Dreamport subsidiary ("Dreamport") provides gaming technology and a comprehensive array of management, development and strategic services to the gaming and entertainment markets. The Company's Europrint subsidiary is among the world's largest providers of media promotional games and the Company's IGI subsidiary has pioneered the development of interactive, televised lottery games. Also, during the second quarter of fiscal 1999, the Company established an Internet wagering subsidiary, Uwin!, to provide legal and secure Internet gaming solutions for government authorized wagering. Uwin! entered into contracts with two international customers in fiscal 2000. 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 may 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 41 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 may still be under way. Accordingly, the Company lacks sufficient information to determine with certainty their existence and 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 such investigations and related matters could have such a material adverse effect. See Note G to the Consolidated Financial Statements, Part I, Item 1, -- "Certain Factors That May Affect Future Performance -- Maintenance of Business Relationships and Certain Legal Matters" and Part I, Item 3 -- "Legal Proceedings" herein for further information concerning these matters and other contingencies. The Company operates on a 52- to 53-week fiscal year ending on the last Saturday in February. Fiscal 2000 was a 52-week year. All references to the Consolidated Financial Statements of the Company and Notes thereto are to those financial statements and notes thereto included in Item 8 herein. 42 The following discussion should be read in conjunction with the table below.
SUMMARY FINANCIAL DATA Fiscal Year Ended --------------------------------------------------------------------------- February 26, February 27, February 28, 2000 1999 1998 (a) ------------------ --------------------- ------------------ (Dollars in thousands) Revenues: Services $860,419 85.1% $887,395 91.2% $868,522 87.7% Sales of products 150,379 14.9 85,528 8.8 122,045 12.3 --------- ----- -------- ----- -------- ----- Total 1,010,798 100.0 972,923 100.0 990,567 100.0 Costs and expenses: Costs of services (b) 557,330 64.8 591,787 66.7 603,484 69.5 Costs of sales (b) 101,953 67.8 59,825 69.9 73,815 60.5 --------- ----- -------- ----- -------- ----- Total 659,283 65.2 651,612 67.0 677,299 68.4 --------- ----- -------- ----- -------- ----- Gross profit 351,515 34.8 321,311 33.0 313,268 31.6 Selling, general and administrative 126,566 12.5 124,433 12.8 133,284 13.5 Research and development 46,053 4.6 40,158 4.1 36,498 3.7 --------- ----- -------- ----- -------- ----- Operating expenses 172,619 17.1 164,591 16.9 169,782 17.1 Special charge (1,104) (0.1) 15,000 1.5 99,382 10.0 Operating income 180,000 17.8 141,720 14.6 44,104 4.4 Other income (expense): Interest income 3,509 0.3 4,079 0.4 5,733 0.6 Equity in earnings of unconsolidated affiliates 2,843 0.3 7,113 0.7 24,376 2.5 Other income (expense) (1,343) (0.1) 25,447 2.6 711 0.1 Interest expense (29,032) (2.9) (27,405) (2.8) (30,311) (3.1) --------- ----- -------- ----- -------- ----- Income before income taxes 155,977 15.4 150,954 15.5 44,613 4.5 Income taxes 62,392 6.1 61,891 6.3 17,399 1.8 --------- ----- -------- ----- -------- ----- Net income $93,585 9.3% $89,063 9.2% $27,214 2.7% ========= ===== ======== ===== ======== =====
(a) 53-week year (b) Percentages are computed based on cost as a percentage of related revenue. 43 Special Charges In the fourth quarter of fiscal 1998 the Company's Board of Directors approved a plan of repositioning and restructuring of the Company's operations (the "Plan") and the Company recorded a $99.4 million special charge ($60.6 million after-tax, or $1.45 per basic share; $1.44 per diluted share) related to the execution of the Plan. The special charge consisted principally of costs to exit the electronic benefits transfer ("EBT") business conducted by the Company's Transactive subsidiary ("Transactive"). In addition, the special charge included costs associated with a worldwide workforce reduction, contractual obligations in connection with the departures of the Company's former Chairman and Vice-Chairman from the Company and asset impairment charges relating to two of the Company's lottery contracts. In February 1998, the Company entered into an asset purchase agreement with Citicorp Services, Inc. ("Citicorp") to sell EBT contracts and certain related assets held by Transactive. The United States Department of Justice commenced a legal action seeking to enjoin the consummation of the transaction, and in January 1999 Citicorp terminated the agreement. Principally as a result of this contract termination, the Company recorded an additional special charge in the fourth quarter of fiscal 1999 of $15.0 million ($8.9 million after-tax, or $.22 per basic and diluted share) in order to write down the assets held for sale to their net realizable value. The proposed sale did not include the contracts or assets in connection with Transactive's provision of benefit identification cards to the state of New York, electronic payment file transfer services to the city of New York, or hunting, fishing and recreational licenses to the state of Texas. The Company plans to continue to honor those contracts and Transactive's EBT contracts, but has decided not to pursue new opportunities in those areas or seek new United States EBT contracts. In the fourth quarter of fiscal 2000, the Company recorded a $1.1 million reduction in the special charge resulting from prudent management of severance costs and attrition at Transactive. Results of Operations COMPARISON OF FISCAL 2000 WITH 1999 Revenues for fiscal 2000 were $1.010 billion, representing a $37.9 million, or 3.9%, increase over revenues of $972.9 million in fiscal 1999. Service revenues, including lottery and other services, in fiscal 2000 were $860.4 million, representing a $27.0 million, or 3.0%, decrease from the $887.4 million of service revenues in fiscal 1999. This decrease reflects a 6.3% decline in domestic lottery service revenues, which were partially offset by a 1.3% increase in international lottery service revenues. In fiscal 2000, lottery sales by the Company's domestic customers declined approximately 4.0% compared with fiscal 1999, primarily reflecting lower sales in Texas, the temporary suspension of Quick Draw in New York and lower jackpot activity. This decline, coupled with the loss of the Company's Indiana lottery contract and contractual rate changes, resulted in a 6.3% decline in the Company's domestic service revenues. 44 Lottery sales by the Company's international customers increased 14.6% in fiscal 2000 compared with fiscal 1999, driven primarily by growth in Brazil, Germany, the Czech Republic, Poland and Mexico. This increase, coupled with contractual rate increases in Brazil, was almost fully offset by the impact of the reduction in the dollar value of foreign currencies, resulting in a 1.3% increase in the Company's international lottery service revenues. Product sales were $150.4 million in fiscal 2000, an increase of $64.9 million over the $85.5 million of product sales in fiscal 1999. This increase was primarily driven by sales of equipment to South Africa, an online lottery system to Israel and a new PRO:SYS central system, including instant ticket validation capabilities to Sweden. The Company sold approximately 13,300 lottery terminals during fiscal 2000, compared to approximately 4,900 lottery terminals during fiscal 1999. Gross margins on service revenues improved from 33.3% in fiscal 1999 to 35.2% in fiscal 2000 due to improved margins from the Company's operations in Brazil. While the Company's service cost structure will continue to benefit from ongoing reengineering efforts, the Company expects that gross margins on service revenues will be in a range of 33% to 34% in fiscal 2001, primarily due to start up costs associated with the implementation of new international lottery systems as well as the high level of jackpot activity experienced in fiscal 2000. Gross margins on product sales fluctuate depending on the mix, volume and timing of product sales contracts. Gross margins on product sales increased from 30.1% in fiscal 1999 to 32.2% in fiscal 2000, primarily due to equipment sales to South Africa, partially offset by lower margins on new online lottery systems installed in fiscal 2000. Product gross margins are expected to be in a range of 23% to 25% in fiscal 2001, primarily due to the high number of central systems anticipated to be sold in fiscal 2001 that have historically carried lower margins. Selling, general and administrative expenses in fiscal 2000 were $126.6 million, representing a $2.2 million, or 1.7%, increase from the $124.4 million incurred in fiscal 1999. This modest increase was primarily attributable to the Company's customer and industry conference held during the second quarter of fiscal 2000. This conference is held every other year. As a percentage of revenues, selling, general and administrative expenses were 12.5% and 12.8% during fiscal 2000 and 1999, respectively. Research and development expenses in fiscal 2000 were $46.1 million, representing a $5.9 million, or 14.7%, increase over research and development expenses of $40.2 million in fiscal 1999. This increase reflects development activities associated with the Company's next generation lottery operating system and terminals, along with increased spending by Dreamport on a number of new products in the development pipeline. As a percentage of revenues, research and development expenses were 4.6% and 4.1% during fiscal 2000 and 1999, respectively. Equity in earnings of unconsolidated affiliates in fiscal 2000 was $2.8 million, a decrease of $4.3 million from the $7.1 million earned during fiscal 1999. This decrease resulted principally from the Company's sale, in April 1998, of its 22.5% equity interest in Camelot Group plc ("Camelot"). Other expense in fiscal 2000 was $1.3 million, and comprises net foreign exchange losses associated with the Company's global asset protection and foreign exchange management programs designed to protect future cash flows, partially offset by the amortization of the gain on the sale of Camelot, which is being amortized over the remaining period of Camelot's operating license, due to expire in September 2001. The foreign exchange losses during fiscal 2000 were more than offset by higher cash gross margin from the Company's foreign operations due to stronger than expected foreign currencies relative to the United States dollar. Other income of $25.4 million in fiscal 1999 principally comprised foreign exchange gains associated with the Company's global asset protection and foreign exchange management programs, as well as the amortization of the gain on the sale of Camelot. As a result of the material devaluation that took 45 place in Brazil in January 1999 and the hedging strategy that the Company had in place at the time, the Company recognized a one-time foreign exchange gain of approximately $17.0 million. Interest expense in fiscal 2000 was $29.0 million, an increase of $1.6 million over interest expense of $27.4 million incurred during fiscal 1999. This increase was primarily due to higher average debt outstanding under the Company's revolving credit facility. The Company's effective income tax rate decreased from 41% in fiscal 1999 to 40% in fiscal 2000 due principally to lower state taxes and increased Research and Development tax credits. The Company's effective income tax rate was greater than the statutory rate primarily due to state income taxes and certain expenses that are not deductible for income tax purposes. COMPARISON OF FISCAL 1999 WITH 1998 Revenues for fiscal 1999 were $972.9 million, representing a $17.7 million, or 1.8%, decrease from revenues of $990.6 million in fiscal 1998. Service revenues in fiscal 1999 were $887.4 million, representing an $18.9 million, or 2.2%, increase over the $868.5 million of service revenues in fiscal 1998. This increase resulted primarily from $11.3 million of higher service revenues from the Company's existing lottery customer base, including higher lottery jackpot activity, and $6.6 million of incremental service revenues from Dreamport. The increase in service revenues reflects a $15.0 million reduction in service revenue associated with having 13 weeks in the first quarter of fiscal 1999 compared with 14 weeks in the first quarter of fiscal 1998. In fiscal 1999, lottery sales by the Company's domestic customers declined approximately 2% compared with fiscal 1998, primarily reflecting the continued decline in sales in Texas and New York. This decline, coupled with contractual rate reductions in Texas, California and Georgia, resulted in a decline in the Company's domestic service revenues of 5.6%. Excluding Texas, lottery sales for the Company's domestic customers increased approximately 5%. Lottery sales by the Company's international customers increased approximately 19% in fiscal 1999 compared with fiscal 1998, driven primarily by growth in Brazil, Mexico, Poland and Germany. This increase, coupled with contractual rate increases in Brazil and Mexico and partially offset by the impact of the reduction in the dollar value of foreign currencies, resulted in growth of 14% in the Company's international lottery service revenues. Worldwide sales by the Company's lottery customers increased approximately 5% in fiscal 1999 versus fiscal 1998. Incorporating rate and currency changes, the Company's total lottery service revenues grew 1.4%. The weakening of foreign currencies affected fiscal 1999 lottery service revenues. However, these effects were offset by gains from financial hedges, reflected in other income. Had average exchange rates in fiscal 1998 continued throughout fiscal 1999, service revenues would have been approximately $30.0 million higher than reported. As anticipated, product sales declined from $122.0 million in fiscal 1998 to $85.5 million in fiscal 1999. This decrease resulted primarily from lower terminal sales in fiscal 1999 than in fiscal 1998. The Company sold approximately 4,900 lottery terminals during fiscal 1999, as compared to approximately 12,000 lottery terminals during fiscal 1998. Fiscal 1998 product 46 sales included approximately 6,500 terminals to the state of Massachusetts comprising part of the sale of a new online lottery central system to that customer in the third quarter of fiscal 1998. Gross margins on service revenues were 33.3% in fiscal 1999, up from 30.5% in fiscal 1998, primarily due to cost reductions resulting from the restructuring and repositioning Plan announced by the Company in February 1998, along with higher lottery jackpot activity in fiscal 1999 than in fiscal 1998. Gross margins on product sales fluctuate depending on the mix, volume and timing of product sales contracts. Gross margins on product sales declined from 39.5% in fiscal 1998 to 30.1% in fiscal 1999. This change was primarily due to a shift in product mix along with the acquisition of Europrint, a business with lower margins than the Company has realized historically. Selling, general and administrative expenses in fiscal 1999 were $124.4 million, representing an $8.9 million, or 6.6%, decrease from the $133.3 million incurred in fiscal 1998. This decrease was primarily attributable to lower legal expenses and a reduction in costs resulting from the restructuring and repositioning Plan. These declines were partially offset by selling, general and administrative expenses of Europrint and IGI. As a percentage of revenues, selling, general and administrative expenses were 12.8% and 13.5% during fiscal 1999 and 1998, respectively. Research and development expenses in fiscal 1999 were $40.2 million, representing a $3.7 million, or 10%, increase over research and development expenses of $36.5 million in fiscal 1998. This increase reflects costs associated with the continuing development of the Company's Internet wagering platform, as well as an increase in the number of new products in the development pipeline. As a percentage of revenues, research and development expenses were 4.1% and 3.7% during fiscal 1999 and 1998, respectively. Interest income in fiscal 1999 was $4.1 million, a decrease of $1.6 million from interest income of $5.7 million earned during fiscal 1998. During fiscal 1998, the Company had higher dollar-denominated cash balances on hand in Brazil than in fiscal 1999 to fund the online lottery system implementation that was completed for Caixa Economica Federal, Latin America's largest financial institution, in fiscal 1998. Equity in earnings of unconsolidated affiliates in fiscal 1999 was $7.1 million, a decrease of $17.3 million from the $24.4 million earned during fiscal 1998. This decrease resulted principally from the Company's sale, in April 1998, of its 22.5% equity interest in Camelot back to Camelot for $84.9 million. The book value of the Company's Camelot investment at the time of sale was $51.8 million. A portion of the cash received by the Company would have to be returned to Camelot in the event that Camelot's operating license is revoked for certain reasons determined to be attributable to the Company. Accordingly, the Company has deferred the recognition of the gain from the sale of its investment and is recognizing such gain ratably over the remaining period of Camelot's operating license, due to expire in September 2001. The sale of this equity interest does not affect the Company's position as the principal supplier of goods and services to Camelot, but has reduced the Company's equity in earnings of unconsolidated affiliates. Other income in fiscal 1999 was $25.4 million, an increase of $24.7 million over the $.7 million earned in fiscal 1998. Other income in fiscal 1999 includes foreign exchange gains associated with the Company's global asset protection and foreign exchange management programs, as well as the amortization of the gain on the sale of Camelot. The Company, through its asset 47 protection strategy, avoided a cash loss in Brazil by investing accumulated cash in dollar-denominated investments while awaiting government approvals to repatriate these dollars to the United States. Subsequent to February 27, 1999, government approval was obtained and this cash was repatriated. The success of the Company's foreign exchange management program offset approximately 90% of the gross profit erosion that resulted from the year-to-year weakening of foreign currencies. Interest expense in fiscal 1999 was $27.4 million, a decrease of $2.9 million from interest expense of $30.3 million incurred during fiscal 1998. This decrease was primarily due to lower debt outstanding under the Company's revolving credit facility, partially offset by higher average interest rates on the Company's outstanding debt. The Company's effective income tax rate increased from 39% in fiscal 1998 to 41% in fiscal 1999 due principally to the loss of the beneficial tax effect of U.K. equity earnings that were reported on an after-tax basis. This increase was partially offset by the congressional extension of the Research and Development tax credit. The Company's effective income tax rate was greater than the statutory rate primarily due to state income taxes and certain expenses that are not deductible for income tax purposes. Changes in Financial Position, Liquidity and Capital Resources During fiscal 2000, the Company generated $230.8 million of cash from operations. This cash was used principally to fund the purchase of $128.6 million of systems, equipment and other assets relating to contracts and to repurchase $98.7 million of the Company's common stock. Trade accounts receivable increased by $8.7 million, from $106.7 million at February 27, 1999 to $115.4 million at February 26, 2000, primarily due to a higher level of product sales in the fourth quarter of fiscal 2000 compared to the fourth quarter of fiscal 1999. Inventories increased by $5.5 million, from $61.9 million at February 27, 1999 to $67.4 million at February 26, 2000, primarily due to spending related to product sales expected to be delivered during the first half of fiscal 2001. Current deferred income taxes decreased by $13.6 million, from $29.4 million at February 27, 1999 to $15.8 million at February 26, 2000 and noncurrent deferred income tax liabilities decreased by $11.8 million, from $18.5 million at February 27, 1999 to $6.7 million at February 26, 2000, primarily due to reclassifications to match deferred income taxes with the related asset or liability on the balance sheet. Investments in and advances to unconsolidated affiliates increased by $15.1 million, from $10.8 million at February 27, 1999 to $25.9 million at February 26, 2000, primarily due to the Company's investment in and advances to Uthingo, the consortium that holds the license to operate the South African National Lottery, along with a 33% investment in Turfway Park, LLC, a joint venture that operates a thoroughbred racing and simulcasting facility in Kentucky. The special charge accrual decreased by $6.1 million in fiscal 2000, due to scheduled severance and related payments along with the release of approximately $1.1 million of the accrual resulting from prudent management of severance costs and attrition at the Company's Transactive subsidiary. 48 Accounts payable increased $9.7 million, from $43.4 million at February 27, 1999 to $53.1 million at February 26, 2000, primarily due to the higher level of inventory at February 26, 2000 relative to February 27, 1999, along with the timing of payments relating to ongoing lottery system installations. Accrued expenses decreased $10.7 million, from $55.6 million at February 27, 1999 to $44.9 million at February 26, 2000, primarily due to the abolishment of certain tax obligations resulting from a change in United Kingdom legislation along with the fulfillment of certain warranty obligations associated with the United Kingdom lottery contract. Income taxes payable (which are reported net of income tax refunds receivable) decreased by $8.5 million, from $57.9 million at February 27, 1999 to $49.4 million at February 26, 2000. This decrease was primarily due to the timing of income tax payments, including those related to the sale of the Company's investment in Camelot in April 1998. 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 2001 will be in a range of $160.0 million to $180.0 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. As of April 1, 2000, the Company had utilized approximately $40.0 million of its $400.0 million Credit Facility. The Company currently expects that its cash flow from operations and available borrowings under its Credit Facility will be sufficient to fund its anticipated working capital and ordinary capital expenditure needs, to service its debt obligations and to fund anticipated internal growth in the foreseeable future. Market Risk Disclosures The primary market risk inherent in the Company's financial instruments and exposures is the potential loss arising from adverse changes in interest rates and foreign currency rates. The Company's exposure to commodity price changes is not considered material and is managed through its procurement and sales practices. The Company did not own any marketable equity securities during fiscal 2000 or fiscal 1999. Interest rates Interest rate market risk is estimated as the potential change in the fair value of the Company's total debt or current earnings resulting from a hypothetical 10% adverse change in interest rates. At February 26, 2000 and February 27, 1999, the estimated fair value of the Company's fixed rate debt, as determined by an independent investment banker, approximated $293.9 million and $313.4 million, respectively. After taking into consideration $150.0 million of interest rate swaps in effect at February 26, 2000, a hypothetical 10% increase in interest rates would change the estimated fair value of the Company's fixed rate debt to $290.5 million and a hypothetical 10% decrease in interest rates would change the estimated fair value of the Company's fixed rate debt to $297.2 million. Comparatively, a hypothetical 10% increase in interest rates would change the estimated fair value of the Company's fixed rate debt to $305.1 million and a hypothetical 10% decrease in interest rates would change the estimated fair value of the Company's fixed rate debt to $322.0 million at February 27, 1999. A hypothetical 10% adverse or favorable change in interest rates applied to variable rate debt would not have a material effect on current earnings. 