-----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, MDG/7jjw5QatdblwClKBhgjJ9836M95Vz5cgVEUZp0lHrLsnrh5jy6vw1a0/qME9 tLUE1gx6zAGXPJTPzZcIDw== 0000950123-01-501041.txt : 20010424 0000950123-01-501041.hdr.sgml : 20010424 ACCESSION NUMBER: 0000950123-01-501041 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20010224 FILED AS OF DATE: 20010423 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: 1608932 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 y48042e10-k.txt FORM 10-K 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 24, 2001 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 10, 2001 was $863,287,810 (Reference is made to Page 35 herein for a statement of the assumptions upon which this calculation is based.) On April 10, 2001, there were 29,413,554 outstanding shares of the registrant's Common Stock. Documents Incorporated By Reference: Certain portions of the registrant's 2001 definitive proxy statement relating to its scheduled July 2001 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 26 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 57 of the 104 international online lottery authorities. 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. However, in recent years the Company has witnessed a downward trend in sales generated by certain of its United States lottery customers. 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 2001 (which ended on February 24, 2001) approximately 93% of the Company's lottery revenues were derived from online lottery service contracts. 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 currently is offered by 16 of the Company's customers. The Company currently provides instant ticket support services, products and systems in 24 domestic 3 jurisdictions and 22 jurisdictions outside of the United States. The Company also offers customers television lottery games. BingoVision(TM), the Company's best known television game, is a televised bingo-based lottery game which is played in 10 jurisdictions. See "Certain Products and Services" below. In recent years, 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, since the start of fiscal 2000, the Company has entered into agreements which permit bill payments over its Brazilian and Chilean lottery networks. In addition, the Company continues to develop and, where permitted, to market, its UWin!(TM) internet based platform through which international providers of government-sponsored lottery products and services may offer interactive games. During fiscal 2001, the Company announced that Dreamport, Inc., the Company's gaming and entertainment subsidiary, would henceforth focus on assisting lotteries to expand their offerings in the area of video-machine gaming and central systems and that activities and assets of Dreamport which were peripheral to the Company's core lottery business would be consolidated and/or divested. See "Certain Significant Developments Since the Start of Fiscal 2001" and "Certain Products and Services" 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. 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. 2 4 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 or expects to be engaged, (ii) the future operating and financial performance of the Company, (iii) the ability of the Company to retain existing business and to obtain and retain new business, and (iv) the results and effects of legal proceedings and investigations. Such forward looking statements reflect management's assessment based on information currently available, but are not guarantees and are subject to risks and uncertainties 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 subsequent press releases and Form 10Qs, and other reports and filings with the Securities and Exchange Commission. 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. 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 itself as a subcontractor or joint venture partner with one or more local companies in seeking international lottery contracts. 3 5 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 have 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. 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 wrong-doing in connection with efforts to obtain and/or the awarding of lottery contracts and related matters. In light of the fact that such investigations frequently are conducted in secret, the Company would not necessarily know of the existence of an investigation which might involve 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, 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. 4 6 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 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. Liquidated damages paid or incurred by the Company with respect to its contracts equaled 0.25%, 0.21%, 0.35%, 0.56% and 0.47% of annual revenues in each of the five fiscal years ending February 1997 through 2001, 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, online lottery sales in a number of US 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 also may have an adverse effect on the profitability of contracts which the Company does obtain. Through fiscal 2003 (which ends in February 2003), several of 5 7 the Company's larger contracts (including the National Lottery of Brazil and Texas, its two largest in fiscal 2001) are expected to be the subject of competitive procurement procedures to select contractors to supply lottery goods and services upon the termination of the Company's current contracts. See "Certain Significant Developments Since the Start of Fiscal 2001 - Other New Online Contracts and Extensions," "Facilities Management Contracts" and "Competition" below. See also Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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 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 2001 LOTTERY CONTRACT AWARDS AND RELATED SIGNIFICANT DEVELOPMENTS Since the start of fiscal 2001 (which ended on February 24, 2001), the Company has received a number of service contract awards and extensions from lottery authorities. NEW ONLINE CUSTOMERS. During fiscal 2001, the Company received awards to install online systems from six new online customers. In April 2000, the Company announced that it had been selected after a competitive procurement as the preferred supplier to provide new online lottery equipment to Santa Casa da Misericordia ("SCML"), the operator of the National Lottery of Portugal. Under the terms of the product sale agreement entered into with SCML in October 2000, GTECH agreed to replace SCML's offline system with a full turn-key online lottery system. For a period of eight years, the Company also agreed to provide ongoing services to SCML, including central system maintenance, terminal maintenance and repairs, software and operations support, and field services. Online sales with respect to the SCML lottery are expected to begin in June 2001. In June 2000, the Company entered into an agreement with the Virginia lottery authority to provide 4,000 ISYS(TM) terminals offering advanced marketing capabilities and implementation, software customisation and warranty maintenance services. The Virginia lottery 6 8 authority has the option to purchase additional terminals and other products under its three-year contract with the Company. In August 2000, the Company entered into a facilities management agreement to provide online lottery equipment and services to the Ukranian National Lottery through 2010, subject to the Lottery's option to discontinue certain services if a five-year revenue forecast is not achieved. The Company has agreed to convert the Ukranian National Lottery's existing online lottery system, expand the Lottery's existing terminal base from approximately 1,000 terminals to approximately 5,000 Tiffany(TM) terminals, provide a variety of installation, maintenance and marketing services, and install and maintain a secure, nationwide communications network. Sales of online lottery tickets on the Ukranian National Lottery system commenced in April 2001. In September 2000, the Company announced that it had signed a new product sale agreement to provide a turn-key online lottery system, including central system hardware and software, and 1,500 Altura(TM) terminals to CMC Prospects Import and Export Company, a China-based corporation, which in turn will supply the Company's equipment to the Beijing Welfare Lottery Center. In addition, the Company entered into agreements to provide a variety of lottery services to the Beijing lottery authority. Sales of online lottery tickets commenced on the Beijing lottery authority's system in March 2001, after the close of fiscal 2001. In January 2001, the Company entered into an agreement with Supreme Ventures Limited ("Supreme Ventures") under which it is the exclusive provider of a fully integrated and secure online lottery system and supporting services to Supreme Venture, the holder of a ten-year license issued by the Jamaica Betting, Gaming & Lotteries Commission to operate certain on-line lottery games in Jamaica. Lottery sales on Supreme Venture's new Company-provided system are expected to commence in June 2001, after the close of fiscal 2001. In addition to these awards, in May 2000, the Company announced that it had entered into an eight-year facilities management contract to provide a fully integrated and secure online lottery system for the Ivory Coast National Lottery. Implementation of the Ivory Coast National Lottery project has been suspended indefinitely, however, pending the resolution of political uncertainties in the Ivory Coast. OTHER NEW ONLINE CONTRACTS AND EXTENSIONS. Since the start of fiscal 2001, the Company also has been awarded online contracts by, or has received contract extensions from, a number of its existing customers. In June 2000, the Company announced that it had been selected by the Ohio lottery authority, following a competitive procurement, to enter into a new long-term facilities management contract to supply an integrated online and instant ticket lottery system (including new central system hardware, software, and terminals and a wide variety of services). The lottery system which is to be installed under the Company's new agreement with the Ohio lottery authority is expected to be operational in June 2001. In September 2000, the Company announced that following a competitive procurement it had been awarded a contract to supply an instant ticket lottery system, and related products and services, to the Nebraska lottery authority. In December 2000, the Company announced that Camelot Group plc ("Camelot") had been selected as the preferred applicant for the next operating license for the United Kingdom's National Lottery by the National Lottery Commission (the "NLC"). Since July 1994, the United Kingdom National Lottery has been operated under a license held by Camelot and the Company has been a supplier of lottery goods and services to Camelot for the National Lottery. Camelot was selected by the NLC as the preferred applicant for the next operating license following a competitive procurement process. As part of Camelot's proposal for the new 7 9 procurement process. As part of Camelot's proposal for the new license, the Company entered into technology transfer and training arrangements with Camelot to, among other things, transfer to Camelot the Company's National Lottery equipment, facilities and U.K. technology employees (in a transaction which was subsequently completed in February 2001), complete a technology transfer to Camelot, and grant to Camelot exclusive rights to operate the Company's gaming system software in the U.K. for