49 The Company uses various techniques to reduce the risk associated with future increases in interest rates, including entering into interest rate swaps and the private placement of seven- and 10-year fixed rate debt on May 29, 1997. Foreign Currency Exchange Rates Foreign exchange exposures arise from current transactions and anticipated transactions denominated in a currency other than an entity's functional currency and from the translation of foreign currency balance sheet accounts into United States dollar balance sheet accounts. The Company seeks to manage its foreign exchange risk by attempting to secure payment from its customers in United States 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 and option contracts. In addition, a significant portion of the costs attributable to the Company's foreign currency revenues are payable in the local currencies. Whenever possible, the Company negotiates clauses into its contracts that allow for price adjustments should a material change in foreign exchange rates occur. The Company, from time to time, enters into foreign currency exchange and option contracts to reduce the exposure associated with current transactions and anticipated transactions denominated in foreign currencies. However, the Company does not engage in currency speculation. At February 26, 2000 and February 27, 1999, a hypothetical 10% adverse change in foreign exchange rates would result in a translation loss of $16.3 million and $17.0 million, respectively, which would be recorded in the equity section of the Company's balance sheet. At February 26, 2000 and February 27, 1999, a hypothetical 10% adverse change in foreign exchange rates would result in a net transaction loss of $3.4 million and $.8 million, respectively, which would be recorded in current earnings after considering the effects of foreign exchange contracts currently in place. At February 26, 2000, a hypothetical 10% adverse change in foreign exchange rates would result in a net reduction of cash flows from anticipatory transactions in fiscal 2001 by $12.1 million. Comparatively, at February 27, 1999, the result of a hypothetical 10% adverse change in foreign exchange rates would have resulted in a net reduction of cash flows from anticipatory transactions of $13.1 million in fiscal 2000. The percentage of fiscal 2000 and fiscal 1999 anticipatory transactions that were hedged varied throughout each fiscal year, but averaged 73% in fiscal 2000 compared to 65% in fiscal 1999. As of February 26, 2000, the Company had contracts for the sale of foreign currency of approximately $87.7 million (primarily Spanish pesetas, South African rand and Irish punts) and the purchase of foreign currency of approximately $66.7 million (primarily pounds sterling), compared to contracts for the sale of foreign currency of approximately $80.3 million (primarily Spanish pesetas, Mexican pesos and Brazilian reals) and the purchase of foreign currency of approximately $71.1 million (primarily pounds sterling) at February 27, 1999. IMPACT OF YEAR 2000 50 The Company began its Y2K remediation program in 1997. Since that time, the Company has spent approximately $23.0 million and devoted more than 200,000 person-hours to ensure that Y2K did not interrupt service. The project, the largest in the Company's history, involved managing not only the Company's own systems, but also numerous other lottery and third-party systems, as well as telecommunications networks in 37 different countries. As a result of those planning and implementation efforts, the Company experienced no disruptions in service or downtime with its systems. The Company will continue to monitor its critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly. 51 Report of Independent Auditors Board of Directors and Shareholders GTECH Holdings Corporation We have audited the accompanying consolidated balance sheets of GTECH Holdings Corporation and subsidiaries as of February 26, 2000 and February 27, 1999 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended February 26, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Camelot Group plc, (an entity in which the Company had a 22.5% interest), have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the 1998 consolidated financial statements of the Company relates to data included for Camelot Group plc, it is based solely on their report. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GTECH Holdings Corporation and subsidiaries at February 26, 2000 and February 27, 1999 and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 26, 2000, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Boston, Massachusetts March 27, 2000 52 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Camelot Group plc We have audited the financial statements of Camelot Group plc as of January 31, 1998 and February 1, 1997, and for the years then ended which are expressed in pounds sterling. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United Kingdom and the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly the financial position of Camelot Group plc at January 31, 1998 and February 1, 1997, and the results of its operations, total recognised gains and losses and cash flows for each of the years ended January 31, 1998 and February 1, 1997, in conformity with generally accepted accounting principles in the United Kingdom. Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of net income expressed in pounds sterling for the years ended January 31, 1998 and February 1, 1997 and the determination of shareholders' equity also expressed in pounds sterling at January 31, 1998 and February 1, 1997 to the extent summarised in footnote 24 to the financial statements. Price Waterhouse Chartered Accountants London, England March 23, 1998 53 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
February 26, February 27, 2000 1999 ----------- ------------ (Dollars in thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,115 $ 7,733 Trade accounts receivable 115,358 106,693 Sales-type lease receivables 10,110 6,743 Inventories 67,418 61,893 Deferred income taxes 15,853 29,419 Other current assets 19,346 14,047 --------- --------- TOTAL CURRENT ASSETS 239,200 226,528 SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 375,918 397,561 GOODWILL 130,710 135,662 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 25,898 10,801 OTHER ASSETS 119,297 103,663 --------- --------- TOTAL ASSETS $ 891,023 $ 874,215 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 53,103 $ 43,402 Accrued expenses 44,898 55,609 Special charge -- 6,058 Employee compensation 30,057 27,379 Advance payments from customers 33,438 30,458 Income taxes payable 49,382 57,907 Current portion of long-term debt 69 1,960 --------- --------- TOTAL CURRENT LIABILITIES 210,947 222,773 LONG-TERM DEBT, less current portion 349,400 319,078 OTHER LIABILITIES 27,363 29,908 DEFERRED INCOME TAXES 6,737 18,550 COMMITMENTS AND CONTINGENCIES -- -- 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, 44,171,315 and 44,152,565 shares issued; 34,804,004 and 38,722,063 shares outstanding at February 26, 2000 and February 27, 1999, respectively 442 442 Additional paid-in capital 176,750 176,434 Equity carryover basis adjustment (7,008) (7,008) Accumulated other comprehensive income (69,493) (84,842) Retained earnings 437,830 345,018 --------- --------- 538,521 430,044 Less cost of 9,367,311 and 5,430,502 shares in treasury at February 26, 2000 and February 27, 1999, respectively (241,945) (146,138) --------- --------- 296,576 283,906 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 891,023 $ 874,215 ========= =========
See Notes to Consolidated Financial Statements 54 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
Fiscal Year Ended ------------------------------------------------------- February 26, February 27, February 28, 2000 1999 1998 (a) ----------- ----------- ------------ (Dollars in thousands, except per share amounts) Revenues: Services $ 860,419 $ 887,395 $ 868,522 Sales of products 150,379 85,528 122,045 ----------- ----------- ----------- 1,010,798 972,923 990,567 Costs and expenses: Costs of services 557,330 591,787 603,484 Costs of sales 101,953 59,825 73,815 ----------- ----------- ----------- 659,283 651,612 677,299 ----------- ----------- ----------- Gross profit 351,515 321,311 313,268 Selling, general and administrative 126,566 124,433 133,284 Research and development 46,053 40,158 36,498 Special charge (1,104) 15,000 99,382 ----------- ----------- ----------- Operating income 180,000 141,720 44,104 Other income (expense): Interest income 3,509 4,079 5,733 Equity in earnings of unconsolidated affiliates 2,843 7,113 24,376 Other income (expense) (1,343) 25,447 711 Interest expense (29,032) (27,405) (30,311) ----------- ----------- ----------- Income before income taxes 155,977 150,954 44,613 Income taxes 62,392 61,891 17,399 ----------- ----------- ----------- Net income $ 93,585 $ 89,063 $ 27,214 =========== =========== =========== ----------- ----------- ----------- Basic earnings per share $ 2.58 $ 2.17 $ .65 =========== =========== =========== ----------- ----------- ----------- Diluted earnings per share $ 2.58 $ 2.16 $ .64 =========== =========== ===========
See Notes to Consolidated Financial Statements (a) 53-week year 55 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ---------------------------------------- February 26, February 27, February 28, 2000 1999 1998 (a) ----------- ----------- ------------ (Dollars in thousands) OPERATING ACTIVITIES Net income $ 93,585 $ 89,063 $ 27,214 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and other intangibles amortization 179,123 193,467 200,100 Goodwill amortization 6,253 5,854 4,668 Special charge (1,104) 15,000 99,382 Deferred income taxes provision (benefit) 1,753 9,868 (24,187) Equity in earnings of unconsolidated affiliates, net of dividends received (376) (3,117) (8,632) Foreign currency transaction losses (gains) 900 (8,650) -- Other 954 2,405 8,214 Changes in operating assets and liabilities, net of effects of acquisitions: Trade accounts receivable (10,006) (10,716) 17,907 Inventories (5,659) (33,479) 7,693 Special charge (4,954) (26,105) (12,163) Other assets and liabilities (29,687) 52,692 (26,061) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 230,782 286,282 294,135 INVESTING ACTIVITIES Purchases of systems, equipment and other assets relating to contracts (128,618) (121,198) (283,542) Acquisitions (net of cash acquired) (318) (19,687) (20,976) Investments in and advances to unconsolidated affiliates (16,209) (529) (5,414) Cash received from affiliates -- 1,906 6,644 Proceeds from sale of investments -- 84,904 -- Other (19,198) (22,627) (20,592) --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (164,343) (77,231) (323,880) FINANCING ACTIVITIES Net proceeds from issuance of long-term debt 221,500 117,706 541,605 Principal payments on long-term debt (192,936) (254,768) (472,542) Purchases of treasury stock (98,747) (70,757) (40,221) Other 2,430 4,771 (2,108) --------- --------- --------- NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (67,753) (203,048) 26,734 Effect of exchange rate changes on cash 4,696 (6,520) (724) --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,382 (517) (3,735) Cash and cash equivalents at beginning of year 7,733 8,250 11,985 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,115 $ 7,733 $ 8,250 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest payments (net of amounts capitalized) $ 28,697 $ 27,574 $ 23,647 Income tax payments 66,883 24,945 32,188 Income tax refunds (662) (13,345) (2,904)
See Notes to Consolidated Financial Statements (a) 53-week year 56 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Equity Accumulated Additional Carryover Other Outstanding Common Paid-in Basis Comprehensive Shares Stock Capital Adjustment Income ----------- ------ ---------- ----------- ------------- (Dollars in thousands) Balance at February 22, 1997 42,490,770 $ 438 $ 169,705 $ (7,008) $ 1,472 Comprehensive income: Net income -- -- -- -- -- Other comprehensive income, net of tax: Foreign currency translation -- -- -- -- (1,514) Comprehensive income Treasury shares repurchased (1,283,600) -- -- -- -- Shares issued under stock award plans 12,226 -- 387 -- -- Shares issued upon exercise of stock options 64,750 1 1,210 -- -- ---------- ----------- ----------- ----------- ----------- Balance at February 28, 1998 41,284,146 $ 439 $ 171,302 $ (7,008) $ (42) Comprehensive income: Net income -- -- -- -- -- Other comprehensive income, net of tax: Foreign currency translation -- -- -- -- (85,094) Net gain on derivative instruments -- -- -- -- 294 Comprehensive income Treasury shares repurchased (2,794,100) -- -- -- -- Shares issued under stock award plans 5,688 -- 159 -- -- Shares reissued under stock award plans 2,079 -- -- -- -- Shares issued upon exercise of stock options 224,250 3 4,973 -- -- ---------- ----------- ----------- ----------- ----------- Balance at February 27, 1999 38,722,063 $ 442 $ 176,434 $ (7,008) $ (84,842) Comprehensive income: Net income -- -- -- -- -- Other comprehensive income, net of tax: Foreign currency translation -- -- -- -- 15,223 Net gain on derivative instruments -- -- -- -- 126 Comprehensive income Treasury shares repurchased (4,049,100) -- -- -- -- Shares reissued under employee stock purchase and stock award plans 112,291 -- -- -- -- Shares issued upon exercise of stock options 18,750 -- 316 -- -- ---------- ----------- ----------- ----------- ----------- Balance at February 26, 2000 34,804,004 $ 442 $ 176,750 $ (7,008) $ (69,493) ========== =========== =========== =========== ===========
Retained Treasury Earnings Stock Total -------- -------- ----- (Dollars in thousands) Balance at February 22, 1997 $ 228,741 $ (35,215) $ 358,133 Comprehensive income: Net income 27,214 -- 27,214 Other comprehensive income, net of tax: Foreign currency translation -- -- (1,514) ----------- Comprehensive income 25,700 Treasury shares repurchased -- (40,221) (40,221) Shares issued under stock award plans -- -- 387 Shares issued upon exercise of stock options -- -- 1,211 ----------- ----------- ----------- Balance at February 28, 1998 $ 255,955 $ (75,436) $ 345,210 Comprehensive income: Net income 89,063 -- 89,063 Other comprehensive income, net of tax: Foreign currency translation -- -- (85,094) Net gain on derivative instruments -- -- 294 ----------- Comprehensive income 4,263 Treasury shares repurchased -- (70,757) (70,757) Shares issued under stock award plans -- -- 159 Shares reissued under stock award plans -- 55 55 Shares issued upon exercise of stock options -- -- 4,976 ----------- ----------- ----------- Balance at February 27, 1999 $ 345,018 $ (146,138) $ 283,906 Comprehensive income: Net income 93,585 -- 93,585 Other comprehensive income, net of tax: Foreign currency translation -- -- 15,223 Net gain on derivative instruments -- -- 126 ----------- Comprehensive income 108,934 Treasury shares repurchased -- (98,747) (98,747) Shares reissued under employee stock purchase and stock award plans (773) 2,940 2,167 Shares issued upon exercise of stock options -- -- 316 ----------- ----------- ----------- Balance at February 26, 2000 $ 437,830 $ (241,945) $ 296,576 =========== =========== ===========
See Notes to Consolidated Financial Statements 57 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: GTECH Holdings Corporation ("Holdings") conducts business through its consolidated subsidiaries and unconsolidated affiliates and has, as its only asset, an investment in GTECH Corporation ("GTECH"), its wholly owned subsidiary. The consolidated financial statements include the accounts of Holdings, GTECH, all majority and wholly owned subsidiaries and other entities controlled by GTECH (collectively referred to herein as the "Company"). Significant intercompany accounts and transactions have been eliminated in preparing the Consolidated Financial Statements. Investments in 20% to 50% owned affiliates, investments in corporate joint ventures and other entities that are not controlled by GTECH are accounted for using the equity method and investments in less than 20% owned affiliates are accounted for using the cost method. Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. Industry Segment and Nature of Operations: The Company operates predominately in one business segment that provides online, high speed, highly secured transaction processing systems to the worldwide lottery industry. The Company's lottery service contracts are generally subject to a new competitive procurement process after the expiration of the contract term and any extensions thereof. The Company's business is highly regulated, and the competition to secure new government contracts is often intense. Fiscal Year: The Company operates on a 52- to 53-week fiscal year ending on the last Saturday in February. Fiscal 2000 and 1999 were 52-week years and fiscal 1998 was a 53-week year. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition: Service revenues are recognized as the services are performed. Liquidated damages are expensed as incurred. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101) which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 is effective for the second fiscal quarter of fiscal years beginning after December 15, 1999 and requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion No. 20, "Accounting Changes." The Company is currently in the process of evaluating what impact, if any, SAB 101 will have on the financial position or results of operations of the Company. Revenues from product sales or sales-type leases are recognized when installation is complete and the product is accepted by the customer. In those instances where the Company is not responsible for installation, revenue is recognized when the product is shipped. Foreign Currency Translation: The functional currency for the majority of the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currencies into United States dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses resulting from such translation are reported in accumulated other comprehensive income, whereas gains or losses resulting from foreign currency transactions are included in results of operations. The Company recognized net foreign exchange gains (losses) of $(6,683,000), $15,268,000 and $(573,000) in fiscal 2000, 1999 and 1998, respectively, that are included as a component of other income in the Company's consolidated income statements. For those foreign subsidiaries operating in a highly inflationary economy or having the United States dollar as their functional currency, nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at current rates. Translation adjustments are included in the determination of net income. 58 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED) Research and Development: Research and development expenses are charged to operations as incurred. Stock-Based Compensation: The Company grants stock options for a fixed number of shares of the common stock of Holdings ("Common Stock") to employees and nonemployee directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense for stock option grants. Derivatives: The Company uses derivative financial instruments principally to manage the risk of foreign currency exchange rate fluctuations and accounts for its derivative financial instruments in accordance with Financial Accounting Standards Board Statement 133, "Accounting for Derivative Instruments and Hedging Activities". From time to time, the Company enters into foreign currency exchange and option contracts to reduce the exposure associated with certain firm commitments, variable service revenues and certain assets and liabilities denominated in foreign currencies. These contracts generally have maturities of 12 months or less, and are regularly renewed to provide continuing coverage throughout the year. The Company does not engage in currency speculation. The Company records certain contracts used to protect the Company against foreign exchange risk on its variable service revenues at fair value in its consolidated balance sheet. The related gains or losses on these contracts are either deferred in shareholders' equity (accumulated other comprehensive income) or immediately recognized in earnings dependent on whether the contract can be treated as a hedge. The deferred gains and losses are subsequently recognized in earnings in the period that the related items being hedged are received and recognized in earnings. Contracts used to hedge assets and liabilities denominated in foreign currencies are recorded in the Company's consolidated balance sheet and the related gains or losses on these contracts are immediately recognized in earnings as a component of other income in the Company's consolidated income statements. Income Taxes: Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted income tax rates and laws that will be in effect when the temporary differences are expected to reverse. Additionally, deferred tax assets and liabilities are separated into current and noncurrent amounts based on the classification of the related assets and liabilities for financial reporting purposes. Cash Equivalents: The Company considers short-term, highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Systems, Equipment and Other Assets Relating to Contracts: Systems, equipment and other assets relating to contracts are stated on the basis of cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful life is generally five years. Capitalized Software Development Costs: Unamortized software development costs, included in systems, equipment and other assets relating to contracts and other assets in the Company's consolidated balance sheets, were $44,291,000 and $51,900,000 at February 26, 2000 and February 27, 1999, respectively. Related amortization expense amounted to $17,167,000, $12,821,000 and $7,457,000 in fiscal 2000, 1999 and 1998, respectively, and is included in cost of services in the Company's consolidated income statements. 59 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED) Impairment of Long-Lived Assets: If facts and circumstances were to indicate that the Company's long-lived assets might be impaired, the estimated future undiscounted cash flows associated with the long-lived asset would be compared to its carrying amount to determine if a write-down to fair value is necessary. Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized on a straight-line basis over periods ranging from seven to 40 years. As of February 26, 2000 and February 27, 1999, accumulated amortization was $36,271,000 and $30,018,000, respectively. Goodwill is periodically reviewed for impairment by comparing the carrying amount to the estimated future undiscounted cash flows of the businesses acquired. If this review indicates that goodwill is not recoverable, the carrying amount would be reduced to fair value. NOTE B - BUSINESS ACQUISITIONS On July 1, 1998, the Company acquired 80% of the equity of Europrint Holdings Ltd. ("Europrint") and its wholly owned subsidiaries, including Interactive Games International ("IGI"), for a net cash purchase price of $21,641,000, including related acquisition costs. Europrint is a provider of media promotional games and IGI has pioneered the development of interactive, televised lottery games. The Company has the option, and under certain circumstances the obligation, to acquire the remaining 20% of the equity of Europrint and IGI within five years from the date of acquisition. On October 3, 1997, the Company acquired 100% of the capital stock of VideoFax Systems, Inc., a provider of multimedia broadcasting software, for cash consideration of $15,362,000. These acquisitions were accounted for using the purchase method of accounting, whereby the purchase prices were allocated to the assets acquired and liabilities assumed based on their respective fair values. Purchase price in excess of these fair values has been recorded as goodwill. The Company has included the operating results of these businesses in its consolidated results since the dates of acquisition. Pro forma information has not been provided because on an individual and aggregate basis, the acquisitions were not material to the Company's operations. NOTE C - INVENTORIES Inventories consist of:
February 26, 2000 February 27, 1999 ----------------- ----------------- (Dollars in thousands) Raw materials $ 23,623 $ 30,245 Work in progress 42,701 23,309 Finished goods 1,094 8,339 ----------------- ----------------- $ 67,418 $ 61,893 ================= =================
60 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D - SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS Systems, equipment and other assets relating to contracts consists of:
February 26, 2000 February 27, 1999 ----------------- ----------------- (Dollars in thousands) Land and buildings $ 5,259 $ 5,259 Computer terminals and systems 1,069,541 1,007,202 Furniture and equipment 110,734 110,231 Contracts in progress 46,221 34,991 ------------------ ----------------- 1,231,755 1,157,683 Less accumulated depreciation and amortization 855,837 760,122 ------------------ ----------------- $ 375,918 $ 397,561 ================== =================
NOTE E - UNCONSOLIDATED AFFILIATES The Company has a 10% interest in Uthingo Management Proprietary Limited ("Uthingo"), a 33.3% interest in Turfway Park, LLC ("Turfway"), a 40% interest in Lottery Technology Enterprises ("LTE"), a 50% interest in each of four joint ventures with Full House Resorts, Inc. ("Full House") and a 50% interest in Union Temporal de Empress ("UTE"). Uthingo is a corporate joint venture which holds the license to operate the South Africa National Lottery. Turfway operates a thoroughbred racing and simulcasting facility in Kentucky. LTE is a joint venture comprising the Company and District Enterprise for Lottery Technology Applications of Washington, D.C., that holds a contract with the District of Columbia Lottery and Charitable Games Control Board. The joint ventures with Full House are engaged in the financing and development of Native American and other casino gaming ventures. UTE is a joint venture comprising the Company and Luditec S.A. that provides facility management services to the Catalunya Lottery in Spain. In addition, as of February 28, 1998, the Company had a 22.5% interest in Camelot Group plc ("Camelot"). Camelot is a consortium that operates the United Kingdom lottery and was the largest of the Company's unconsolidated affiliates. In April 1998, the Company sold its investment back to Camelot for $84,904,000. The book value of the Camelot investment at the time of the sale was $51,763,000. A portion of the cash received by the Company will have to be returned to Camelot in the event that Camelot's operating license is revoked for certain reasons determined to be attributable to the Company. Accordingly, the Company has deferred the recognition of the gain from the sale of its investment and is recognizing such gain ratably over the remaining period of Camelot's operating license, which is due to expire in September 2001. The deferred gain at February 26, 2000 and February 27, 1999 is included in advance payments from customers and other liabilities in the Company's consolidated balance sheets. The Company continues as the principal supplier of goods and services to Camelot. The Company's equity in the earnings of Camelot amounted to $2,624,000 and $20,988,000 in fiscal 1999 and 1998, respectively. 61 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E - UNCONSOLIDATED AFFILIATES-(CONTINUED) The following is a summary of the combined financial condition of the Company's unconsolidated affiliates along with their combined results of operations, for those investments held at the fiscal year end presented, used as the basis for applying the equity method of accounting:
Fiscal Year Ended ------------------------------------------------------------------------ February 26, 2000 February 27, 1999 February 28, 1998(a) ----------------- ----------------- -------------------- (Dollars in thousands) Earnings data: Revenues $ 53,016 $ 34,950 $ 9,098,191 Gross (loss) profit (10,393) 8,683 295,169 Net (loss) income (8,994) 8,847 99,833 Balance sheet data: Current assets $ 15,689 $ 4,659 $ 757,944 Noncurrent assets 101,600 7,452 123,603 Current liabilities 43,544 3,617 599,365 Noncurrent liabilities 19,240 169 45,101
(a) Includes the 22.5% interest in Camelot, which the Company sold in April 1998. The Company's share of undistributed earnings of affiliated companies included in retained earnings was $2,633,000, $2,258,000 and $35,130,000 at February 26, 2000, February 27, 1999 and February 28, 1998, respectively. Dividends received from unconsolidated affiliates were $2,467,000, $3,996,000 and $15,744,000 in fiscal 2000, 1999 and 1998, respectively. NOTE F - LONG-TERM DEBT Long-term debt consists of:
February 26, 2000 February 27, 1999 ----------------- ----------------- (Dollars in thousands) Revolving credit facility $ 45,000 $ 18,000 7.75% Series A Senior Notes due 2004 150,000 150,000 7.87% Series B Senior Notes due 2007 150,000 150,000 Other 4,469 3,038 ----------------- ----------------- 349,469 321,038 Less current portion 69 1,960 ----------------- ----------------- $ $349,400 $ $319,078 ================= =================
62 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F - LONG-TERM DEBT-(CONTINUED) The Company has an unsecured revolving credit facility of $400,000,000 expiring in June 2002 (the "Credit Facility"). At February 26, 2000, the weighted average interest rate for all outstanding borrowings under the Credit Facility was 6.14%. The Company is required to pay a facility fee of .125% per annum on the total revolving credit commitment. The restrictive provisions of the Credit Facility include, among other things, requirements relating to the maintenance of certain financial ratios, restrictions on additional indebtedness and restrictions on the ability of the Company to make cash distributions on its Common Stock under certain circumstances. At February 26, 2000, under the most restrictive covenants, the Company had available $169,082,000 of retained earnings for the payment of dividends. The Company has never paid cash dividends on its Common Stock and does not plan to do so in the foreseeable future. The current policy of the Company's Board of Directors is to reinvest earnings in the operation and expansion of the Company. The Company's 7.75% Series A Senior Notes due 2004 and 7.87% Series B Senior Notes due 2007 (collectively, the "Senior Notes") are unsecured. Interest on each issue is payable semiannually in arrears. Up to $100,000,000 of the Credit Facility may be used for the issuance of letters of credit. There were no letters of credit outstanding under the Credit Facility as of February 26, 2000. The Company had outstanding, at February 26, 2000, $66,656,000 of letters of credit issued outside of the Credit Facility. The weighted average annual cost for these letters of credit was .5%. At February 26, 2000, long-term debt maturing over the next five fiscal years is as follows:
Fiscal Year (Dollars in thousands) ----------- 2001 $ 69 2002 - 2003 49,400 2004 - 2005 150,000 Thereafter 150,000
NOTE G - COMMITMENTS AND CONTINGENCIES Contracts Contracts generally contain time schedules for, among other things, commencement of system operations and the installation of terminals, as well as detailed performance standards. The Company is typically required to furnish substantial bonds to secure its performance under these contracts. In addition to other possible consequences, including contract termination, failure to meet specified deadlines or performance standards could trigger substantial penalties in the form of liquidated damage assessments. Many of the Company's contracts permit the customer to terminate the contract at will and do not specify the compensation, if any, that the Company would be entitled were such a termination to occur. 63 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Legal Matters As previously reported, J. David Smith, a former sales manager of the Company, was convicted in the New Jersey U.S. District Court in October of 1996 of receiving kickbacks for his personal benefit from consultants to the Company. In October 1998, Mr. Smith was sentenced to a prison term which he is currently serving, and he was fined and ordered to pay restitution to the Company. The charges brought against Mr. Smith did not allege any wrongdoing on the part of the Company. In November 1998, the New Jersey U.S. Attorney's Office, which had brought the charges against Mr. Smith, advised the Company that the Company was not then the subject or target of any ongoing grand jury investigation by that office. In a related matter the previously reported civil damages suit brought by Joseph LaPorta (one of the consultants who was indicted along with J. David Smith but was found not guilty) against GTECH and one of its former Co-Chairmen was dismissed by the court by summary judgement in September 1999. In 1995, the Texas U.S. Attorney's Office also issued grand jury document subpoenas to the Company, with which the Company complied, and the Company has not received any further subpoenas or requests for information since that time. In February 1999, a witness appearing before the Moriarty Tribunal, an investigative body convened by the Irish Parliament and chaired by Mr. Justice Moriarty to investigate the business affairs generally of former Taoiseach (Prime Minister) of Ireland Charles Haughey, testified that in February 1993 Guy B. Snowden, then Chief Executive Officer of the Company, had invested pounds sterling 67,000 (approximately $100,000) of his personal funds in a company owned by Mr. Haughey's son. Mr. Haughey had resigned as Taoiseach in February 1992. In July 1992, the An Post Irish National Lottery Company, the Irish lottery authority (the "NLC"), issued a Request for Proposals respecting online and instant ticket lottery goods and services, and in September 1992 the Company, which was the then incumbent provider of lottery goods and services to the NLC under an agreement awarded to the Company in 1987, submitted a Proposal to the NLC in response to the NLC's Request for Proposals. In November 1992, the NLC selected the Company to provide online and instant ticket goods and services to the NLC under the terms of the competitive procurement and, following negotiations, a definitive agreement was entered into between the NLC and the Company in March 1993. The Tribunal has requested that the Company provide various documents regarding the Company's business in Ireland. The Company is cooperating with the Tribunal. In addition, the Company has made its own inquiry into the facts surrounding Mr. Snowden's investment and the extent, if any, of the Company's involvement in or knowledge of that investment. The Company's investigation has determined that no Company funds were used to make Mr. Snowden's investment, and there is no information to suggest that Mr. Snowden ever sought reimbursement for the investment from the Company. Further, there is no information to suggest that Mr. Snowden informed anyone else at the 64 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company of his investment at the time or that his investment was related in any way to the renewal of the Company's contract to supply systems and support to the NLC. Mr. Snowden has advised the Company through counsel that (i) his investment was a strictly personal one, (ii) the investment was made from his personal funds, (iii) he never sought reimbursement for any portion of his investment from the Company or any other entity, and (iv) his investment was not related to the NLC and was not intended to and did not influence the NLC's decision to renew the Company's contract. No charges of wrongdoing have ever been brought against the Company by any grand jury or other governmental authority. The Company does not believe that it has engaged in any wrongdoing in connection with these matters. However, since investigations are or may still be underway and, investigations of this type customarily are conducted in whole or in part in secret, the Company lacks sufficient information to determine with certainty their existence or 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 governmental 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. The Company monitors, and occasionally affirmatively becomes involved in, litigation involving Indian gaming in states where such litigation may, directly or indirectly, concern or call into question the legal rights and operations of state lotteries to which the Company provides contract services. The purpose of this effort is to protect state lottery interests, and thus the Company's revenue streams, from service contracts. As previously publicly reported, one such piece of litigation is Rumsey Indian Rancheria v. Wilson, currently pending in the Ninth Circuit Court of Appeals on appeal from the U.S. District Court For the Eastern District of California, which involves a suit by several California Indian tribes against the State and Governor of California under the federal Indian Gaming Regulatory Act ("IGRA"). The Indian Tribes claimed in the District Court that certain elements of the California State Lottery (which is a customer of the Company)("CSL") and the equipment on which it is run involve the operation of slot machines and, therefore, under IGRA, the tribes also must be permitted to operate slot machines. The State of California argued at times that the CSL does not involve the operation of slot machines; however, the State at times appeared to be taking the position that, if and to the extent the CSL does involve the operation of slot machines, it must be terminated because the CSL is not exempt from the California law prohibiting the operation of slot machines. The Company filed amicus curiae briefs in the District Court arguing that the CSL does not involve the operation of slot machines and that even if it does, the CSL is exempt from the State law prohibition on slot machines. In September 1998, the District Court entered summary judgment 65 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the defendants, without addressing whether or not the CSL operates slot machines. In October 1998, the Indian tribes appealed the District Court's decision to the Ninth Circuit Court of Appeals. Since March 1999, the Ninth Circuit has stayed briefing in the case, first pending the outcome of legal action challenging California's first Indian gaming initiative, Proposition 5, and then pending the outcome of another Indian gaming initiative, Proposition 1A, which was designed to eliminate the state constitutional problem that the state Supreme Court found in Proposition 5. Proposition 1A has now passed, it appears that no legal challenges to it have been filed, and briefing in Rumsey remains stayed. Proposition 1A effectively legalizes the operation by Indian tribes of various forms of gaming that are otherewise illegal in California, subject to certain conditions that appear agreeable to most or all tribes. If Proposition 1A is not challenged, or if it survives any challenge, it appears likely that the Rumsey case will not again become active and may be voluntarily dismissed by the tribes, thus eliminating any need for the Company to intervene in the case. There can be no assurance that this will be the case, however, and the Company intends to continue to monitor developments and may seek to intervene in this litigation, if the Company deems it to be appropriate under the circumstances. In April 1999, the Company was served with a lawsuit entitled Pantaleon Arellano, et.al. and Estelle Arellano v. The California State Lottery, et, al, in California Superior Court (Orange County), which was filed in March, 1999. In this action, plaintiffs are a brother and sister who claim to have purchased a winning ticket in the California State Lottery's ("CSL's") April 8, 1998 Super Lotto drawing. That drawing resulted in the award of a $102 million jackpot, which was split evenly among three holders of tickets bearing the winning numbers. Plaintiffs here claim to have purchased a ticket for that drawing with the same winning numbers; the computer records of the Company and the CSL reveal that the ticket plaintiffs hold was purchased after the close of sales for that drawing, and after the winning numbers were announced. If plaintiffs had purchased a winning ticket in the relevant drawing, they would have a claim against the CSL for one-fourth of that jackpot amount, i.e., approximately $25.5 million. In their complaint, they attempt to state a claim against both the CSL (and its Commission and the State of California) and the Company for $104 million, apparently their approximation of the full amount of the jackpot. They also seek to have this amount trebled, alleging that the defendants' conduct in denying plaintiffs' claim to the jackpot was racially motivated, and they seek various other amounts, including emotional distress damages and attorney fees. The Company believes that this complaint, and the allegations underlying the complaint, are wholly without merit. The Company intends to defend itself vigorously in these proceedings. The Company also is subject to certain legal proceedings and claims which management believes, on the basis of information presently available to it, will not materially adversely affect the Company's consolidated financial position or results of operations. 66 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE H - STOCK OPTION AND PURCHASE PLANS The Company has four stock option plans that provide for the granting of incentive stock options and nonqualified stock options to officers and other key employees of the Company and nonemployee members of the Company's Board of Directors. All current outstanding options are nonqualified stock options. The options granted under these plans are to purchase Common Stock at a price not less than fair market value at the date of grant. The 1997 employee stock option plan and 1999 Nonemployee Directors' Stock Option Plan are the only plans under which stock options may still be granted. The Company is authorized to grant options for up to 3,040,000 shares of Common Stock under these plans, and at February 26, 2000, 2,038,000 options had been granted. Employee options generally become exercisable ratably over a four-year period from date of grant and expire 10 years after date of grant unless an earlier expiration date is set at time of grant. Nonemployee director options are exercisable approximately one year after date of grant and expire five years after date of grant. Both employee and nonemployee directors' stock options are subject to possible earlier exercise and termination in certain circumstances. The Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for the plans. Accordingly, no compensation expense has been recognized. Had compensation expense for options granted under the plans after February 25, 1995 been determined based on the estimated fair value at the grant dates for awards under the plan, the Company's pro forma net income and basic and diluted earnings per share for fiscal 2000, 1999 and 1998 would have been $89,936,000 and $2.48 and $2.48, respectively, $85,797,000 and $2.09 and $2.09, respectively, and $25,267,000 and $.60 and $.60, respectively. The fair value of options granted after February 25, 1995 under the plans was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for fiscal 2000, 1999 and 1998, respectively: risk-free interest rates of 5.21%, 5.77% and 6.14%; volatility factors of the expected market price of the Company's common stock of .35, .40, and .28; and a weighted-average expected life of the option of 5.4 years, 5.3 years and 6.5 years. The Company did not assume a dividend yield for fiscal 2000, 1999 or 1998. Under these assumptions, the weighted-average fair value of an option to purchase one share granted in fiscal 2000, 1999 and 1998, respectively, was approximately $10, $15 and $13. The Company's stock option activity and related information is summarized as follows:
Fiscal Year Ended ------------------------------------------------------------------------------------------- February 26, 2000 February 27, 1999 February 28, 1998 ----------------------------- ----------------------------- ------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average Under Exercise under Exercise under Exercise Options Price Options Price Options Price ----------- ------------- ------------ ------------- ----------- ---------- Outstanding at beginning of year 2,083,300 $ 29.255 1,501,550 $ 25.127 1,356,175 $ 23.462 Granted 1,075,500 24.794 1,012,500 34.044 252,000 32.392 Exercised (18,750) 16.875 (228,750) 22.295 (60,250) 18.043 Forfeited (315,875) 28.624 (202,000) 30.458 (46,375) 25.112 ----------- ------------ ---------- Outstanding at end of year 2,824,175 $ 27.709 2,083,300 $ 29.255 1,501,550 $ 25.127 =========== ============ ========== Exercisable at end of year 1,176,800 $ 26.617 890,550 $ 24.220 731,425 $ 23.063
67 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE H - STOCK OPTION AND PURCHASE PLANS - (CONTINUED) Exercise prices for options outstanding under the plans are summarized as follows:
Weighted Average ----------------------- Weighted Remaining Average Range of Options Contractual Exercise Options Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price ----------------- ------------ ------------ -------- ----------- --------- February 26, 2000 $16.88 - $22.19 341,300 5.1 $ 18.590 326,300 $ 18.507 $24.06 - $25.31 961,500 8.9 24.919 - - $25.69 - $35.28 1,521,375 6.9 31.518 850,500 29.729 --------- --------- 2,824,175 1,176,800 ========= ========= February 27, 1999 $16.88 - $22.19 349,175 5.8 $ 18.400 348,300 $ 18.390 $25.69 - $35.28 1,734,125 7.9 31.441 542,250 27.965 --------- --------- 2,083,300 890,550 ========= =========