the term of the new license, in consideration for receiving certain license fees payable by Camelot over the term of the new license. In February 2001, the Company entered into an agreement to supply Camelot with more than 26,000 new ISYS(TM) terminals prior to the commencement of Camelot's second operating license in January 2002. The Company is also obligated to assist Camelot in converting the National Lottery's current online gaming and instant ticket systems to the Company's AlphaGols(TM) system during the term of the second operating license. See Item 3-"Legal Proceedings" and Note F to "Notes to Consolidated Financial Statements" below. In March 2000, the Company announced that it had signed a new agreement to provide online lottery equipment, software and services to the Western Australia Lotteries Commission. In connection with this product sale of central system hardware, network communication equipment, and software the Company entered into an agreement to provide software license and software support to the Western Australia Lotteries Commission for a term of at least five years. In July 2000, the Company announced that it had been selected, following a competitive procurement, as the preferred supplier to provide lottery equipment to Sistemas Tecnicos de Loterios del Estado ("STL"), provider of the online system for the Spanish National Lottery. Under the terms of the product sale agreement the STL, the Company will provide STL with Altura(TM) terminals and AccuTherm(TM) printers, and a variety of services, including software development, technology transfer and training. In February 2001, after the close of fiscal 2001, the Company announced that Totalizator Sportowy Sp. Zo.o., a government-sponsored lottery authority in Poland ("TS"), had selected the Company after a competitive procurement as the preferred applicant for award of a ten-year operating license for Poland's National Lottery, such term to take effect upon the expiration of the Company's current facilities management contract with TS in October 2001. However, recently it has been reported in the Polish press that the contract may be rebid. Since the commencement of fiscal 2001, the lottery authorities of Barbados (T.L Lotteries Ltd.), New Jersey and Missouri have extended the terms of their online contracts with the Company. In addition, SAZKA, the Czech lottery authority, entered into an agreement with the Company to extend the Company's online contract as part of the resolution of certain matters which were the subject of an arbitration between the parties. See Item 3, "Legal Proceedings" and Note F to "Notes to Consolidated Financial Statements," below. During fiscal 2001, the Company also reported that the Iowa lottery authority, currently a customer of the Company, had selected another vendor to provide equipment and services for a new online and instant ticket lottery system following expiration of the Company's current contract in June 2001. 8 10 NON-LOTTERY PRODUCTS AND SERVICES Since the commencement of fiscal 2001, the Company has made several announcements respecting its non-lottery products and services. During fiscal 2001, the Company continued to make progress in its efforts to broaden its offerings of high-volume transaction processing services outside its core online lottery application. In June 2000, the Company signed a new contract with Caixa Economica Federal, operator of Brazil's National Lottery, to include additional financial transaction services (including bill and tax payment, social security contribution, credit card, and traditional banking transaction services) over the Company's dedicated network infrastructure. Under the terms of the agreement, the Company will install 7,300 terminals of which 4,800 will process financial transactions exclusively, with the remaining 2,500 processing financial and lottery transactions. In December 2000, the Company signed agreements with more than 500 of its lottery retailers in Chile to provide electronic bill payment services at lottery retailer outlets throughout Chile. In May 2000, the Company announced that it had been selected by the Texas Department of Human Services to provide call center support services for the state's electronic benefit transfer system. In August 2000, in connection with the Company's value assessment described below, the Company announced that Dreamport, Inc. ("Dreamport"), the Company's gaming and entertainment subsidiary, would henceforth focus on assisting lotteries to expand their offerings in the area of video-machine gaming and central systems. Activities and assets of Dreamport which were peripheral to the Company's core lottery business, such as casino and slot operations, would be consolidated and/or divested and Dreamport's operations would be relocated from Florida to Rhode Island. In March 2001, after the close of fiscal 2001, the Company reported that it had sold its 50% interest in three limited liability companies which were pursuing non-lottery gaming opportunities in Michigan, Oregon and California, respectively, to Full House Resorts, Inc., the owner of the remaining 50% interest in these companies, for a cash purchase price of $1,800,000. VALUE ASSESSMENT In July 2000, the Company announced that it would conduct, and in February 2001 the Company announced that it had completed, a comprehensive value assessment of its operations. In the wake of this value assessment, the Company undertook a number of measures to strengthen its focus on its business strategy. Such measures included the strategic and operational decisions respecting Dreamport, described above, as well as the decision by the Company to reduce its workforce by approximately 255 employees. The Company recorded special charges of $42.3 million in fiscal 2001 in connection with this value assessment. See "Note P