In July 1998 shareholders approved the GTECH Holdings Corporation 1998 Employee Stock Purchase Plan (the "Plan") that allows substantially all full-time employees to acquire shares of Common Stock through payroll deductions over six-month offering periods (May 1 and November 1). The purchase price is equal to 85% of the shares' fair market value on either the first or last day of the offering period, whichever is lower. Purchases are limited to 10% of an employee's salary, up to a maximum of $25,000 per calendar year. The Plan expires upon the earlier of July 31, 2003 or the date the shares provided by the Plan have been purchased. A total of 750,000 treasury shares are available for purchase under the Plan. At February 26, 2000, 106,203 shares of Common Stock had been issued under the Plan. NOTE I - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Fiscal Year Ended ------------------------------------------------------------ February 26, 2000 February 27, 1999 February 28, 1998 ----------------- ----------------- ----------------- (Dollars and shares in thousands, except per share amounts) Numerator: Net income $ 93,585 $ 89,063 $ 27,214 Denominator: Weighted average shares - Basic 36,217 40,957 41,887 Effect of dilutive securities: Employee stock options 43 188 342 ----------------- --------------- ---------------- Weighted average shares - Diluted 36,260 41,145 42,229 ================= =============== ================ Basic earnings per share $ 2.58 $ 2.17 $ .65 ================= =============== ================ Diluted earnings per share $ 2.58 $ 2.16 $ .64 ================= =============== ================
68 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE J - INCOME TAXES The components of income before income taxes were as follows:
Fiscal Year Ended ----------------------------------------------------------------- February 26, 2000 February 27, 1999 February 28, 1998 ----------------- ----------------- ----------------- (Dollars in thousands) United States $ 93,848 $ 51,773 $ 4,883 Foreign 62,129 99,181 39,730 ----------------- ---------------- ----------------- $ 155,977 $ 150,954 $ 44,613 ================= ================ =================
Significant components of the provision for income taxes were as follows:
Fiscal Year Ended ----------------------------------------------------------------- February 26, 2000 February 27, 1999 February 28, 1998 ----------------- ----------------- ----------------- (Dollars in thousands) Current: Federal $ 12,375 $ 3,135 $ 17,254 State 5,780 4,448 5,154 Foreign 42,484 44,440 19,178 ----------------- ---------------- ----------------- Total Current 60,639 52,023 41,586 ----------------- ---------------- ----------------- Deferred: Federal $ (129) $ 14,216 $ (21,504) State 107 2,521 (2,683) Foreign 1,775 (6,869) -- ----------------- ---------------- ----------------- Total Deferred 1,753 9,868 (24,187) ----------------- ---------------- ----------------- Total Provision $ 62,392 $ 61,891 $ 17,399 ================= ================ =================
Significant components of the Company's deferred tax assets and liabilities were as follows:
February 26, 2000 February 27, 1999 ----------------- ----------------- (Dollars in thousands) Deferred tax assets: Special charge $ -- $ 8,104 Accruals not currently deductible for tax purposes 14,034 16,177 Cash collected in excess of revenue recognized 5,398 7,643 Inventory reserves 2,788 1,806 Other 5,578 2,738 ----------------- ----------------- 27,798 36,468 Deferred tax liabilities: Depreciation (15,553) (21,666) Other (3,129) (3,933) ----------------- ----------------- (18,682) (25,599) ----------------- ----------------- Net deferred tax assets $ 9,116 $ 10,869 ================= =================
69 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE J - INCOME TAXES-(CONTINUED) Undistributed earnings of foreign subsidiaries, excluding accumulated net earnings of foreign subsidiaries that, if remitted, would result in little or no additional tax because of the availability of foreign tax credits, amounted to $5,600,000 at February 26, 2000. These earnings reflect full provision for foreign income taxes and are intended to be indefinitely reinvested in foreign operations. United States taxes that would be payable upon the remittance of these earnings are estimated to be $560,000. The effective income tax rate on income before income taxes differed from the statutory federal income tax rate for the following reasons:
Fiscal Year Ended ------------------------------------------------------------- February 26, 2000 February 27, 1999 February 28, 1998 ----------------- ----------------- ----------------- Federal income tax using statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.5 3.0 3.6 Equity in earnings of unconsolidated affiliates .4 -- 3.2 Nondeductible expenses 1.7 1.6 4.2 Goodwill 1.1 1.1 3.7 Tax credits (1.0) (.8) (6.5) Other .3 1.1 (4.2) ----------------- ----------------- ----------------- 40.0% 41.0% 39.0% ================= ================= =================
NOTE K - TRANSACTIONS WITH RELATED PARTIES Sales of products and services to Camelot and the other members of the U.K. lottery consortium were $53,355,000 in fiscal 1998. In April 1998, the Company sold its 22.5% equity interest in Camelot (See Note E). Sales of products and services to LTE were $3,598,000, $4,155,000 and $3,907,000 in fiscal 2000, 1999 and 1998, respectively. At February 26, 2000 and February 27, 1999, the Company had receivables of $682,000 and $278,000, respectively, from LTE. Sales of products and services to Uthingo were $41,845,000 in fiscal 2000. At February 26, 2000 the Company had trade receivables of $12,092,000 and loans receivable of $9,151,000 from Uthingo. At February 26, 2000 and February 27, 1999, the Company had a note receivable from Full House of $3,000,000. The note was interest free until January 25, 1998 and interest bearing thereafter at the prime rate. Interest is payable monthly. The principal balance of the note is due on January 25, 2001. The Company paid rent of $3,510,000, $2,612,000 and $2,612,000 to West Greenwich Technology Associates Limited Partnership (that is 50% owned by the Company and 50% owned by an unrelated third party), in fiscal 2000, 1999 and 1998, respectively, for the Company's West Greenwich, Rhode Island corporate headquarters and research and development and main production facility. The agreement calls for rent payments to escalate to $3,531,000 beginning March 1, 2004. 70 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE L - LEASES The Company leases certain facilities, equipment and vehicles under noncancelable operating leases that expire at various dates through fiscal 2014. Certain of these leases have escalation clauses and renewal options ranging from one to 10 years. The Company is required to pay all maintenance, taxes and insurance relating to its leased assets. Future minimum lease payments, by year and in the aggregate, under noncancelable operating leases with initial terms greater than one year, consist of the following at February 26, 2000:
Fiscal Year (Dollars in thousands) ----------- 2001 $ 28,682 2002 26,837 2003 17,791 2004 14,334 2005 12,620 Thereafter 50,199 --------------- Total minimum lease payments $ 150,463 ===============
Rental expense for operating leases was $28,659,000, $28,358,000 and $28,937,000 for fiscal 2000, 1999 and 1998, respectively. NOTE M - EMPLOYEE BENEFITS The Company has two defined contribution 401(k) retirement savings and profit sharing plans (the "Plans") covering substantially all full-time employees in the United States and the Commonwealth of Puerto Rico. Under these Plans, an eligible employee may elect to defer receipt of a portion of base pay each year. The Company contributes this amount on the employee's behalf to the Plans and also makes a matching contribution equal to 50% of the amount that the employee has elected to defer, up to a maximum matching contribution of 2 1/2% of the employee's base pay. The Company, at its discretion, may contribute additional amounts to the Plans on behalf of employees based upon its profits for a given fiscal year. Participants are 100% vested at all times in their entire account balance in the Plans. Benefits under the Plans generally will be paid to participants upon retirement or in certain other limited circumstances. In fiscal 2000, 1999 and 1998, the Company recorded expense under these Plans of $5,840,000, $7,070,000 and $5,706,000, respectively. The Company has a defined contribution Supplemental Retirement Plan that provides additional retirement benefits to certain key employees. The Company, at its discretion, may contribute additional amounts to this plan on behalf of such key employees equal to the percentage of profit sharing contributions contributed for the calendar year multiplied by the key employees' compensation (as defined) for such year. In fiscal 2000, 1999 and 1998 the Company recorded expense under this plan of $275,000, $415,000 and $952,000, respectively. 71 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA The Company presently has one reportable segment, the Lottery segment, which provides online, high speed, highly secured transaction processing systems to the worldwide lottery industry. The accounting policies of the Lottery segment are the same as those described in the summary of significant accounting policies. Executive management of the Company evaluates segment performance based on net operating profit after income taxes. All other revenues (as reported below) principally comprise revenues from the Company's Transactive and Dreamport subsidiaries (See Note P for additional information regarding the Company's Transactive subsidiary). The Company's business segment data is summarized below:
February 26, 2000 Lottery All Other Consolidated - ----------------- ------------ ------------ ------------ (Dollars in thousands) OPERATING DATA: Revenues from external sources $ 932,277 $ 78,521 $1,010,798 Net operating profit (loss) after income taxes 119,012 (3,833) 115,179 Interest income 1,893 1,616 3,509 Equity in earnings (losses) of unconsolidated affiliates (1,118) 3,961 2,843 Depreciation and amortization 165,992 19,384 185,376 BALANCE SHEET DATA (AT END OF PERIOD): Segment assets 804,741 86,282 891,023 Investment in and advances to unconsolidated affiliates 9,083 16,815 25,898 CASH FLOW DATA: Capital expenditures 126,135 2,483 128,618 February 27, 1999 - ----------------- OPERATING DATA: Revenues from external sources $ 873,984 $ 98,939 $ 972,923 Net operating profit after income taxes 110,846 2,456 113,302 Interest income 3,065 1,014 4,079 Equity in earnings of unconsolidated affiliates 2,791 4,322 7,113 Depreciation and amortization 187,736 11,585 199,321 BALANCE SHEET DATA (AT END OF PERIOD): Segment assets 786,006 88,209 874,215 Investment in and advances to unconsolidated affiliates 68 10,733 10,801 CASH FLOW DATA: Capital expenditures 114,209 6,989 121,198 February 28, 1998 - ----------------- OPERATING DATA: Revenues from external sources $ 929,191 $ 61,376 $ 990,567 Net operating profit (loss) after income taxes 120,689 (9,995) 110,694 Interest income 3,763 1,970 5,733 Equity in earnings of unconsolidated affiliates 21,369 3,007 24,376 Depreciation and amortization 189,168 15,600 204,768 BALANCE SHEET DATA (AT END OF PERIOD): Segment assets 955,878 67,934 1,023,812 Investment in and advances to unconsolidated affiliates 52,593 12,215 64,808 CASH FLOW DATA: Capital expenditures 257,806 25,736 283,542
72 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA-(CONTINUED) The following is a reconciliation of net operating profit after income taxes to net income as reported on the consolidated income statements:
Fiscal Year Ended ----------------------------------------------------------- February 26, 2000 February 27, 1999 February 28, 1998 ----------------- ----------------- ----------------- (Dollars in thousands) Net operating profit after income taxes $ 115,179 $ 113,302 $ 110,694 Reconciling items, net of tax: Interest expense (17,419) (16,169) (18,490) Special charge 662 (8,850) (60,623) Other (4,837) 780 (4,367) ----------------- ----------------- ----------------- Net income $ 93,585 $ 89,063 $ 27,214 ================= ================= =================
The Company's geographic data is summarized below:
Fiscal Year Ended ----------------------------------------------------------- February 26, 2000 February 27, 1999 February 28, 1998 ----------------- ----------------- ----------------- (Dollars in thousands) Revenues from external sources: United States $ 530,193 $ 570,548 $ 622,244 Brazil 117,639 118,611 88,589 Other foreign 362,966 283,764 279,734 ----------------- ----------------- ----------------- $ 1,010,798 $ 972,923 $ 990,567 ================= ================= =================
Revenues are attributed to countries based on the location of the customer.
Fiscal Year Ended ------------------------------------------------------------ February 26, 2000 February 27, 1999 February 28, 1998 ----------------- ----------------- ----------------- (Dollars in thousands) Systems, equipment and other assets relating to contracts: United States $ 216,498 $ 260,585 $ 297,861 Brazil 58,104 63,015 150,301 Other foreign 101,316 73,961 78,694 ----------------- ----------------- ----------------- $ 375,918 $ 397,561 $ 526,856 ================= ================= =================
For fiscal 2000 and 1999 the aggregate revenues from Caixa Economica Federal in Brazil represented 10.7% and 11.2% of the Company's consolidated revenues, respectively. For fiscal 1999 and 1998, the aggregate revenues from the state of Texas represented 10.6% and 14.2% of the Company's consolidated revenues, respectively. No other customer accounted for more than 10% of the consolidated revenues in such years. 73 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE O - FINANCIAL INSTRUMENTS Cash and cash equivalents Cash equivalents are stated at cost that approximates fair value. Debt The carrying amounts of the Company's borrowings under the Credit Facility approximate fair value due primarily to its variable interest rate characteristics and its short-term tenure. At February 26, 2000, the estimated fair value of the Senior Notes as determined by an independent investment banker approximated $293,942,000. Foreign Currency Exchange Contracts At February 26, 2000, the Company had contracts for the sale of foreign currency of $87,749,000 (primarily Spanish pesetas, South African rand, and Irish punts) and the purchase of foreign currency of $66,675,000 (primarily pounds sterling), compared to contracts for the sale of foreign currency of $80,296,000 (primarily Spanish pesetas, Mexican pesos and Brazilian reals) and the purchase of foreign currency of $71,085,000 (primarily pounds sterling) at February 27, 1999. The fair values of the Company's foreign currency exchange contracts are estimated based on quoted market prices of comparable contracts, adjusted through interpolation when necessary for maturity differences. In the aggregate, the carrying value of these contracts approximated fair value at February 26, 2000 and February 27, 1999. The Company had minimal exposure to loss from nonperformance by the counterparties to its forward exchange contract agreements at the end of fiscal 2000, and does not anticipate nonperformance by counterparties in the periodic settlements of amounts due. The Company currently minimizes this potential for risk by entering into forward exchange contracts exclusively with major, financially sound counterparties, and by limiting exposure with any one financial institution. Interest Rate Swaps The Company uses various interest rate hedging instruments to reduce the risk associated with future interest rate fluctuations. In February 2000, the Company entered into two interest rate swaps with an aggregate notional amount of $150,000,000 that provide interest rate protection over the period February 25, 2000 to May 15, 2007. The swaps effectively entitle the Company to receive payments of 7.87% from the financial institutions that are counterparties to the swaps and make interest payments of LIBOR plus 53 basis points to the financial institutions. The fair value of the swaps at February 26, 2000 is approximately $122,000. NOTE P - SPECIAL CHARGE In the fourth quarter of fiscal 1998, the Company recorded a $99,382,000 special charge ($60,623,000 after-tax, or $1.45 per basic share; $1.44 per diluted share). The special charge consisted principally of costs to exit the electronic benefit transfer (EBT) business conducted by the Company's Transactive subsidiary ("Transactive"). In addition, the special charge included costs associated with a worldwide workforce reduction, contractual obligations in connection with the departures of the Company's former Chairman and Vice Chairman from the Company and asset impairment charges relating to two of the Company's lottery contracts. In February 1998, the Company entered into an asset purchase agreement with Citicorp Services, Inc. ("Citicorp"), to sell EBT contracts and certain related assets held by Transactive. In July 1998, the United States Department of Justice commenced a legal action seeking to enjoin the consummation of the transaction, on antitrust grounds and in January 1999 Citicorp terminated the agreement pursuant to a clause in the contract that permitted termination by either party if the closing did not occur within a timeframe that has expired. As a result, the Company recorded an additional special charge of $15,000,000 ($8,850,000 after-tax, or $.22 per basic and diluted share) in the fourth 74 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS quarter of fiscal 1999 in order to write down the assets held for sale in connection with this transaction to their net realizable value. Those assets consisted primarily of EBT contract assets. 75 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE P - SPECIAL CHARGE-(CONTINUED) A summary of the special charge activity is as follows:
Disposition Worldwide Executive Asset of EBT Workforce Contractual Impairment Business Reduction Obligations Charges Other Total ----------- --------- ----------- ---------- ------- -------- (Dollars in thousands) Special charge $ 43,556 $ 12,484 $ 17,950 $ 14,903 $ 10,489 $ 99,382 Cash expenditures (241) (204) (9,437) -- (2,281) (12,163) Noncash charges (37,386) -- -- (15,098) (1,104) (53,588) ----------- -------- ----------- -------- -------- -------- Balance at February 28, 1998 5,929 12,280 8,513 (195) 7,104 33,631 ----------- -------- ----------- -------- -------- -------- Change in estimate 13,601 (2,948) (20) 2,604 1,763 15,000 Cash expenditures (3,662) (7,868) (8,493) (1,543) (4,539) (26,105) Noncash charges (14,241) -- -- (866) (1,361) (16,468) ----------- -------- ----------- -------- -------- -------- Balance at February 27, 1999 1,627 1,464 -- -- 2,967 6,058 Change in estimate (930) (37) -- 19 (156) (1,104) Cash expenditures (697) (1,427) -- (19) (2,811) (4,954) ----------- -------- ----------- -------- -------- -------- Balance at February 26, 2000 $ -- $ -- $ -- $ -- $ -- $ -- =========== ======== =========== ======== ======== ========
NOTE Q - QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for fiscal 2000 and 1999:
First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- (Dollars in thousands, except per share amounts) Fiscal year ended February 26, 2000: Service revenues $ 211,158 $ 209,843 $ 221,093 $ 218,325 Sales of products 27,502 45,546 28,473 48,858 Gross profit 80,125 82,159 89,559 99,672 Net income 18,935 21,754 22,779 30,117 Basic earnings per share $ .50 $ .58 $ .65 $ .87 Diluted earnings per share $ .50 $ .58 $ .65 $ .87 Fiscal year ended February 27, 1999: Service revenues $ 221,881 $ 224,582 $ 226,076 $ 214,856 Sales of products 10,398 8,952 25,599 40,579 Gross profit 75,679 78,199 87,753 79,680 Net income 18,679 21,848 26,476 22,060 Basic earnings per share $ .45 $ .53 $ .64 $ .55 Diluted earnings per share $ .45 $ .53 $ .64 $ .55
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly basic and diluted earnings per share in fiscal 2000 and the sum of the quarterly diluted earnings per share in fiscal 1999 do not equal the total computed for the year. 76 ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 77 PART III INCORPORATED BY REFERENCE The information called for by Item 10-- "Directors and Executive Officers of the Registrant" (other than the information concerning executive officers set forth after Item 4 herein), Item 11-- "Executive Compensation," Item 12-- "Security Ownership of Certain Beneficial Owners and Management" and Item 13-- "Certain Relationships and Related Transactions" of Form 10-K is incorporated herein by reference Holdings' definitive proxy statement for its Annual Meeting of Shareholders scheduled to be held in August 2000, which definitive proxy statement is expected to be filed with the Commission not later than 120 days after the end of the fiscal year to which this report relates. 78 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statement Schedules and Exhibits: Page(s) (1) Report of Ernst & Young LLP, Independent Auditors (2) Report of Price Waterhouse, Independent Accountants The following consolidated financial statements of GTECH Holdings Corporation and subsidiaries are included in Item 8: Consolidated Balance Sheets at February 26, 2000 and February 27, 1999 Consolidated Income Statements Fiscal year ended February 26, 2000, Fiscal year ended February 27, 1999, and Fiscal year ended February 28, 1998 Consolidated Statements of Shareholders' Equity-- Fiscal year ended February 26, 2000, Fiscal year ended February 27, 1999, and Fiscal year ended February 28, 1998 Consolidated Statements of Cash Flows-- Fiscal year ended February 26, 2000, Fiscal year ended February 27, 1999, and Fiscal year ended February 28, 1998 Notes to Consolidated Financial Statements SCHEDULES OMITTED: All schedules are omitted as they are not applicable or the information is shown in the financial statements or notes thereto. 79 (3) EXHIBITS: 3.1 Restated Certificate of Incorporation of Holdings, as amended (incorporated by reference to Exhibit 3.1 to the Form S-1 of Holdings and GTECH Corporation ("GTECH"), Registration No. 33-31867 (the "1990 S-1"). 3.2 Certificate of Amendment to the Certificate of Incorporation of Holdings (incorporated by reference to Exhibit 3.2 to the Form S-1 of Holdings, Registration No. 33-48264 (the "July 1992 S-1")). +3.3 Amended and Restated By-Laws of Holdings. 4.1 Amended and Restated Credit Agreement, dated as of June 18, 1997, among GTECH, certain lenders and Bank of Montreal, Banque Paribas, Fleet National Bank, The Bank of Nova Scotia and BankBoston, N.A., as Co-Agents; The Bank of New York, as Documentation Agent, and NationsBank, as Administrative Agent (incorporated by reference to Exhibit 4.1 of Holdings' 10-Q for the quarterly period ended May 31, 1997). 4.2 Amendment No. 1 to Amended and Restated Credit Agreement, dated as of February 26, 1999, among GTECH, certain lenders, and Bank of Montreal, Banque Paribas, Fleet National Bank, the Bank of Nova Scotia and Bank Boston, NA, as Co-Agents; The Bank of New York, as Documentation Agent and Nations Bank, as Administrative Agent (incorporated by reference to Exhibit 4.2 of Holdings' 1999 10-K). 4.3 Note and Guarantee Agreement, dated as of May 15, 1997, among GTECH Holdings and certain financial institutions (incorporated by reference to Exhibit 4.2 of Holdings' 10-Q for the quarterly period ended May 31, 1997). 4.4 Amendment No. 1 to Note and Guarantee Agreement dated as of May 15, 1997, dated as of February 22, 1999 (incorporated by reference to Exhibit 4.4 of Holdings' 1999 10-K). 4.5 Specimen Form of certificate of Common Stock (incorporated by reference to Exhibit 4.18 of the December 1992 S-1). 