of Notes to Consolidated Financial Statements" included in this report. MANAGEMENT DEVELOPMENTS Since the start of fiscal 2001, there have been a number of significant managerial developments. In May 2000, the Company appointed Kathleen McKeough as Senior Vice President of Human Resources. In July 2000, W. Bruce Turner was appointed as non-executive Chairman of the Company's Board of Directors following the resignations of William Y. O'Connor, the Company's Chairman of the Board of Directors and Chief Executive Officer, and Steven P. 9 11 Nowick, the Company's President and Chief Operating Officer. In September 2000, the Company appointed Robert Vincent as Vice President of Corporate Communications, and in February 2001, the Company appointed Antonio Carlos Rocha as Senior Vice President of Marketing. In March 2001, after the close of fiscal 2001, the Company announced the appointment of Howard S. Cohen as Chief Executive Officer, and Marc A. Crisafulli as Senior Vice President and General Counsel of the Company. 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 190 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. 10 12 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 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 2000, total annual lottery ticket sales in the United States grew from approximately $147.5 million to approximately $38.4 billion, although the Company has witnessed, in recent years, a downward trend in sales generated by certain of 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 57.8% of total lottery ticket sales in 2000. There are currently 38 jurisdictions operating online lotteries in the United States. Implementation of lotteries in other jurisdictions, including in South Carolina (where in November 2000 voters approved an initiative to introduce an online lottery), 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, 104 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 African National Lottery provide important exceptions 11 13 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. 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. 12 14 Under a number of the Company's lottery contracts, in addition to providing, operating and maintaining the online lottery system in these jurisdictions, the company is providing a wide range of support services and equipment for the lottery's instant ticket games, such as marketing, distribution and automation of 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. Unless otherwise indicated, the table below sets forth the lottery authorities with which the Company had Facilities Management Contracts and fully installed, operational lottery systems as of March 30, 2001, and as to which the Company is the sole supplier of central computers and terminals and material services. The table also sets forth information regarding the term of each contract and, as of March 30, 2001, the approximate number of terminals installed in each jurisdiction. 13 15
APPROXIMATE CURRENT NUMBER OF LOTTERY DATE OF COMMENCEMENT DATE OF EXPIRATION OF EXTENSION JURISDICTION TERMINALS INSTALLED(1) OF CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS* - ------------ ---------------------- ------------------- --------------------- -------- UNITED STATES: Arizona 2,500 9/99 9/04 2 one-year California (2) 20,310 10/93 10/03 -- Colorado 4,000 3/95 10/04 -- D.C. (3) 575 6/99 11/09 -- Georgia 6,930 4/93 9/03 -- Illinois 6,660 4/00 10/07 1 one-year Iowa (4) 1,485 4/91 6/01 1 two-year 1 three-year Kansas 1,830 7/97 6/02 1 two-year Kentucky 3,000 4/97 6/03 5 one-year Louisiana 2,775 6/97 6/05 5 one- year Maine (4) 970 4/89 6/01 -- Michigan 9,500 1/98 1/06 3 one-year Missouri 2,800 7/96 6/03 -- Nebraska 900 4/94 6/04 -- New Jersey 6,000 6/96 11/06 -- New Mexico 1,235 6/96 11/03 5 one-year New York 13,700 11/00 3/07 3 one-year Ohio 7,500 10/93 6/03 (5) 3 two-year Oregon 2,760 12/96 6/05 3 one-year Rhode Island 1,100 1/97 7/02 5 one-year Texas 17,050 3/92 8/02 -- Washington 3,640 9/95 6/04 -- Wisconsin 3,137 6/97 6/02 2 one-year INTERNATIONAL: Barbados 200 10/94 11/04 -- - -T.L. Lotteries Brazil (6) - -National Lottery (6) 22,000 1/97 1/03 -- - -Minas Gerais 770 10/94 11/06 -- - -Parana 720 9/99 9/03 one 1-year - -Goias 120 7/97 7/01 one 1-year
14 16
APPROXIMATE CURRENT NUMBER OF LOTTERY DATE OF COMMENCEMENT DATE OF EXPIRATION OF EXTENSION JURISDICTION TERMINALS INSTALLED(1) OF CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS* - ------------ ---------------------- ---------------- --------------------- -------- Chile - -Polla Chilena de Beneficencia S.A. 1,650 12/93 8/02 -- Czech Republic - -SAZKA 5,700 10/92 12/05 (7) -- Ireland (8) - -An Post Nat'l Lottery Company 2,050 3/93 3/01 (8) Ivory Coast - -Ivory Coast National Lottery (9) (9) (9) (9) Jamaica - -Supreme Ventures Limited (10) 11/00 01/11 -- Lithuania (11) - -OLIFEJA 800 12/94 12/09 (11) Morocco - -La Societe de Gestion de la Loterie Nationale - -La Marocaine des Jeux et Les Sports 800 8/99 8/08 -- Poland (12) - -Totalizator Sportowy 6,400 3/91 10/01 (12) Puerto Rico - -Loteria Electronica de Puerto Rico 1,860 3/99 3/05 1 three-year Slovak Republic - - TIPOS a.s. 1,140 3/96 10/04 -- South Africa (13) - -National Lottery 4,900 7/99 7/09 -- Spain - -L'Entitat Autonoma de Jocs I Apostes de la Generalitat de Catalunya 2,510 10/97 10/03 1 six-month Trinidad & Tobago - -National Lotteries Control Board 665 12/93 7/06 1 three
15 17
APPROXIMATE CURRENT NUMBER OF LOTTERY DATE OF COMMENCEMENT DATE OF EXPIRATION OF EXTENSION JURISDICTION TERMINALS INSTALLED(1) OF CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS* - ------------ ---------------------- ------------------- --------------------- -------- United Kingdom - -The National Lottery (14) 24,865 7/94 9/01 -- Ukraine - -Ukrainian National Lottery (15) 8/00 (15) --
* 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 1% interest, and to which the Company supplies lottery goods and services. (4) During fiscal 2001, the Iowa Lottery authority, and during fiscal 2000, the Maine lottery authority, selected another vendor to provide lottery goods and services, respectively, at the expiration of the Company's current contract term. (5) During fiscal 2001, the Company entered into a new facilities management agreement to install a system which is expected to be operational in June 2001. (6) Operated by GTECH Brasil Holdings, S.A., a Brazilian company in which the Company owns all voting stock. During fiscal 2001, CAIXA, the lottery authority operating the Brazilian National Lottery, commenced a competitive procurement process to determine the provider of lottery goods and services upon the termination of the Company's contract in January 2003. The terms of this competitive procurement provide for more than one vendor to supply the lottery goods and services which are provided exclusively by the Company under the present contract. (7) In March 2001, the Company and SAZKA resolved certain business and contractual issues that had been the subject of an arbitration by, among other things, agreeing to extend the current contract through December 2005. (8) 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. (9) In May 2000, the Company entered into an eight-year facilities management contract to provide an integrated lottery system to the Ivory Coast National Lottery. Implementation of this project has been suspended for the indefinite future pending resolution of political uncertainties in the Ivory Coast. (10) Lottery sales are scheduled to commence in June 2001. The Company plans to have installed 700 terminals by the end of fiscal second quarter of 2002. (11) The Company's contract with the Lithuania lottery authority automatically extends from year-to-year unless either party gives timely notice of non-renewal. (12) In February 2001, after the close of fiscal 2001, the Company announced that the Poland Lottery authority had selected the Company after a competitive procurement as the preferred applicant for award of a ten-year operating license upon expiration of the Company's current facilities management contract in October 2001. Subsequent to this, the Company has received indications that it is possible that requisite governmental approvals will not be granted with respect to this contract. (13) Operated by Uthingo consortium, in which GTECH is a 10 percent equity owner. (14) Operated by Camelot Group plc, a consortium, on a facilities management basis. During fiscal 2001, Camelot was granted an interim license to operate the National Lottery through January 2002, and a second running license commencing upon the expiration of its current license to operate the National Lottery through January 2009. During fiscal 2001, the Company and Camelot entered into agreements under which the Company agrees to provide to Camelot technology transfer and training, software licensing and lottery terminals with respect to Camelot's second running license. See "Certain Significant Developments Since the Start of Fiscal 2001." (15) Operated by the Company under an agreement entered into in August 2000 which expires December 2010, subject to earlier termination by the Ukrainian National Lottery if, among other things, certain revenue targets are not achieved. The lottery commenced on-line lottery sales in April 2001 with an initial installation of 1800 terminals. 16 18 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 March 30, 2001. 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 March 30, 2001, the approximate number of terminals installed in each jurisdiction. OPERATING CONTRACTS
APPROXIMATE NUMBER OF LOTTERY DATE OF EXPIRATION CURRENT TERMINALS DATE OF COMMENCEMENT OF CURRENT EXTENSION JURISDICTION INSTALLED(1) OF CURRENT CONTRACT CONTRACT TERM OPTIONS* - ------------ ------------ ------------------- ------------- -------- UNITED STATES: Idaho 975 2/99 2/03 4 one-year INTERNATIONAL: Argentina - -Loteria National 790 11/93 4/03 -- Sociedad del Estado Turkey - -Turkish National Lottery 4,000 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. 17 19 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 since March 1, 1998 have purchased (or have agreed to purchase) from the Company new online lottery systems, software and/or lottery terminals and equipment in connection with the expansion of existing lottery systems. Argentina --National Lottery of Argentina Australia --Lotteries Commission of New South Wales Australia --Lotteries Commission of South Australia Australia --Western Australia Lotteries Commission Belgium --Loterie Nationale de Belgique China --Beijing Welfare Lottery Center Denmark --Dansk Tipstjanst France --La Francaise des Jeux Israel --Mifal Hapayis Italy --Teseo S.r.l Massachusetts --Massachusetts State Lottery Commission Netherlands --Stichting de Nationale Sport Totalisator Portugal --Santa Casa de Misericordia de Lisboa Singapore --Singapore Pools (Pte) Ltd. South Africa --Uthingo Spain --Sistemas Tecnicos de Loterias del Estado Sweden --AB Svenska Spel Switzerland --Loterie de la Suisse Romande