10.1 Amended and Restated Employment Agreement dated September 19, 1997 between GTECH, Holdings and William Y. O'Connor (incorporated by reference to Exhibit 10.1 of Holdings' 10-Q for the quarterly period ended August 30, 1997).* 10.2 First Amendment to Employment Agreement dated as of April 6, 1998 between GTECH, Holdings and William Y. O'Connor. (incorporated by reference to Exhibit 10.11 of Holdings' 1998 10-K).* 80 10.3 Agreement dated January 15, 1999 by and between Steven P. Nowick and Holdings. (incorporated by reference to Exhibit 10.4 of Holdings' 1999 10-K).* 10.4 Employment Severance Agreement and Release dated November 4, 1999 by and among Holdings, GTECH and Thomas J. Sauser (incorporated by reference to Exhibit 10 of Holdings' 10-Q for the quarterly period ended November 27, 1999).* +10.5 Form of Agreement, relating to a potential change of control involving Holdings, entered into between Holdings and, respectively, certain members of senior management and a list of signatories to and dates of such Agreements.* +10.6 GTECH Corporation Executive Perquisites Program and list of participants.* 10.7 Form of Executive Separation Agreement and Schedule of Recipients (form of Executive Separation Agreement incorporated by reference to Exhibit 10.18 of Holdings' 1996 10-K).* +10.8 Supplemental Retirement Plan effective January 1, 1992 and list of participants.* 10.9 Contract for the Texas Lottery Operator for the State of Texas between GTECH and the Texas Comptroller of Public Accounts -- Lottery Division, dated March 7, 1992 (available through the Public Reference Branch of the Securities and Exchange Commission, Washington, D.C.). 10.10 Amendment to the Contract for the Texas Lottery Operator for the State of Texas between GTECH and the Texas Comptroller of Public Accounts -- Lottery Division, dated June 1, 1994 (incorporated by reference to Exhibit 10 of Holdings, 10-Q for the quarterly period ended May 25, 1996). 10.11 Second Amendment to the Contract for the Texas Lottery Operator for the State of Texas between GTECH and the Texas Comptroller of Public Accounts -- Lottery Division, dated May 28, 1996 (incorporated by reference to Exhibit 10.1 to the Form S-3 of Holdings, Registration No. 333-3602). +10.12 Agreement between Caixa Economica Federale and RACIMEC Informatica Brasileira S.A. (predecessor to GTECH Brasil Holdings, S.A.) respecting the provision of goods and services for the Brazil National Lottery. 10.13 Amended and Restated Agreement of Limited Partnership by and among GTECH, GP Technology Associates, L.P. and GP Technology, Inc. dated August 26, 1993; Certificate of Limited Partnership of West Greenwich Technology Associates, L.P. dated August 26, 1993; Amended and Restated Indenture of Lease between GTECH and West Greenwich Technology Associates, L.P. dated August 26, 1993 (available through the Public Reference Branch of the Securities and Exchange Commission, Washington, D.C.). 81 10.14 Business Agreement dated December 28, 1990 between Digital Equipment Corporation and GTECH; Work Statement Number NED91188 dated March 11, 1991 to GTECH from Digital Equipment Corporation; First Addendum dated March 19, 1991 to Digital Work Statement Number NED91188 dated March 11, 1991 to GTECH from Digital Equipment Corporation (incorporated by reference to Exhibit 10.57 of the July 1992 S-1). 10.15 Maintenance Agreement Number 117A dated December 1, 1989, between GTECH and Concurrent Computer Corporation (incorporated by reference to Exhibit 10.58 of the July 1992 S-1). 10.16 1994 Stock Option Plan, as amended and restated (incorporated by reference to Exhibit 10.1 of Holdings' 10-Q for the quarterly period ended May 31, 1997).* 10.17 1996 Non-Employee Directors' Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.2 of Holdings' 10-Q for the quarterly period ended May 31, 1997).* 10.18 1997 Stock Option Plan (incorporated herein by reference to the Appendix of Holdings' 1997 Notice of Annual Meeting and Proxy Statement).* 10.19 Holdings' 1998 Non-Employee Directors' Stock Election Plan (incorporated by reference to Exhibit 4.2 to the Form S-8 of Holdings, Registration Number 333-5781). 10.20 Income Deferral Plan - 1998 (incorporated by reference to Exhibit 10 of the Holdings' 10-Q for the quarterly period ended November 28, 1998).* 10.21 1999 Non-Employee Directors' Stock Option Plan (incorporated by reference to the Appendix of Holdings' 1999 Notice of Annual Meeting and Proxy Statement).* +10.22 Form of Non-Qualified Stock Option Agreement, between Holdings and each of its Executive Officers (other than William Y. O'Connor), respecting the grant of stock options under the 1994 and 1997 Stock Option Plans. +10.23 Form of Non-Qualified Stock Option Agreement, between Holdings and William Y. O'Connor, respecting the grant of stock options under the 1994 and 1997 Stock Option Plans.* 10.24 Trust Agreement, dated December 18, 1998, by and between Holdings and The Bank of New York, as Trustee, respecting the Income Deferral Plan - 1998 (incorporated by reference to Exhibit 10.1 of the Holdings' 10-Q for the quarterly period ended November 28, 1998).* +21.1 Subsidiaries of the Company. +23.1 Consent of Ernst & Young, LLP. 82 +23.2 Consent of Price Waterhouse. +27.1 Fiscal 2000 Financial Data Schedule. - -------------- + Filed herewith. * Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. Certain instruments defining the rights of holders of long-term debt have not been filed pursuant to item 601(b)(4)(iii)(A) of Regulation SK. Copies of such instruments will be furnished to the Commission upon request. (b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the last quarter of the fiscal year covered by this report. 83 SIGNATURES Pursuant to the requirements of Section 13 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, in West Greenwich, Rhode Island, on May 3, 2000. GTECH HOLDINGS CORPORATION By: /s/ William Y. O'Connor ---------------------------- William Y. O'Connor, Chairman of the Board and CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ William Y. O'Connor Director, Chairman of the May 3, 2000 - ----------------------- Board, Chief Executive Officer William Y. O'Connor (principal executive officer) /s/ Jaymin B. Patel Senior Vice President & Chief May 3, 2000 - ------------------- Financial Officer (principal Jaymin B. Patel financial officer) /s/ Robert J. Plourde Vice President and Corporate May 3, 2000 - --------------------- Controller (principal accounting Robert J. Plourde officer)
84 SIGNATURE TITLE DATE /s/ Robert M. Dewey, Jr. Director May 3, 2000 - -------------------------------- Robert M. Dewey, Jr. /s/ Burnett W. Donoho Director May 3, 2000 - -------------------------------- Burnett W. Donoho /s/ The Rt. Hon. Lord Moore Director May 3, 2000 - -------------------------------- The Rt. Hon. Lord Moore of Lower Marsh, P.C. /s/ Lt. Gen. Emmett Paige, Jr. Director May 3, 2000 - -------------------------------- Lt. Gen. (Ret.) Emmett Paige, Jr. /s/ Anthony Ruys Director May 3, 2000 - -------------------------------- Anthony Ruys /s/ William Bruce Turner Director May 3, 2000 - -------------------------------- William Bruce Turner EX-3.3 2 AMENDED AND RESTATED BYLAWS 1 Exhibit 3.3 AMENDED AND RESTATED BY-LAWS OF GTECH HOLDINGS CORPORATION * * * * * ARTICLE I OFFICES Section 1. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle/City of Dover, County of Kent, State of Delaware, or such other address as the Board of Directors may by resolution determine from time to time. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. Section 3. Books. The books of the Corporation may be kept within or without of the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Time and Place of Meetings. All meetings of stockholders shall be held at such place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the Chairman or any Co-Chairman in the absence of a designation by the Board of Directors). Section 2. Annual Meetings. Annual meetings of stockholders shall be held to elect the Board of Directors and transact such other business as may properly be brought before the meeting. Section 3. Special Meetings. Special meetings of stockholders may only be called by the Chairman or the President and shall be called by the Chairman, the President or the Secretary at the request in writing of a majority of the total number of directors of the 1 2 Exhibit 3.3 Corporation or the holders of record of a majority of the outstanding capital stockholders of the Corporation entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 4. Notice of Meetings and Adjourned Meetings; Waivers of Notice. (a) A written notice of stockholders' meetings shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("Delaware Law"), such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Unless these bylaws otherwise require, when a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (b) A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, and does so object, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 5. Quorum. Unless otherwise provided under the certificate of incorporation or these bylaws and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business. Section 6. Voting. (a) Unless otherwise provided in the certificate of incorporation and subject to Delaware Law, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Unless otherwise provided by Delaware Law, the certificate of incorporation or these bylaws, in all matters other than the election of directors (which shall be decided by plurality vote) the affirmative vote of a majority of the outstanding capital stock of the Corporation shall be the act of the stockholders; provided, however, that with respect to any matter which has been approved by a majority of the total number of directors of the Corporation, the affirmative vote of a majority of the shares of capital stock present in person or represented by proxy at a meeting of stockholders and entitled to vote on the matter shall be the act of the stockholders. (b) Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date. 2 3 Exhibit 3.3 Section 7. Action by Consent. (a) Unless otherwise provided in the certificate of incorporation, and subject to the applicable rules of any stock exchange on which any securities of the Corporation may be listed, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this Section and Delaware Law to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Section 8. Organization. At each meeting of stockholders, the Chairman or any Co-Chairman or Vice Chairman of the Board, if one shall have been elected (or if the members of the Board of Directors otherwise agree, any director of the Corporation), shall act as chairman of the meeting. The Secretary (or in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof. Section 9. Order of Business. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. At such meetings, each member of the Board of Directors shall be entitled to present any matter for consideration and discussion. ARTICLE III DIRECTORS Section 1. General Powers. Except as otherwise provided in Delaware Law or the certificate of incorporation, the business and affairs of the Corporation shall be managed by 3 4 Exhibit 3.3 or under the direction of the Board of Directors. Section 2. Number, Election and Term of Office. The number of directors which shall constitute the whole Board shall be such number not less than six and not more than twelve as shall be designated from time to time by resolution of the Board. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The term of the initial Class I directors terminated on the date of the 1993 annual meeting of stockholders; the term of the initial Class II directors terminated on the date of the 1994 annual meeting of stockholders; and the term of the initial Class III directors terminated on the date of the 1995 annual meeting of stockholders. At each annual meeting of stockholders beginning in 1993, successors to the class of directors whose term expires at that annual meeting shall be elected for a three year term. If the number of directors is changed, any increase or decrease shall be apportioned by the Board of Directors among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall have been duly elected and qualified or until such director's earlier death, resignation, retirement, disqualification or removal from office. Directors need not be stockholders. No person shall be eligible for election or reelection as a director of the Company after he or she has reached the age of 72; provided, however, that this limitation shall not prevent any director who is serving at such time he or she reaches the age of 72 from continuing to serve for the remainder of his or her then current term. Section 3. Nomination of Directors. (a) Nominations for the election of directors may be made by the Board of Directors, a committee appointed by the Board or by a stockholder entitled to vote in the election of directors. A stockholder entitled to vote in the election of directors, however, may make such a nomination only if written notice of such stockholder's intent to do so has been given, either by personal delivery or by United States mail, postage prepaid, and received by the Corporation: (i) with respect to an election to be held at an annual meeting or stockholders, not later than sixty nor more than ninety days prior to the first anniversary of the preceding year's annual meeting (or, if the date of the annual meeting is changed by more than twenty days from such anniversary date, within ten days after the date the Corporation mails or otherwise gives notice of the date of such meeting), and (ii) with respect to an election to be held at a special meeting of stockholders called for that purpose, within ten days after the date on which notice of the special meeting was first mailed to stockholders of the Corporation. (b) Each stockholder's notice of intent to make a nomination shall set forth: (i) the name(s) and address(es) of the stockholder who intends to make the nomination and of the person or person to be nominated, (ii) a representation that the stockholder: (1) is a holder of record of stock of the Corporation entitled to vote at such meeting, (2) will continue to hold such stock through the date on which the meeting is held, and (3) intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iii) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination is to be made by the stockholder, (iv) such other information regarding each nominee proposed 4 5 Exhibit 3.3 by such stockholder as would be required to be included in a proxy statement filed pursuant to Regulation 14A promulgated under Section 14 of the Securities Exchange Act of 1934, as amended, as now in effect or hereafter modified, had the nominee been nominated by the Board of Directors; and (v) the consent of each nominee to serve as a director of the Corporation if so elected. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the qualifications of such person to serve as a director. (c) The officer presiding at the meeting of stockholders may declare invalid any nomination made by a stockholder which is not in compliance with the foregoing procedure, and, in such case, any votes cast in the election of directors for such person shall not be counted by the inspector(s) of election. Section 4. Quorum and Manner of Acting. General Provisions. Unless the certificate of incorporation or these bylaws require a greater number, a majority of the total number of directors shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 5. Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors (or the Chairman or any Co-Chairman or Vice Chairman in the absence of a determination by the Board of Directors). Section 6. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice. Section 7. Regular Meetings. The place and time of regular meetings of the Board of Directors shall be determined by the Board of Directors. Notice of regular meetings of the Board of Directors shall be given to each director at least seven days before the date of the meetings. Section 8. Special Meetings. Special meetings of the Board of Directors may be 5 6 Exhibit 3.3 called by the Chairman or any Co-Chairman or Vice Chairman of the Board or the President and shall be called by the Chairman or any Co-Chairman or Vice Chairman of the Board, the President or the Secretary on the written request of any director. Notice of such special meeting shall be given to each director at least two days before the date of the meeting in such manner as is reasonably determined by the Board of Directors. Section 9. Meetings. At annual, special or regular meetings of the Board of Directors, each director shall be entitled to present any matter for consideration or discussion. Section 10. Action by Consent. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if all members of the Board consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board. Section 11. Telephonic Meetings. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 12. Resignation. Any director may resign at any time by giving written notice to the Board of Directors or to the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 13. Vacancies. (a) Unless otherwise provided in the certificate of incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected, unless otherwise provided by the Certificate of Incorporation or resolution or resolutions adopted by the Board of Directors. (b) Each director so chosen shall hold office for a term that shall coincide with the term of the class to which such director shall have been elected, or until his earlier death, resignation or removal. (c) If there are no directors in office, then an election of directors may be held in accordance with Delaware Law. (d) Unless otherwise provided in the certificate of incorporation, when one or more directors shall resign from the Board, effective at a future date, a majority of the directors 6 7 Exhibit 3.3 then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in the filling of other vacancies. Section 14. Removal. No director may be removed from office by the stockholders except for cause with the affirmative vote of the holders of not less than a majority of the total voting power of all outstanding Securities of the corporation then entitled to vote generally in the election of directors, voting together as a single class. Section 15. Compensation. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses. Section 16. Committees of Directors. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist to one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or qualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise all of the powers and authority of the Board of Directors and may authorize the seal of the Corporation to be affixed to all papers which may require it, but no such committee shall have the power or authority in reference to amending the certificate of incorporation (except that a committee may, to the extent authorized in the resolution providing for the issuance of shares of stock adopted by the Board of Directors, fix any preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the bylaws the Corporation; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep a record of its meetings and report the same to the Board of Directors when requested. 7 8 Exhibit 3.3 ARTICLE IV OFFICERS Section 1. Principal Officers. The principal officers of the Corporation shall be a President, a Chairman, one or more Co-Chairman, one or more Vice Chairmen, one or more corporate Vice Presidents, a Treasurer and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other principal officers, including one or more Controllers, as the Board may in its discretion appoint. One person may hold the offices and perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of President and Secretary. Section 2. Election, Term of Office and Renumeration. The principal officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine. Section 3. Subordinate Officers. In addition to the principal officers enumerated in Section 1 of this Article IV, the Corporation may have one or more non-corporate Vice Presidents, Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such other subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees. Section 4. Removal. Except as otherwise permitted with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by the Board of Directors. Section 5. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Powers and Duties. The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors. 8 9 Exhibit 3.3 ARTICLE V INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 1. Right to Indemnification. The Corporation shall indemnify, to the full extent permissible under Delaware law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Corporation, or while a director or officer of the Corporation is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. Section 2. Payment of Expenses in Advance. Expenses incurred in defending an action, suit or proceeding referred to in Section 1 of this Article V shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding in the manner and to the full extent permissible under Delaware law upon request of any person requesting indemnification under Section 1 of this Article V. Section 3. Procedure. On the request of any person requesting indemnification under Section 1 of this Article V or an advance under Section 2 of this Article V, the Board of Directors or a committee thereof shall determine whether such indemnification or advance is permissible or such determination shall be made by independent legal counsel if the Board or committee so directs or if the Board or committee is not empowered by statute to make such determination. Section 4. Other Rights. The indemnification provided by these bylaws shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any statute, agreement, vote of stockholders or disinterested directors, or otherwise both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. Without limiting the generality of the foregoing, by action of the Board of Directors (notwithstanding the interest of its members in the transaction) the Corporation may enter into agreements with persons indemnified under this Article V and others providing for indemnification of and advancement of expenses to such persons by the Corporation either under the provisions of this Article V or otherwise, and, in the event of any conflict between the provisions of this Article V and the provisions of any such indemnification agreement, the provisions of such indemnification agreement shall prevail. Section 5. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against him and incurred by him in any 9 10 Exhibit 3.3 such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of these bylaws. Section 6. Effect; Benefit; Modification. The obligations of the Corporation to indemnify and to advance expenses to a party under the provisions of this Article V shall be in the nature of a contract between the Corporation and each such party. No amendment or repeal of any provision of this Article V shall alter, to the detriment of such party, the right of such party to indemnification or the advancement of expenses with respect to any claim based on an actual or alleged act or failure to act which took place prior to such amendment, repeal or termination. ARTICLE VI GENERAL PROVISIONS Section 1. Fixing the Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by Delaware Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested if no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by Delaware Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of 10 11 Exhibit 3.3 Directors adopts the resolution taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors, may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 2. Dividends. Subject to limitations contained in Delaware Law and the certificate of incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, in property or in shares of the capital stock of the Corporation. Section 3. Fiscal Year. The fiscal year of the Corporation shall commence (i) on the day after the last Saturday of the month of February in any particular calendar year and end on the last Saturday of the month of February of the next succeeding calendar year or (ii) as otherwise determined by the Board of Directors. Section 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced. Section 5. Voting of Stock Owned by the Corporation. The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock, and on behalf of the Corporation to consent to any action by any such corporation without meeting. Section 6. Amendments. These bylaws or any of them, may be altered, amended or repealed, or new bylaws may be made, by the stockholders entitled to vote thereon at any annual or special meeting thereof or by the Board of Directors. 11 EX-10.5 3 FORM OF AGREEMENT RE: CHANGE IN CONTROL 1 Exhibit 10.5 AGREEMENT AGREEMENT, dated this _____ day of _________________, 199_, by and between, ________________________ ("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 2 Exhibit 10.5 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, -2- 3 Exhibit 10.5 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 -3- 4 Exhibit 10.5 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 -4- 5 Exhibit 10.5 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 -5- 6 Exhibit 10.5 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 -6- 7 Exhibit 10.5 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 -7- 8 Exhibit 10.5 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. -8- 9 Exhibit 10.5 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 -9- 10 Exhibit 10.5 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: -10- 11 Exhibit 10.5 (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 -11- 12 Exhibit 10.5 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 -12- 13 Exhibit 10.5 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. -13- 14 Exhibit 10.5 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 -14- 15 Exhibit 10.5 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. Nothing herein shall be deemed to modify any existing obligations Executive may have with respect to confidentiality, non-competition and similar obligations. 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: 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 By: - ------------------------------- ---------------------------------- WITNESS: - ------------------------------- ---------------------------------- -15- 16 Exhibit 10.5 Signatories to Agreement Respecting Change of Control
Executive Officers Dates Steven P. Nowick January 15, 1999 Thomas J. Sauser July 15, 1997 Donald Stanford July 29, 1997 Donald Sweitzer October 13, 1998 Jaymin B. Patel March 22, 2000 David J. Calabro April 14, 1999 Jean-Pierre Desbiens October 13, 1998
EX-10.6 4 EXECUTIVE PREREQUISITES PROGRAM 1 Exhibit 10.6 GTECH CORPORATION Executive Perquisite Program Benefit costs as a percent of payroll are significantly reduced at higher salary levels. This reflects caps on such benefits as Social Security, long-term disability, 401(k) programs, etc., and the flat costs of such coverage as medical and dental insurance. In an effort to provide equal levels of benefits to executives, despite these caps, GTECH is instituting the following Executive Perquisite Program (E.P.P.). This program is available to all officers of the Corporation (Vice President and above). The E.P.P. will provide each covered executive with a pre-established dollar amount with which he/she may select perquisites that best suit his/her needs in this area. This program will be administered by the Director Human Resources Administration to ensure proper handling and financial reporting. Monies spent through the E.P.P. will be added to the executives' W-2 at year end and that amount will be grossed-up to alleviate any tax liability on the part of the executive. Therefore, it is imperative that all reporting be extremely accurate. The maximum amount available to an executive per calendar year will be $27,500. Normally, if an executive becomes eligible for participation in the E.P.P. during the plan year, the $27,500 maximum will be pro-rated for the number of months of participation. The Chairman of the Board, the Vice Chairman or the Chief Operating Officer may elect to waive the pro-rata. share during the first year of eligibility. The available E.P.P. funds may be spent on any combination of perquisites as deemed appropriate by the executive. Also, the executive may wish to spend the entire amount available on one particular item. Any funds not spent by the end of the calendar year will be forfeited. The Board of Director may elect to adjust the maximum amount available per calendar year and add to the selection list of perquisites. 2 Exhibit 10.6 PERK ACCOUNT PROCEDURE In order to be reimbursed for perquisite expenses, the executive must submit proof of payment (copy of a canceled check, credit card receipt, etc.) with the request for reimbursement. If the executive prefers to have the vendor paid directly, the invoice should be forwarded with the request to Human Resources. The perquisite accounts will be monitored by Human Resources. All monies spent through this program will be added to the executive's W-2 at year end and the amount will be grossed-up to alleviate any personal tax liability. The following is a list of perquisites choices for this calendar year. Available funds may be spent on one item or on a combination of items. INSURANCE Disability Insurance Life Insurance Umbrella Personal Liability Insurance Dependent/Spouse Life Insurance Long Term Nursing Care Insurance Split Dollar Life Insurance Burial/Cemetery Insurance Joint and Survivor Insurance FINANCIAL Financial Counseling Interest on Company Loan Individual Retirement Account EDUCATION Dependent Tuition Matching Contributions to Educational Institutions Unmatched Donations to Educational Institutions Contribution for Uniform Gifts to Minors Act HEALTH/FITNESS Country/Athletic Club Initiation Fees Country/Athletic/Health Club Dues Vision and Hearing Care Orthodontia Quit Smoking Clinics Home Health Fitness Equipment Personal Trainer/Dietitian 3 Exhibit 10.6 RECREATION Concert, Ballet, Theater Subscriptions Professional Sporting Event Tickets/Subscriptions Yacht Club Dues and Fees FAMILY CARE Child Care Expenses (in non-GTECH facility) Elder Care Expenses (in non-GTECH facility) Senior Care OTHER Legal Counseling First Class Air Travel/Spousal Travel Leased Automobile Security Device for Home Charitable Contributions Home Computer System 4 Exhibit 10.6 EXECUTIVE PERQUISITES PROGRAM PARTICIPANTS William Y. O'Connor Steven P. Nowick David J. Calabro Stephen A. Davidson Jean-Pierre Desbiens Jaymin B. Patel Donald L. Stanford Donald R. Sweitzer Jean-Marc Lafaille William F. Middlebrook Vino C. Mody Cynthia A. Nebergall William M. Pieri Robert John Plourde Fred Reis EX-10.8 5 SUPPLEMENTAL RETIREMENT PLAN 1 Exhibit 10.8 GTECH CORPORATION SUPPLEMENTAL RETIREMENT PLAN GTECH Corporation has adopted this Supplemental Retirement Plan, effective January 1, 1992, to provide supplemental retirement benefits under the circumstances hereinafter set forth. I. DEFINITIONS Wherever used herein, the following terms shall have the meaning specified: "Beneficiary" means a beneficiary or survivor of a deceased Participant who is designated to receive benefits under the Plan after a Participant's death. If no Beneficiary is designated or if a designation is ineffective with respect to an Plan benefit, the beneficiary of the Participant under the 401(k) Plan shall be the Beneficiary for the Plan's death benefit. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means the Chief Operating Officer, the Controller and the General Counsel of the Company. "Company" means GTECH Corporation and any successor thereto, whether by acquisition of its stock or substantially all of its assets. "Compensation" means, as of each April 1, an eligible employee's previous calendar year's base salary minus the Code Section 401(a)(17) maximum for that year (but not less than zero), the value of perquisites provided during the previous calendar year and any bonus and commissions earned during the previous corporate fiscal year. "Plan" means the Supplemental Retirement Plan set forth in this instrument, as amended from time to time. "401(k) Plan" means the GTECH Corporation 401(k) and Profit Sharing Plan, as amended from time to time. "Participant" means an employee of the Company who satisfies the requirements for participation, as hereinafter set forth. Singular words shall include the plural, and masculine words shall include the feminine, unless the context clearly indicates a distinction. 2 Exhibit 10.8 II. ELIGIBILITY An officer of the Company who is a participant in the 401(k) Plan shall be a Participant. Participation in the Plan shall cease upon a Participant's termination of employment with the Company. III. SUPPLEMENTAL BENEFIT 3.1 Amount of Benefit The gross benefit to be provided each Participant under the Plan shall be an annual award equal to the percentage of 401(k) Plan compensation contributed under the profit sharing provisions of the 401(k) Plan for the calendar year which ended immediately prior to the year in which the award is paid multiplied by each Participant's Compensation. 3.2 Payment (a) Awards to Participants shall be contributed to the Plan by the end of April each year net of required tax withholding. All funds contributed in accordance with the foregoing provisions of the Plan shall be fully vested in the Participants and shall be deposited to accounts established by the Company with Fidelity Investments and invested in the available investment funds in such proportions as the Participants shall direct. In addition to these amounts, each Participant may contribute to the Plan such amounts of cash as shall be delivered to the Company and designated as a contribution to the Plan in January, April, July and October in each year. The Fidelity investment funds available to the Participants under the Plan shall be in the same funds as are offered to participants in the 401(k) Plan. (b) Payment from a Participant's account in the Plan may be made by the Company to the Participant in cash in January, April, July and October of each year at the Participant's request. Upon termination of a Participant's employment with the Company, the Company shall promptly sell the shares in the Participant's account in the Plan and pay the Participant the cash received from such sale. If a Participant dies before receiving his account in the Plan, the balance of the account shall be paid to his Beneficiary. IV. ADMINISTRATION The Committee shall administer the Plan. The Committee shall have discretionary authority to determine any question arising in connection with the interpretation, application or administration of the Plan, and any determination or decision of the Committee shall be conclusive and binding on all persons at any time having or claiming to have any interest whatever under this Plan. 3 Exhibit 10.8 V. MISCELLANEOUS 5.1 Amendment and Termination The Company reserves the right at any time and from time to time to amend or terminate this Plan by action of the Board; provided, however, that no amendment or termination shall reduce benefits accrued under the Plan prior to the adoption of the amendment or approval of termination and that Participants are notified of such amendment or termination promptly. If the Plan is terminated, benefits accrued through the date of termination will be paid in such manner and at such time as they would have been paid if the Plan had not been terminated. 5.2 No Enlargement of Employment Rights Nothing contained in the Plan shall be construed as a contract of employment between the Company and an employee, or as a right of any employee to continued employment with the Company, or as a limitation on the right of the Company to discharge an employee with or without cause. IN WITNESS WHEREOF, the Company has caused this document to be executed as of January 1, 1992. GTECH CORPORATION By: /s/ Robert A. Breakstone 4 Exhibit 10.8 List of Participants in Supplemental Retirement Plan of GTECH Corporation (Fiscal Year 2000) Calabro, David J. Davidson, Stephen A. Desbiens, Jean-Pierre Middlebrook, William F. Mody, Vino C. Nebergall, Cynthia A. Nowick, Steven P. O'Connor William Y. Patel, Jaymin B. Pieri, William M. Plourde, Robert J. Reis, Fred Stanford, Donald L. Sweitzer, Donald R. EX-10.12 6 AGREEMENT WITH CAIXA ECONOMICA FEDERALE 1 Exhibit 10.12 CAIXA ECONOMICA FEDERAL AGREEMENT* FOR THE PROVISION OF SERVICES TO RENDER THE CAIXA ECONOMICA FEDERAL LOTTERY SYSTEM OPERATIONAL IN ON-LINE, REAL TIME MODE, ENTERED INTO BY THE PARTY OF THE FIRST PART, CAIXA ECONOMICA FEDERAL, AND THE PARTY OF THE SECOND PART, THE JOINT VENTURE LED BY RACIMEC INFORMATICA BRASILEIRA S.A., PURSUANT TO THE FOLLOWING: By virtue of this instrument, the party of the first part, CAIXA ECONOMICA FEDERAL, a financial institution in the form of a public company, created and organized pursuant to the terms of Decree Law No. 759 of 8/12/69 and Decree No. 66,303 of 3/670, currently governed by the bylaws approved by Decree No. 99,531 of 9/17/90 registered with the C.G.C/M.F. [Ministry of Finance Tax Roll] under number OO.360.305/0001-04, with head office at SBS, Quadra 4, Lote 34, Brasilia, Federal District, hereby represented by its infrastructure Department Manager (GEAST), hereinafter to be referred to as the CEF; and the party of the second part, the joint venture lead by RACIMEC INFORMATICA BRASILEIRA S.A., with head office at Praia do Botafogo, 228, 3(degree) pavimento, registered with the C.G.C/M.F. under No. 33.643.305/0001-70, hereby represented by it Chairman, Mr. ANTONIO CARLOS LINO DA ROCHA a Brazilian citizen, married, holder of R.G. Identification Card No. 02.172.548-6, IFP and C.P.F. No. 098.425.197-91. resident of and domiciled at Rua David Gebara 146, apto. 62, in the city of Sao Paulo, SP, hereinafter to be referred to simply as the CONTRACTING PARTY; in view of the authorization of the CEF Board of Directors, RD, Minutes No. 1306 of 12/26/96, proceeding No. 99.9807/93 - Competitive Bid N9. 001/94 - CPL/MZ have duly agreed to provide services to render the Lottery systems of Caixa Economica Federal operational in ON-LINE/OFF-LINE modes, corresponding to the respective terms and conditions and to the proposal submitted by the CONTRACTING PARTY in the aforementioned competitive bid, the contracting parties being subject to the regulations contained in Law No. 8,666 of 6/21/93, and to the following clauses: CLAUSE ONE - OBJECTIVE The objective of this agreement is to provide services for the development and establishment of the Lottery systems of Caixa Economica Federal in ON-LINE REAL TIME mode, and to render them operational, as well as services relating to the payment of ticket prizes corresponding to the Brazil Federal Lottery and the Brazil Instant Federal Lottery, collecting revenue from the public service concessionaires * This document is a translation, which management believes to be accurate and complete, from the Portugese language original of the Agreement. The Company will file a Portugese version of this Exhibit if so directed by the Commission. 2 Exhibit 10.12 and other payments made within the retail network pursuant to the specifications and implementation schedule shown in Annexes I and II of this agreement, which form and integral part of and complement it. CLAUSE TWO - PRICE In return for perfect execution of the services covered under this contractual instrument, the CEF shall pay the CONTRACTING PARTY, as compensation for the lottery-related services, the weekly sums corresponding to the percentages shown on the attached spreadsheet (Annex III) of gross collections from the lotteries and any new games implemented on the on-line, real time terminals installed and on any terminals not yet connected to the on-line network for which the CONTRACTING PARTY is responsible, subject to such additional deductions as are provided for by law. Paragraph One - The compensation corresponding to the sub-system and processing of services relating to the monitoring and payment of ticket prizes for the Brazil Federal Lottery and the Brazil Instant Federal Lottery is included within the compensation provided for in the main body of this Clause. Paragraph Two -As compensation for the services corresponding to the collection of revenue from public service concessionaires and other payments made within the lottery retailer network the sum of R$0.05 (five centavos) shall be paid for each certified document processed. Paragraph Three - The sums provided for in this Agreement shall be denominated in Brazilian Reals (R$) and shall remain fixed and non-adjustable, with a new agreement being allowed on an annual basis, the basic parameters of which must include the quality and prices prevailing in the market for providing the services covered under this agreement. CLAUSE THREE - FORM OF PAYMENT The CEF shall pay the CONTRACTING PARTY on a weekly basis, on the 3rd (third) business day of the week following that during which the services were executed, by crediting the current account obligatorily maintained by the CONTRACTING PARTY at a CEF branch. Paragraph One -The CONTRACTING PARTY shall issue, on a weekly basis, the bill of sale/invoice corresponding to services provided during the same period, simultaneously with the closing of game sales for each week. Paragraph Two - The CONTRACTING PARTY shall submit to the CEF the bill of sale/invoice on weekly basis, together with the reports generated by the system, for purposes of comparison. 3 Exhibit 10.12 Paragraph Three - In the event that the payment deadline established in the preceding sub-item has expired, the amount due shall be financially restated on the basis of the pro-rata change in the prevailing financial index, from the date established for payment, until the actual payment date. Paragraph Four - No payment shall exempt the CONTRACTING PARTY from its liabilities and obligations, nor shall imply final acceptance of the services. Paragraph Five - The weekly payment to be made pursuant to this Clause shall be conditional upon submission by the CONTRACTING PARTY of supporting documentation declaring a discharge of the previous months obligations vis-a-vis the INSS [National Social Security Institute] and the FGTS (Government Severance Indemnity Fund for Employees). Paragraph Six - The CEF shall withhold from the CONTRACTING PARTY'S invoices the amount corresponding to the cost of maintaining the equipment in off-line mode which is the responsibility of the CONTRACTING PARTY, i.e. in the region where the on-line, real-time system is being installed. Paragraph Seven - payment for the services discussed in Paragraph Two, Clause Two of this agreement shall be made on a weekly basis by submission of a specific bill of sale/invoice issued by the CONTRACTING PARTY. CLAUSE FOUR - VALIDITY PERIOD AND EXTENSION OF THE AGREEMENT This agreement shall have a duration of 48 (forty-eight) months as of its signing date, and may be extended for an equal or lesser period at the discretion of the CEF and consent of the CONTRACTING PARTY, in conformance with any legal restrictions. CLAUSE FIVE - INITIATION OF EXECUTION OF THE SERVICES The CONTRACTING PARTY shall have a period of up to 120 (one hundred twenty) days to adapt its structure and familiarize itself with the CEF routines, standards and operating situation, as well as to develop and test the systems, before actually initiating execution of the services for which it was engaged. Paragraph One - Implementation of the first phase of the schedule shall be considered as the initiation of execution of the services. Paragraph Two - During this preparation period, no payment by the CEF shall be due, and all expenses shall be assumed solely by the CONTRACTING PARTY, with the validity period of the adjustment also to remain unchanged in such event. 