18 20 United Kingdom --The National Lottery Virginia --Virginia 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 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. 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 19 21 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 basic functions of the Company's systems, which are 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. TERMINALS The Company designs, manufactures and provides the point-of-sale terminals used in its online lottery systems. The Company's 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. The Company's Spectra(R) terminal series (GT-401/0M, 402/0M and 403/OM), first introduced in 1989, is distinguished by its modular internal and external architecture. 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. 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, New Jersey, New York, Rhode Island, Israel, Ireland, , Loto-Quebec, The Netherlands and New Zealand lottery authorities to supply PlayerExpress(TM) terminals. During fiscal 1999, the Company also announced the launch of its Altura(TM) family of terminals. See "Certain Products and Services" below. SOFTWARE The Company designs and provides all applications solutions 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 20 22 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, ProSys(R), 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, Jamaica, Lithuania, Mexico, Morocco, New Mexico, Poland, Puerto Rico, Slovakia, South Africa, Trinidad and Tobago, and Ukraine, 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 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, Nebraska, New Mexico, Texas and Washington, and internationally in Argentina, the Czech Republic, Brazil, Chile, Israel, 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. GAMES 21 23 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, Louisiana, Massachusetts, 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. 22 24 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 2001, 2000 and 1999 were not material. The Company typically does not provide a 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 also launched in recent years 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, and Goias), California, Georgia, Kansas, 23 25 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 $1.9 billion and accounting for more than 8.7% of total United States online lottery revenues in calendar year 2000. 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 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. The New York legislature subsequently extended authorization for Quick-Draw through June 2001. It is uncertain at present whether Quick-Draw will be authorized in New York beyond June 2001. 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 24 26 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, Idaho, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Missouri, Nebraska, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Texas, Washington and Wisconsin. Internationally, the Company currently supplies lottery authorities in Australia, Belgium, Brazil, Chile, Denmark, Finland, Ireland, Israel, Mexico, Morocco, Netherlands, New Zealand, Portugal, The Slovak Republic, South Africa, Spain (Catalunya), Sweden 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, The Slovak Republic, 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 ProSys(R) 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; South Australia; New South Wales, Western Australia and Illinois and is in the process of installing ProSys(R) in three 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 25 27 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. 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. 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. 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. During fiscal 2001, the Company announced that Dreamport would focus upon assisting lotteries to expand their offerings in the area of video machine gaming systems and would consolidate 26 28 and/or divest gaming activities and assets which were peripheral to the Company's core lottery business. See "Certain Significant Developments Since the Start of Fiscal 2001." 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. The Company continues to actively market its UWin!(TM) offering, where permitted, to international lottery authorities. PRODUCT DEVELOPMENT The Company devotes substantial resources in order to enhance its present products and systems and develop new products. In fiscal 2001, the Company spent approximately $49.3 million on research and development, as compared to $46.1 million in fiscal 2000 and $40.2 million in fiscal 1999. 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 $199.9 million as of February 24, 2001, as compared to a backlog of approximately $101.8 million as of February 26, 2000. Approximately $30.2 million, or 15.1% of the backlog at February 24, 2001, is not expected to be filled during fiscal 2002. 27 29 COMPETITION The online lottery business is highly competitive in the United States and internationally. Both in the United States and internationally, price is an increasingly 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 2001, 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) were 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) (14); Autotote Corporation ("Autotote") (18); International Totalizator Systems, Inc. (5); and Essnet/Alcatel (15). 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. In addition, during fiscal 2001, Scientific Games Holdings Corporation, a leading provider of instant ticket lottery technology as well as of online lottery systems and services, was acquired by Autotote, and the lottery divisions of these two companies were integrated. This merger provides the combined entity with a broader range of product offerings than the entities had previously offered individually. PERSONNEL As of April 2, 2001, the Company had approximately 4,650 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 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 the Company has an option to purchase the property. The Company owns approximately 24 acres adjoining its headquarters in West Greenwich, Rhode Island. 28 30 The Company also owns 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. 