4 Exhibit 10.12 Paragraph Three - The CONTRACTING PARTY must prepare and submit a work schedule for review by the CEF, within a period not to exceed 15 (fifteen) calendar days after the signing date of the agreement, under penalty of the cancellation thereof and application of the corresponding penalties. Paragraph Four - Upon submission of the "Work Schedule", the CEF may approve it or reject it in whole or in part, with the CONTRACTING PARTY being responsible for revising it, if necessary, within a period not to exceed 5 (five) calendar days after notification by the CEF, and assuming all expenses resulting therefrom. CLAUSE SIX - AMENDMENTS The CEF may increase or decrease the number of points of sale (lottery retailers) necessary for the services by up to 25% (twenty-five percent) of the total originally engaged, as specified in Annex III of this agreement. I - to develop all phases of the on-line, real-time lottery system, passing on to the CEF all knowledge and respective software and hardware projects, and all documentation, in Portuguese, corresponding to the subject of this agreement, and to render it operational in cooperation with the CEF technicians; II - to consolidate into the system any information received in off-line mode corresponding to terminals not connected to the network maintaining it and keeping the CEF updated on it, on a daily basis; III - to gradually replace, throughout CELOT/RLOT and in accordance with the proposed schedule, the off-line lottery system by the on-line, real-time system and new equipment based on updated technology in full use throughout the market, the CONTRACTING PARTY to assume the expense of any supplies needed for the installation thereof, such as wheels, paper bobbins, printer ribbons, etc., as well as the expense of operating and maintaining the system installed thereby; IV - to install terminals for purposes of auditing and monitoring the system, at the locations specified by the CEF; V - to install terminals and printers at the Head Office and in the installed lottery units of the CELOT/RLOT; VI - to customize the system's proprietary auditing application, pursuant to the specifications of the Lottery and Technology Departments, ensuring its completion and approval by the CEF by such time as installation of the on-line, real-time system is initiated, as well as: 5 Exhibit 10.12 a) to permit unrestricted access to the knowledge and operational basis of the System to employees specified by the CEF for auditing purposes; b) to furnish the CEF with formatted files for auditing purposes pursuant to the specifications provided thereby, when so requested; c) to maintain files and records for the period of time specified by the CEF in order to facilitate monitoring and auditing of the transactions at any time. VII - to prepare the CPD, at a site to be approved by the CEF, for installation of the central computers and communications equipment; VIII - to install a service post, qualify technical representatives or assign resident technicians to provide maintenance and technical assistance services for the equipment to be allocated in execution of the services within the periods and under the conditions established herein; IX - to inform the CEF, immediately and in writing, of any irregularity in execution of the services that it may notice; X - to provide such clarifications as may be requested by the CEF, the complaints of which must be addressed in timely fashion; XI - to print such advertising as may be specified by the CEF on the brochures for all games and at no cost to the CEF; XII - to install the equipment and software needed to carry out the work; XIII - to install and maintain a secure communications network for connecting the terminals with the CPD; XIV - to train the retailers and up to a maximum of 6 (six) employees thereof per store, on operating the terminals; XV - to keep assigned staff at the CPD and Service Posts to train and provide field services for the retailer; XVI - to provide marketing advisory services for new games, new software, general management and operation of the on-line, real-time system, with the adoption of such measures or actions as may be suggested at the sole discretion of the CEF; XVII - to pay its employees on time, and to furnish the CEF, whensoever requested, a copy of the payroll and the contribution collection guides for 6 Exhibit 10.12 social security (INSS), FGTS, PIS [Employee Profit-Sharing Program], and Income Tax withheld at Source, as applicable, corresponding to employees assigned to execution of the contracted services; XVIII - to ensure that its employees treat CEF staff, customer visitors and other contracted parties politely and courteously, with the removal of those whose conduct is deemed inappropriate to be required; XIX - to respect and enforce respect for the safety and labor medicine regulations provided for in the relevant law and banking regulations corresponding to the CEF; XX - to maintain a head office or representative office In Brasilia/Federal District. and prove such condition within a period not to exceed 30 (thirty) days after the contract signing date; XXI - to maintain its own agent at each site and on each shift corresponding to execution of the service in order to coordinate, supervise and give orders to the assigned staff and in order to settle any disputes pertaining to execution of the services, correct any adverse situations and immediately address complaints/requests received from the CEF; XXII - to assume total liability for such equipment, furniture and fixtures as may be provided for purposes of executing the services ensuring the integrity thereof and reimbursing the CEF for effective maintenance expenses incurred as a result of the misuse thereof; XXIII - to inform the CEF, for purposes of controlling access to its facilities, of the name and respective identity card number of the employees assigned to provide the services; XXIV - to inform the CEF, also for purposes of controlling access to its facilities, of any employee dismissals and hirings, the former within a period of 24 hours and the latter by the start date of work; XXV - to duly identify its employees by means of a badge when in service at the CEF facilities; XXVI - to optimize the on-line, real-time system in accordance with the instructions and monitoring from the CEF Systems Department; XXVII - to assume liability for any losses, improper reproductions and/or adulterations as may be caused to the documents and magnetic files during the period during which they are in its custody; 7 Exhibit 10.12 XXVIII - to monitor the complete fulfillment of the services to which it has committed, and to be completely liable for any charges incurred, which monitoring shall be independent of any that may be exercised by the CEF; XXIX - to accept the broadest monitoring by the CEF through its agent at any time during the contractual validity period, with such monitoring to be entitled to be carried out at its facilities with a view to strict fulfillment of the contractual obligations; XXX - to assume all expenses relating to personnel and any others as may be incurred relating to the subject of this agreement, with the exception of those stipulated as being the CEF's responsibility: XXXI - to assume all precautions and obligations established in specific labor accident law in the event that, under related circumstances, its employees are harmed while performing the services or in connection therewith, even if this occurs at CEF facilities; XXXII - to provide the staff necessary for operating the CPD and to provide field services for the repair of equipment installed at on-line, real-time points of sale; XXXIII - to execute the system tests with the participation of the CEF; XXXIV - to train the CEF employees specified thereby in the operation and security of the Systems; XXXV - to develop sub-systems to permit the monitoring and payment of ticket prizes for the Brazil Federal Lottery and the Brazil Instant Federal Lottery, under the conditions established by the CEF, and to permit the collection of revenue from public concessionaires and other payments made within the lottery retailer network; XXXVI - to promote and participate in such meetings as may be called to discuss points of view on work techniques and methods; XXXVII - to operate the CPD on days and hours defined by the CEF; XXXVIII - to provide preventive and corrective maintenance of the system equipment in order to keep it in perfect operating condition; XXXIX - to provide maintenance for all software, including installations and the testing of any changes in accordance with changes requested by the CEF; 8 Exhibit 10.12 XL - to prepare, maintain and supply to the CEF management and operating information, by means of reports on magnetic media, on a schedule to be defined, for all activities relating to monitoring of the games; XLI - to keep the system, user and operating manuals up-to-date, making them available to the CEF and accredited retailers; XLII - to implement, pursuant to CEF instructions the collection of revenue from public service concessionaires and payments due to the CEF, on the new equipment, through the lottery systems in on-line, real-time mode and on the remaining off-line equipment; XLIII - to provide the necessary infrastructure such as servers installed within the CEF environment which the controlling party shall define, including with respect to the engagement and maintenance of date communications lines, subject to acceptance of a specific proposal by the CONTRACTING PARTY; XLIV - to expand the data communications network whenever the average response time exceeds the limit initially established, even if the transmission volume is caused by information from systems processed at the CEF; XLV - to process the CEF information (data) within its computer environment as so defined by the contracting party, in order to enhance the feasibility of new products and services and to ensure a high level of security and complete confidentiality; XLVI - to analyze the form of connection, and if necessary, to permit the installation and use of financial terminal cash machines and customer terminals, in transparent fashion together with the lottery terminals multiplexed within the same communications channel, upon submission of a specific proposal to the CEF; XLVII - to provide for the possibility of paying bets and/or collecting revenue from public service concessionaires and payments due to the CEF, by means of cards, whether they be debit card, a credit cards, magnetic cards or "chip cards"; XLVIII - to furnish modular-style, i.e.. state-of-the-art capture machines transmission radii capable of sending at a minimum of 9,600 bps with the necessary redundancy in the sections considered by both parties as being critical; XLIX - to promote transfer to the CEF of all information relating to operation of the system, without a continuity solution, in the event of an interruption of services by the CONTRACTING PARTY. 9 Exhibit 10.12 CLAUSE EIGHT - RESPONSIBILITIES OF THE CONTRACTING PARTY The following are the responsibilities of the CONTRACTING PARTY: I - to be liable for any harm caused to the CEF or to third parties, as a consequence of malfunctions in the safety system for the equipment and services provided; II - to be liable for every and all harm caused to the CEF or to third parties, even if guilty, which may be caused by its agents employees or representatives, not excluding or reducing such liability to monitoring or follow-up by the CEF; III - to be liable to the CEF for any type of actions or activities it may experience as a consequence of the rendering of services as well as for the employment contracts for its employees, even in cases involving any court rulings, with the CEF to be held harmless of any joint and several responsibility or liability; Sole Paragraph - The CONTRACTING PARTY authorizes the CEF to discount the value of the aforementioned damages directly from the invoices corresponding to the monthly payments due it or from the contractual guarantee, independently of any judicial or extra-judicial procedure. CLAUSE NINE - OBLIGATIONS OF THE CEF The CEF promises to fulfill the following: I - to make the payments due under the conditions established in this agreement; II - to notify the CONTRACTING PARTY of any irregularities found in executing the services; III - to authorize and de-authorize points of sale, establishing in an agreement, and at its discretion, the terms and conditions for the qualification of each such point of sale; IV - to previously inspect the sites, the number of points of sale and the number of terminals, for establishment of the installation schedule for the equipment and the training of retailers; V - to monitor the points of sale in order for them to be legally licensed to sell the games through terminals and communications equipment installed at their store; 10 Exhibit 10.12 VI - to monitor the points of sale in order for them to be equipped with a dedicated alternating current powerline and sufficient space for the installed terminals to operate properly; VII - to monitor the points of sale to ensure that they maintain the schedule of services to the public as set by the CEF, in accordance with local municipal orders; VIII - to collect the sales proceeds at each point of sale; IX - to promote the games, in order to maintain bettor interest with a view to maximizing sales; X - to pay all prizes from the lottery system to be installed. Sole Paragraph - Delays in the payments discussed in section I of this Clause shall be cause for a financial restatement of the amount due pursuant to applicable and prevailing law. CLAUSE TEN - CONTRACTUAL GUARANTEE For purposes of executing this agreement, the CONTRACTING PARTY shall provide a cash guarantee in the amount of R$ 20,000,000.00 (twenty million Brazilian reals). Paragraph One - Only the restatement corresponding to the index of changes in passbook savings rate yields (or the list day of the month, excluding interest, calculated proportionally, as the case may be, from the date of the deposit until the actual release of the guarantee, shall apply to the cash surety. Paragraph Two - The guarantee, when applicable, must be paid whenever the value of the contractual fine is deducted. Paragraph Three - Substitution of the guarantee may be permitted at any time subject to notification to the CEF, pursuant to the terms provided for in Law 8,666/93 of 6/21/93. Paragraph Four - The guarantee shall be released after complete fulfillment of the agreement, provided that all contractual term, clauses and conditions have been fulfilled. Paragraph Five - The loss of guarantee in favor of the CEF by reason of failure to fulfill the contractual obligations shall be as a full matter of law, regardless of any judicial or extra-judicial notification. 11 Exhibit 10.12 CLAUSE ELEVEN - BUDGET RESOURSES Expenses incurred as a consequence of entering into this agreement shall be covered by a budget allocation provided for under the classification "EXPENSES RELATING TO THE EXECUTION OF DATA PROCESSING SERVICES" - account No. 5.23.223.355. CLAUSE TWELVE - AUDITING During the course of executing the services, the CEF shall be entitled to audit complete fulfillment of the provisions contained in this agreement, either directly or through such party as it may appoint to this end. Sole Paragraph - To this end, the CEF shall prepare a report of deficiencies found in execution of the services, and shall forward a notification to the CONTRACTING PARTY for immediate correction of the specified irregularities without prejudice to the application of such penalties as are provided for in this agreement. CLAUSE THIRTEEN - TAX LIABILITIES, CHARGES, INSURANCE, ETC. The following shall be paid at the sole expense of the CONTRACTING PARTY: I - All taxes and duties as may be due as a consequence of the subject of this competitive bid; 11 - Contributions owed to Social Security, labor charges, insurance and labor accident premiums, fees and such other expenses as may be necessary for executing the services. CLAUSE FOURTEEN - FAILURE TO PERFORM AND CANCELLATION OF THE AGREEMENT Total or partial failure to execute the agreement shall result in the cancellation thereof, with all contractual consequences and those provided for by law. Paragraph One - The following shall constitute causes for cancellation of the agreement, independently of judicial or extra-judicial notification or interpolation: I - complete or partial failure by the CONTRACTING PARTY to fulfill any of the obligations/responsibilities provided for in this agreement; II - complete or partial transfer of the agreement, without the prior consent of the CEF; III - repeated commitment of errors or defects in executing the services; 12 Exhibit 10.12 IV - a declaration of bankruptcy by the CONTRACTING PARTY; V - dissolution of the corporation: VI - corporate amendment or change In the purpose or structure of the company which at the discretion of the CEF is to the detriment of execution of the agreement; VII - delay in fulfillment, leading the CEF to assume failure to execute the service. Paragraph Two - Upon occurrence of the contractual cancellation based on sections I and VII, the guarantee shall be paid in favor of the CEF without prejudice to such other reparations as may apply. Paragraph Three - Cancellation of the agreement shall result in the withholding of payments pursuant to the agreement, up to the value of the harm caused to the CEF, independently of any judicial or extra-judicial proceeding on the part of the CEF, without prejudice to the sanctions provided for in this agreement and by law, up to the total value of the indemnification for damage caused. CLAUSE NINETEEN - COURT DISTRICT In order to settle such dispute as may arise from this agreement, the Judiciary Section of the Federal Justice Department for the Federal District shall have jurisdiction. Being thereby in due agreement, the CEF and the CONTRACTING PARTY hereby sign this agreement in 4 (four) identical copies in the presence of the undersigned witnesses. Brasilia. D.F. ,1996 --------------------------------- CAIXA ECONOMICA FEDERAL --------------------------------- JOINT VENTURE LED BY RACIMEC INFORMATICA BRASILEIRA S.A. WITNESSES - --------------------------- - --------------------------- 13 Exhibit 10.12 ANNEX II ON-LINE SYSTEM REVENUE MATRIX
- -------------------------- ------------- ------------------- ------------------ ------------------- ------------------ RANGE YEAR 1 YEAR 2 YEAR 3 YEAR IV YEAR V - -------------------------- ------------- ------------------- ------------------ ------------------- ------------------ Up to 20M 7,5104 6,5230 6,3351 6,3107 6,2407 - -------------------------- ------------- ------------------- ------------------ ------------------- ------------------ From 20 to 25 M 7,4980 6,5050 6,3276 6,2791 6,1783 - -------------------------- ------------- ------------------- ------------------ ------------------- ------------------ From 25 to 30 M 7,4604 6,4725 6,3245 6,2470 6,1153 - -------------------------- ------------- ------------------- ------------------ ------------------- ------------------ From 30 to 35 M 7,4604 6,4230 6,3195 6,2154 6,0516 - -------------------------- ------------- ------------------- ------------------ ------------------- ------------------ From 35 to 40 M 7,4604 6,4230 6,2995 6,1832 5,9873 - -------------------------- ------------- ------------------- ------------------ ------------------- ------------------ From 40 to 45 M 7,4604 6,4230 6,1351 6,1510 5,9305 - -------------------------- ------------- ------------------- ------------------ ------------------- ------------------ From 45 to 50 M 7,4604 6,4230 6,1351 6,1302 5,9102 - -------------------------- ------------- ------------------- ------------------ ------------------- ------------------ Over 50 M 7,4604 6,4230 6,1351 6,1302 5,9102 - -------------------------- ------------- ------------------- ------------------ ------------------- ------------------
14 Exhibit 10.12 "ON-LINE" SYSTEM EQUIPMENT + IMPLEMENTATION SCHEDULE BY STATE
MONTH STATE % TERM TOTAL - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- MAI/97 PARANA 55 385 TOTAL 385 385 JUN/97 PARANA 20 140 SAO PAULO 20 767 BRASILIA 15 71 MINAS GERAIS 5 63 RIO DE JANEIRO 10 135 TOTAL 1,176 1,561 JUL/97 SAO PAULO 20 767 BRASILIA 15 71 MINAS GERAIS 20 253 RIO DE JANEIRO 20 271 RIO GRANDE DO SUL 10 71 BAHIA 10 54 SANTA CATARINA 10 32 TOTAL 1,519 3,080 AGO/97 SAO PAULO 20 767 BRASILIA 15 71 MINAS GERAIS 20 253 PANARA 10 70 RIO DE JANEIRO 20 271 RIO GRANDE DO SUL 15 103 BAHIA 20 106 SANTA CATARINA 15 46 GOIAS 10 39 PERNAMBUCO 10 30 TOTAL 1,756 4,836 SET/97 PARANA 15 105 SAO PAULO 20 767 MINAS GERAIS 20 253 RIO DE JANEIRO 20 271 RIO GRANDE DO SUL 15 103 BAHIA 20 106 SANTA CATARINA 15 46 GOIAS 25 96 PERNAMBUCO 20 58 BRASILIA 15 71 TOTAL 1,876 6,712 - -----------------------------------------------------------------------------------------------------------------
EX-10.22 7 FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT 1 Exhibit 10.22 GTECH HOLDINGS CORPORATION NON-QUALIFIED STOCK OPTION AGREEMENT NON-QUALIFIED STOCK OPTION AGREEMENT made as of the ___ day of ___________, ____ (the "Grant Date"), between GTECH HOLDINGS CORPORATION, a Delaware corporation (the "Company"), and _______________, an Employee of the Company (the "Employee" or "optionee"). WHEREAS, the Company desires to afford the Employee an opportunity to purchase shares of Common Stock, $.01 par value, of the Company ("Stock"), as hereinafter provided, in accordance with the provisions of the Company's 1997 STOCK OPTION PLAN (the "Plan"), a copy of which is attached hereto. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Plan. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto, intending to be legally bound hereunder, agree as follows: 1. GRANT OF OPTIONS. The Company hereby grants to the Employee the right and option (the "Options") to purchase all or any part of an aggregate of ______ shares of Stock. The Options are in all respects limited and conditioned as hereinafter provided, and are subject to the terms and conditions of the Plan now in effect and as they may be amended from time to time in accordance with the Plan and any rules, regulations and procedures pursuant thereto which may be adopted by the Compensation Committee (the "Committee") from time to time (which terms, conditions, rules, regulations and procedures are and automatically shall be incorporated herein by reference and made a part hereof and shall control in the event of any conflict with any other terms of this Option Agreement). It is intended that the Options granted hereunder be Non-Qualified Stock Options ("NQSOs") and NOT Incentive Stock Options ("ISOs") as such term is defined in section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. PURCHASE PRICE. The purchase price per share of the shares of Stock covered by the Options (the "Option Price") shall be $_______. It is the determination of the Committee that on the Grant Date the Option Price was not less than the higher of: (i) one hundred percent (100%) of the Fair Market Value of said Stock, or (ii) the par value thereof. 2 Exhibit 10.22 3. TERM. Unless earlier terminated pursuant to any provision of the Plan or of this Option Agreement, the Options shall expire _____________, (the "Expiration Date"), which date is not more than ten years from the Grant Date. The Options shall not be exercisable after the Expiration Date. 4. EXERCISE OF OPTIONS. The Options shall become exercisable in such installments and on such dates, as is set forth below, subject to possible acceleration as provided in this Option Agreement or the Plan: NUMBER OF SHARES DATE EXERCISABLE ------- -------- ------- -------- ------- -------- ------- -------- Options that become exercisable in accordance with the fore-going shall remain exercisable, subject to the provisions of the Plan and this Option Agreement, until the expiration of the term of the Options as set forth in Section 3 hereof or until other termination of the Options. 5. METHOD OF EXERCISING OPTIONS. Subject to the terms and conditions of this Option Agreement and the Plan, the Options may be exercised upon written notice to the Company, Attention: Corporate Secretary, at the Company's principal office, which currently is located at 55 Technology Way, West Greenwich, Rhode Island 02817, or to such agent as the Company may designate, at such agent's address. Such notice, a form of which shall be made available prior to the first exercise date, shall state the election to exercise the Options and the number of shares with respect to which they are being exercised; shall be signed by the person or persons so exercising the Option; shall, if the Company so requests, be accompanied by the investment certificate referred to in Section 6 hereof and shall be accompanied by payment of the full Option price of such shares. The Option price shall be paid to the Company: (a) In cash, or in its equivalent; (b) In unrestricted Stock previously acquired by the Employee, provided that if such shares of Stock were acquired through exercise of an ISO or NQSO under the Plan or of an option under a similar plan of the Company or related corporation, such shares have been held by the Employee for a period of more than six(6) 3 Exhibit 10.22 months on the date of exercise or for such longer or shorter period as the Committee may determine; (c) In any combination of (a) and (b) above; or (d) By delivering a properly executed notice of exercise of the Options to the Company and a broker, with irrevocable instructions to the broker promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price of the Options, and by delivering such proceeds in cash or its equivalent. (NOTE THAT THE PAYMENT PROCEDURE SPECIFIED IN CLAUSE (D) IS CONSIDERED A SALE BY AN EMPLOYEE WHO IS SUBJECT TO SECTION 16(B) OF THE SECURITIES EXCHANGE ACT OF 1934 ("SECTION 16(B)") WHICH MAY BE MATCHED WITH ANY NON-EXEMPT PURCHASE WITHIN THE SIX-MONTH PERIOD BEFORE OR AFTER THE BROKER FINANCED TRANSACTION. In the event such Option Price is paid, in whole or in part, with shares of Stock, the portion of the Option Price so paid shall be equal to the Fair Market Value of such Stock being used as payment on the date the notice of exercise is received by the Company or its agent. Upon receipt of such notice and payment, the Company, as promptly as practicable, shall deliver or cause to be delivered a certificate or certificates representing the shares of Stock with respect to which the Options are so exercised. The certificate or certificates for such shares shall be registered in the name of the person or persons so exercising the Options (or, if the Options shall be exercised by the Employee and if the Employee shall so request in the notice exercising the Options, shall be registered in the name of the Employee and the Employee's spouse, jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person or persons exercising the Options. All shares that shall be purchased upon the exercise of the Options as provided herein shall be fully paid and non-assessable by the Company. 6. SHARES TO BE PURCHASED FOR INVESTMENT. Unless the Company has theretofore notified the Employee that a registration statement covering the shares to be acquired upon the exercise of the Options has become effective under the Securities Act of 1933 and the Company has not thereafter notified the Employee that such registration is no longer effective, it shall be a condition to any exercise of the Options that the shares acquired upon such exercise be acquired for investment and not with a view to distribution, and the person effecting such exercise shall submit to the Company a certificate of such investment intent, together with such other evidence supporting the 4 Exhibit 10.22 same as the Company may request. The Company shall be entitled to restrict the transferability of the shares issued upon any such exercise to the extent necessary to avoid a risk of violation of the Securities Act of 1933 (or of any rules or regulations promulgated thereunder) or of any state laws or regulations. Such restrictions may, at the option of the Company, be noted or set forth in full on the share certificates. 7. NON-TRANSFERABILITY OF OPTION. Except as otherwise permitted by the Committee, the Options are not assignable or transferable, in whole or in part, by the Employee otherwise than by will or by the laws of descent and distribution, and during the lifetime of the Employee the Options shall be exercisable only by the Employee or, in the event of his disability, by his guardian or legal representative. 8. TERMINATION OF EMPLOYMENT. If the Employee's employment with the Company and all Affiliates is terminated for any reason prior to the Expiration Date of the Options set forth in Section 3 hereof, the Options, to the extent unexercised, shall terminate upon the date of such termination of Employment, except as otherwise provided below or in the Plan or as the Committee otherwise may determine in its sole discretion subject to the Plan. (a) DEATH OR DISABILITY. If the Employee's employment is terminated as a consequence of his or her death or Disability, as defined in the Plan, the Options may be exercised, but only to the extent of the number of shares with respect to which the Employee could have exercised them on the date of such termination of employment, or to any greater extent permitted by the Committee in its sole discretion subject to the Plan, at any time prior to the earlier of: (i) the Expiration Date specified in Section 3 hereof; or (ii) the expiration of one year following the date of such termination of employment. (b) RETIREMENT OR DISCHARGE WITHOUT CAUSE. If the Employee's employment is terminated by his or her Retirement or discharge without Cause, as such terms are defined in the Plan, the Options may be exercised, but only to the extent of the number of shares with respect to which the Employee could have exercised them on the date of such termination of employment, or to any greater extent permitted by the Committee in its sole discretion subject to the Plan, at any time prior to the earlier of: (i) the Expiration Date specified in Section 3 hereof; or (ii) the expiration of one year following the date of such termination of employment. 5 Exhibit 10.22 (c) Notwithstanding paragraphs (a) and (b) above, the period of exercisability of the Options following termination of employment is subject to possible earlier termination under the provisions of the Plan, including Section 3(b) thereof. 9. WITHHOLDING OF TAXES. In calculating the Employee's tax obligations, the Company shall value the Stock being purchased as follows: With respect to Sections 5(a) through (c), the value of the Stock being purchased shall be its Fair Market Value on the day the Company or its agent receives the Employee's notice of exercise. With respect to Section 5(d), the value of the Stock being purchased shall be the price at which the Employee's broker enters into a contract to sell the Stock being purchased, as certified in writing by such broker. The obligation of the Company to deliver shares of Stock upon the exercise of the Options shall be subject to the Company's receipt of the Employee's share of those amounts which the Company is obligated to withhold under applicable federal, state and local tax withholding requirements. If the exercise of any of the Options is subject to the withholding requirements of applicable tax laws, the Committee may permit the Employee, subject to the provisions of the Plan and such additional withholding rules (the "Withholding Rules") as may be adopted by the Committee, to satisfy the withholding tax, in whole or in part, by electing to have the Company withhold (or by returning to the Company) shares of Stock, which shares shall be valued, for this purpose, at their Fair Market Value on the date of exercise of the Options (or, if later, the date on which the optionee recognizes ordinary income with respect to such exercise) (the "Determination Date"). An election to use shares of Stock to satisfy tax withholding requirements must be made in compliance with and subject to the Withholding Rules. 10. GOVERNING LAW. This Option Agreement shall be construed in accordance with, and its interpretation shall be governed by, the laws of the State of Delaware, without giving effect to conflicts of laws principles. 6 Exhibit 10.22 IN WITNESS WHEREOF, the Company has caused this NON-QUALIFIED STOCK OPTION AGREEMENT to be duly executed by its officers thereunto duly authorized, and the Employee has hereunto set his or her hand and seal, all on the day and year first above written. GTECH Holdings Corporation Attest By: By: --------------------------- ----------------------------- - ----------------------------- ----------------------------- [Employee] Witness EX-10.23 8 FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT 1 Exhibit 10.23 GTECH HOLDINGS CORPORATION NON-QUALIFIED STOCK OPTION AGREEMENT NON-QUALIFIED STOCK OPTION AGREEMENT made as of the ___ day of ___________, ____ (the "Grant Date"), between GTECH HOLDINGS CORPORATION, a Delaware corporation (the "Company"), and William Y. O'Connor, an Employee of the Company (the "Employee" or "optionee"). WHEREAS, the Company desires to afford the Employee an opportunity to purchase shares of Common Stock, $.01 par value, of the Company ("Stock"), as hereinafter provided, in accordance with the provisions of the Company's [1997] [1994] STOCK OPTION PLAN (the "Plan"), a copy of which is attached hereto. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Plan. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto, intending to be legally bound hereunder, agree as follows: 1. GRANT OF OPTIONS. The Company hereby grants to the Employee the right and option (the "Options") to purchase all or any part of an aggregate of ______ shares of Stock. The Options are in all respects limited and conditioned as hereinafter provided, and are subject to the terms and conditions of the Plan now in effect and as they may be amended from time to time in accordance with the Plan and any rules, regulations and procedures pursuant thereto which may be adopted by the Compensation Committee (the "Committee") from time to time (which terms, conditions, rules, regulations and procedures are and automatically shall be incorporated herein by reference and made a part hereof and shall control in the event of any conflict with any other terms of this Option Agreement). It is intended that the Options granted hereunder be Non-Qualified Stock Options ("NQSOs") and NOT Incentive Stock Options ("ISOs") as such term is defined in section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. PURCHASE PRICE. The purchase price per share of the shares of Stock covered by the Options (the "Option Price") shall be $_______. It is the determination of the Committee that on the Grant Date the Option Price was not less than the higher of: (i) one hundred percent (100%) of the Fair Market Value of said Stock, or (ii) the par value thereof. 2 Exhibit 10.23 3. TERM. Unless earlier terminated pursuant to any provision of the Plan or of this Option Agreement, the Options shall expire _____________, (the "Expiration Date"), which date is not more than ten years from the Grant Date. The Options shall not be exercisable after the Expiration Date. 4. EXERCISE OF OPTIONS. The Options shall become exercisable in such installments and on such dates, as is set forth below, subject to possible acceleration as provided in this Option Agreement or the Plan: NUMBER OF SHARES DATE EXERCISABLE -------- ---------- -------- ---------- -------- ---------- -------- ---------- Options that become exercisable in accordance with the fore-going shall remain exercisable, subject to the provisions of the Plan and this Option Agreement, until the expiration of the term of the Options as set forth in Section 3 hereof or until other termination of the Options. 5. METHOD OF EXERCISING OPTIONS. Subject to the terms and conditions of this Option Agreement and the Plan, the Options may be exercised upon written notice to the Company, Attention: Corporate Secretary, at the Company's principal office, which currently is located at 55 Technology Way, West Greenwich, Rhode Island 02817, or to such agent as the Company may designate, at such agent's address. Such notice, a form of which shall be made available prior to the first exercise date, shall state the election to exercise the Options and the number of shares with respect to which they are being exercised; shall be signed by the person or persons so exercising the Option; shall, if the Company so requests, be accompanied by the investment certificate referred to in Section 6 hereof and shall be accompanied by payment of the full Option price of such shares. The Option price shall be paid to the Company: (a) In cash, or in its equivalent; (b) In unrestricted Stock previously acquired by the Employee, provided that if such shares of Stock were acquired through exercise of an ISO or NQSO under the Plan or of an option under a similar plan of the Company or related corporation, such shares have been held by the Employee for a period of more than six(6) 3 Exhibit 10.23 months on the date of exercise or for such longer or shorter period as the Committee may determine; (c) In any combination of (a) and (b) above; or (d) By delivering a properly executed notice of exercise of the Options to the Company and a broker, with irrevocable instructions to the broker promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price of the Options, and by delivering such proceeds in cash or its equivalent. (NOTE THAT THE PAYMENT PROCEDURE SPECIFIED IN CLAUSE (d) IS CONSIDERED A SALE BY AN EMPLOYEE WHO IS SUBJECT TO SECTION 16(b) OF THE SECURITIES EXCHANGE ACT OF 1934 ("SECTION 16(b)") WHICH MAY BE MATCHED WITH ANY NON-EXEMPT PURCHASE WITHIN THE SIX-MONTH PERIOD BEFORE OR AFTER THE BROKER FINANCED TRANSACTION. In the event such Option Price is paid, in whole or in part, with shares of Stock, the portion of the Option Price so paid shall be equal to the Fair Market Value of such Stock being used as payment on the date the notice of exercise is received by the Company or its agent. Upon receipt of such notice and payment, the Company, as promptly as practicable, shall deliver or cause to be delivered a certificate or certificates representing the shares of Stock with respect to which the Options are so exercised. The certificate or certificates for such shares shall be registered in the name of the person or persons so exercising the Options (or, if the Options shall be exercised by the Employee and if the Employee shall so request in the notice exercising the Options, shall be registered in the name of the Employee and the Employee's spouse, jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person or persons exercising the Options. All shares that shall be purchased upon the exercise of the Options as provided herein shall be fully paid and non-assessable by the Company. 6. SHARES TO BE PURCHASED FOR INVESTMENT. Unless the Company has theretofore notified the Employee that a registration statement covering the shares to be acquired upon the exercise of the Options has become effective under the Securities Act of 1933 and the Company has not thereafter notified the Employee that such registration is no longer effective, it shall be a condition to any exercise of the Options that the shares acquired upon such exercise be acquired for investment and not with a view to distribution, and the person effecting such exercise shall submit to the Company a certificate of such investment intent, together with such other evidence supporting the 4 Exhibit 10.23 same as the Company may request. The Company shall be entitled to restrict the transferability of the shares issued upon any such exercise to the extent necessary to avoid a risk of violation of the Securities Act of 1933 (or of any rules or regulations promulgated thereunder) or of any state laws or regulations. Such restrictions may, at the option of the Company, be noted or set forth in full on the share certificates. 7. NON-TRANSFERABILITY OF OPTION. Except as otherwise permitted by the Committee, the Options are not assignable or transferable, in whole or in part, by the Employee otherwise than by will or by the laws of descent and distribution, and during the lifetime of the Employee the Options shall be exercisable only by the Employee or, in the event of his disability, by his guardian or legal representative. 8. TERMINATION OF EMPLOYMENT. If the Employee's employment with the Company and all Affiliates is terminated for any reason prior to the Expiration Date of the Options set forth in Section 3 hereof, the Options, to the extent unexercised, shall terminate upon the date of such termination of Employment, except as otherwise provided below or in the Plan or as the Committee otherwise may determine in its sole discretion subject to the Plan. (a) DEATH OR RETIREMENT. If the Employee's employment is terminated as a consequence of his or her death or Retirement, as defined in the Plan, the Options may be exercised, but only to the extent of the number of shares with respect to which the Employee could have exercised them on the date of such termination of employment, or to any greater extent permitted by the Committee in its sole discretion subject to the Plan, at any time prior to the earlier of: (i) the Expiration Date specified in Section 3 hereof; or (ii) the expiration of one year following the date of such termination of employment. (b) DISABILITY, DISCHARGE WITHOUT CAUSE, AND RESIGNATION FOR GOOD REASON. If the Employee's employment is terminated: (i) by reason of the Employee's "Disability", as defined in the Plan or in the Employee's Amended and Restated Employment Agreement with the Company dated September 19, 1997 (the "Employment Agreement"), (ii) by the Company without "Cause", as defined in the Plan or in the Employment Agreement, or (iii) by the Employee for "Good Reason" as defined in the Employment Agreement, the Options shall accelerate and become vested in full on the date of such termination or employment and may be exercised at any time prior to the earlier of: (1) the Expiration Date specified in Section 3 hereof, or (2) the expiration of one year following the date of such termination of Employment. 5 Exhibit 10.23 (c) Notwithstanding paragraphs (a) and (b) above, the period of exercisability of the Options following termination of employment is subject to possible earlier termination under the provisions of the Plan, including Section 3(b) thereof. 9. WITHHOLDING OF TAXES. In calculating the Employee's tax obligations, the Company shall value the Stock being purchased as follows: With respect to Sections 5(a) through (c), the value of the Stock being purchased shall be its Fair Market Value on the day the Company or its agent receives the Employee's notice of exercise. With respect to Section 5(d), the value of the Stock being purchased shall be the price at which the Employee's broker enters into a contract to sell the Stock being purchased, as certified in writing by such broker. The obligation of the Company to deliver shares of Stock upon the exercise of the Options shall be subject to the Company's receipt of the Employee's share of those amounts which the Company is obligated to withhold under applicable federal, state and local tax withholding requirements. If the exercise of any of the Options is subject to the withholding requirements of applicable tax laws, the Committee may permit the Employee, subject to the provisions of the Plan and such additional withholding rules (the "Withholding Rules") as may be adopted by the Committee, to satisfy the withholding tax, in whole or in part, by electing to have the Company withhold (or by returning to the Company) shares of Stock, which shares shall be valued, for this purpose, at their Fair Market Value on the date of exercise of the Options (or, if later, the date on which the optionee recognizes ordinary income with respect to such exercise) (the "Determination Date"). An election to use shares of Stock to satisfy tax withholding requirements must be made in compliance with and subject to the Withholding Rules. 10. GOVERNING LAW. This Option Agreement shall be construed in accordance with, and its interpretation shall be governed by, the laws of the State of Delaware, without giving effect to conflicts of laws principles. 6 Exhibit 10.23 IN WITNESS WHEREOF, the Company has caused this NON-QUALIFIED STOCK OPTION AGREEMENT to be duly executed by its officers thereunto duly authorized, and the Employee has hereunto set his or her hand and seal, all on the day and year first above written. GTECH Holdings Corporation Attest By: By: -------------------------- ---------------------- - ----------------------------- ------------------------- William Y. O'Connor Witness EX-21.1 9 SUBSIDIARIES OF THE COMPANY 1 GTECH CORPORATION Exhibit 21.1 DIRECT & INDIRECT SUBSIDIARIES Dreamport, Inc. (Delaware) (formerly GTECH Gaming Sub 1) Dreamport do Brasil Ltda. Dreamport International, Inc. (Delaware) Dreamport Suffolk Corporation (Delaware) (formerly GTECH Suffolk Corporation) Environmental Paper Products, Inc. (RI) Europrint Holdings Ltd. (UK) GameScape, Inc. (RI) Gana De Mexico S.A. de C.V. (Mexico) GRYTEK Co. Ltd. (Poland) GTECH Asia Corporation (Delaware) GTECH Australasia Corporation (Delaware) GTECH Avrasya Teknik Hizmetler ve Musavialik A.S. (Turkey) GTECH Brasil Ltda. (Brazil) GTECH Canada Computer Systems Corporation (Canada) GTECH Child Care Center (Rhode Island) GTECH Computer Systems Sdn Bhd (Malaysia) GTECH Corporation (Utah) GTECH Czech Republic Corporation (Delaware) formerly GTECH Czechoslovakia Corporation GTECH Eastern Europe Sp. Z.o.o. (Poland) GTECH Eesti A.S. (Estonia) 2 GTECH CORPORATION DIRECT & INDIRECT SUBSIDIARIES GTECH Espana Corporation (Delaware) GTECH Europe S.A. (Belgium) GTECH Far East Pte Ltd (Singapore) GTECH Foreign Holdings Corporation (Delaware) GTECH France S.A.R.L. (France) GTECH Gaming Subsidiary 2 Corporation (Delaware) GTECH Global Services Corporation Ltd. (Cyprus) GTECH GmbH (Germany) GTECH Ireland Corporation (Delaware) GTECH Italia Srl (Italy) GTECH Italy Corporation (Delaware) GTECH Latin America Corporation (Delaware) GTECH LIT Corporation (Lithuania) GTECH Management P.I. Corporation (Delaware) GTECH Mexico S.A. de C.V. (Mexico) GTECH Nevada Corporation (Delaware) GTECH Northern Europe Corporation (Delaware) GTECH Rhode Island Corporation (Rhode Island) GTECH South Africa Corporation (Delaware) GTECH Southern Africa (Pty.) Ltd. (South Africa) GTECH Sweden Corporation (Delaware) 2 3 GTECH CORPORATION DIRECT & INDIRECT SUBSIDIARIES GTECH Taiwan Corporation (Delaware) GTECH U.K. Limited (U.K.) GTECH U.K. Corporation (Delaware) GTECH Worldserv, Inc. (Delaware) GTECH Worldserv International, Inc. (Delaware) GTECH Worldwide Services Corporation (Delaware) LAC Corporation (Rhode Island) On-Line Lottery License and Lease B.V. (Netherlands) Online Transaction Technologies SARL a Associe Unique (Morocco) A subsidiary of GTECH Foreign Holdings Corporation Oy GTECH Finland Ab. (Finland) SB Industria E Comercio Ltd. (Brazil) Siam GTECH Company Limited (Thailand) Technology Risk Management Services, Inc. Transaction Strategies Inc. (Texas) Transactive Corporation (Delaware) (formerly GTECH Administrative Services Corp.) Uwin Corporation (Delaware) Uwin Ireland Operation Ltd. (Ireland) Uwin Network Operations Ltd. (Ireland) Uwin R&D Ltd. (Ireland) VideoSite, Incorporated (Delaware) (formerly VideoFax Company) Watson Land Company (Rhode Island) 3 4 GTECH CORPORATION DIRECT & INDIRECT SUBSIDIARIES AFFILIATES Affiliated Marketing Solutions BTN Telecommunicados Ltda (Brazil) ("Limitada") Clidet No. 278 (Proprietary) Limited (South Africa) DataTrans Sp. Z.o.o. (Poland) Gaming Entertainment, L.L.C. Gaming Entertainment (DE) Gaming Entertainment (MI) Gaming Entertainment (CA) GTECH do Brazil Commercial Ltda (Brazil) ("Limitada") Lottery Technology Enterprises (D.C.) (joint venture) Lottery Technology Investment Corporation (Taiwan) Pro-Olimpic S.R.L. (Romania) (joint venture) Retama Park Associates, Inc. Secure Gaming Technologies, LLC (Delaware) Sterling Suffolk Racecourse, LLC West Greenwich Technology Associates, L.P. (limited partnership) Wireless Business Solutions Pty. Ltd. (South Africa) 4 EX-23.1 10 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-64167) pertaining to the 1998 Employee Stock Purchase Plan, in the Registration Statement (Form S-8 No. 333-57781) pertaining to the 1997 Stock Option Plan and the 1998 Non-Employee Directors' Stock Election Plan, in the Registration Statement (Form S-8 No. 33-88426 and No. 333-27835) pertaining to the 1994 Stock Option Plan and in the Registration Statement (Form S-8 No. 333-27831) pertaining to the 1996 Non-Employee Directors' Stock Option Plan and the 1992 Outside Directors' Director Stock Unit Plan, of GTECH Holdings Corporation of our report dated March 27, 2000, with respect to the consolidated financial statements of GTECH Holdings Corporation included in the Annual Report (Form 10-K) for the fiscal year ended February 26, 2000. ERNST & YOUNG LLP Boston, Massachusetts May 1, 2000 EX-23.2 11 CONSENT OF PRICE WATERHOUSE 1 Exhibit 23.2 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-64167) pertaining to the 1998 Employee Stock Purchase Plan and in the Registration Statement (Form S-8 No. 333-57781) pertaining to the 1997 Stock Option Plan and the 1998 Non-Employee Directors' Stock Election Plan and in the Registration Statement (Form S-8 No. 33-88426 and No. 333-27835) pertaining to the 1994 Stock Option Plan and in the Registration Statement (Form S-8 No. 333-27831) pertaining to the 1996 Non-Employee Directors' Stock Option Plan and the 1992 Outside Directors' Director Stock Unit Plan, of GTECH Holdings Corporation of our report dated March 23, 1998 with respect to the financial statements of Camelot Group plc as of January 31, 1998 and February 1, 1997 and for the years ended January 31, 1998 and February 1, 1997, which is included in the Annual Report (Form 10-K) of GTECH Holdings Corporation for the fiscal year ended February 26, 2000. Price Waterhouse Chartered Accountants London, England May 1, 2000 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS FEB-26-2000 FEB-28-1999 FEB-26-2000 11,115 0 125,468 0 67,418 239,200 1,231,755 855,837 891,023 210,947 349,400 0 0 442 296,134 891,023 150,379 1,010,798 101,953 659,283 0 0 29,032 155,977 62,392 93,585 0 0 0 93,585 2.58 2.58
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