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 a number of other locations. The Company's facilities are in good condition and are adequate for its present needs. ITEM 3. LEGAL PROCEEDINGS As publicly reported, 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 the 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 "Irish NLC"), issued a Request for Proposals respecting online and instant ticket lottery goods and services, and in September 1992 the Company, which was then the incumbent provider of lottery goods and services to the Irish NLC under an agreement awarded to the Company in 1987, submitted a Proposal to the Irish NLC in response to the Irish NLC's Request for Proposals. In November 1992, the Irish NLC selected the Company to provide online and instant ticket goods and services to the Irish NLC under the terms of the competitive procurement and, following negotiations, a definitive agreement was entered into between the Irish NLC and the Company in March 1993. In calendar 1999, the Tribunal requested that the Company provide various documents regarding the Company's business in Ireland, which the Company has done, and the Company has been 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 Irish 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 Irish NLC and was not intended to and did not influence the Irish NLC's decision to renew the Company's contract. 29 31 No charges of wrongdoing have been brought against the Company in connection with the Moriarty investigation, and the Company does not believe that it has engaged in any wrongdoing in connection with this matter. However, since this investigation is 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 its ultimate scope and whether the government authorities will assert claims resulting from this investigation 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 a government authority were to make an allegation, or if there were to be a finding, of improper conduct on the part of or attributable to the Company in any matter, including in respect of the Moriarty investigation, 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 this investigation and related matters could have such a material adverse effect. Since July 1994, the United Kingdom National Lottery has been operated under a license held by Camelot Group plc ("Camelot"), and the Company has been a supplier of lottery goods and services to Camelot for the lottery. As publicly reported, in or around April or May 2000, the United Kingdom National Lottery Commission (the "NLC"), the regulator of the United Kingdom National Lottery, commenced an investigation into a lottery terminal software malfunction in the United Kingdom in which, under certain rare circumstances, a duplicate transaction was recorded on the Company's central system while only one ticket was presented to the retailer. The software malfunction resulted in a relatively small amount of overcharges to lottery retailers with respect to the duplicate transactions and a relatively small amount of overpayments or underpayments to certain prizewinners. The Company first identified this software malfunction in the United Kingdom in June 1998 and corrected the malfunction in July 1998, but without notifying Camelot or the NLC, as it should have done. The Company fully cooperated with the NLC's investigation and undertook to implement a number of measures respecting its corporate compliance and governance functions and software development processes in the wake of the investigation. The Company has also agreed to reimburse United Kingdom lottery players and retailers for any financial losses incurred by virtue of the software malfunction. As has also been publicly reported, the developments described above took place in the context of a competitive procurement respecting the award by the NLC of a new license to operate the National Lottery with effect from October 1, 2001. In 1999, the NLC established a competitive procedure for the award of the new license, and two bidders, Camelot and The People's Lottery ("TPL"), subsequently submitted bids for the new license. Camelot's bid was supported by agreements with the Company pursuant to which the Company had contracted to continue to supply lottery goods and services to Camelot during the term of the new license in the event that Camelot was awarded the new license. In August 2000, the NLC announced that it had decided that the NLC would proceed on the basis of a new procedure under which it would negotiate exclusively with TPL for one month. 30 32 Promptly after the NLC's announcement, Camelot initiated legal proceedings in the United Kingdom challenging the legality of the NLC's decision to initiate a new procedure of negotiation with TPL to the exclusion of Camelot. In September 2000, the High Court of Justice (Queen's Bench Division) overturned the NLC's August 2000 decision to negotiate exclusively with TPL and directed that the NLC enter into an exclusive negotiation period with Camelot so as to afford Camelot the same opportunity granted to TPL to improve its bid to address the NLC's concerns. As part of the improved Camelot proposal for the new license, the Company entered into technology transfer and training arrangements with Camelot providing for the transfer to Camelot of the Company's National Lottery equipment, facilities and U.K. technology employees, a technology transfer to Camelot (after a period of training), and a grant to Camelot of exclusive rights to operate the Company's gaming system software in the U.K. for the term of the new license. Under these new arrangements, the Company will license its software and provide a range of support services to Camelot for which the Company expects to receive compensation during the term of the new license in the range of between $40 to $45 million per year commencing in fiscal year 2003. The Company also anticipates receiving revenues of approximately $65 million with respect to the sale to Camelot of new terminals prior to the commencement of the new license term. The Company further agreed to negotiate a technology transfer and a related software license for the exclusive use by Camelot under the new license of the internet gaming applications of the Company's UWin! subsidiary. In December 2000, the NLC announced its decision to award a new seven-year license to operate the National Lottery to Camelot and that it will grant Camelot an interim license to cover the period from October 1, 2001 through January 30, 2002 in order to provide a twelve-month conversion period prior to the beginning of the new license. TPL has not protested the NLC's decision to award the new license to Camelot and the period in which a protest must be made has since lapsed. In April 2001, the NLC issued a report of its investigation into the above described lottery software terminal malfunction. The NLC report states that its investigation of the lottery software incident had established breaches of Camelot's license, including in respect of the failure of the Company to give proper notification before rectifying the software fault. The report further states that Camelot has agreed to pay pounds sterling 115,000 (approximately $175,000) into the National Lottery prize fund as compensation for underpayments to players resulting from the software malfunction, and that Camelot has undertaken to identify the amounts by which individual retailers have been overcharged. The NLC has declined, however, to fine Camelot with respect to breaches of its license resulting from (or revealed by the NLC investigation of) the software incident. The NLC report summarizes the steps taken and to be undertaken by the Company in the wake of investigation of the lottery software malfunction (including the measures implemented by the Company with respect to its corporate compliance and governance functions and software development processes and the technology transfer arrangements, as described above) and concludes, in light of these steps, that the Company sufficiently addressed the NLC's ongoing concerns about whether it is a "fit and proper" body for purposes of involvement in the operation of the National Lottery. Payment by the Company of amounts: (i) to reimburse Camelot for payments with respect to underpayments to United Kingdom players and overcharges of retailers, 31 33 as described above, (ii) to reimburse Camelot with respect to any other out-of-pocket costs incurred by Camelot with respect to the lottery terminal software malfunction, and (iii) to reimburse other customers of the Company with respect to effects of the lottery terminal software malfunction outside the United Kingdom, which amounts have been accrued in the accompanying financial statements, are not expected to have a material adverse effect on the Company's consolidated financial position or results of operation. As publicly reported, in August 2000, a shareholder class action lawsuit on behalf of all persons who purchased Company stock during the period from April 11, 2000 to July 25, 2000, was brought against the Company, the Company's former Chairman and Chief Executive Officer, William Y. O'Connor, and the Company's current Chairman, W. Bruce Turner, in the U.S. District Court of Rhode Island relating to various Company announcements made between April 11, 2000 and July 25, 2000. The complaint filed in the case, Sandra Kafenbaum, individually and on behalf of all others similarly situated, v. GTECH Holdings Corporation, William Y. O'Connor and W. Bruce Turner, generally alleges that the defendants violated federal securities laws (including Section 10(b) of the Securities Exchange Act of 1934) by making allegedly false and misleading statements (including statements alleged to be overly optimistic respecting certain lottery contract awards to the Company and respecting the Company's prospects in certain non-lottery business lines and investments), while failing to disclose in a timely manner certain allegedly material adverse information that it purportedly had a duty to disclose (including an alleged inability to close certain contract awards and as to certain alleged cost overruns). The complaint seeks to recover monetary damages from the Company and the individual defendants. In February 2001, the plaintiffs filed an amended complaint which added Steven P. Nowick, the Company's former President and Chief Operating Officer, as an individual defendant. In addition, the amended complaint expands the purported class of plaintiffs to include all persons who purchased common stock of the Company during the period from July 13, 1998 through August 29, 2000. The type of relief sought in the amended complaint is similar to that sought in the original action. The Company believes that it has good defenses to the claims made in this lawsuit and intends to file a motion to dismiss the amended complaint as to all of the defendants. At the present time, however, the Company is unable to predict the outcome, or the financial statement impact, if any, of this lawsuit. As publicly reported, in May 2000, Sazka, a.s., a lottery customer of the Company in the Czech Republic ("Sazka"), filed a Request for Arbitration with the International Arbitral Centre of the Austrian Federal Economic Chamber of Commerce in Vienna, Austria, seeking to arbitrate certain business and contractual issues under the Company's online lottery contract with Sazka. Sazka sought damages valued at approximately $2.6 million in connection with alleged delays in the recent extensive expansion of the lottery sales network. Sazka also sought a determination that its online contract with the Company would expire approximately two years earlier than the date on which the Company maintained its contract would terminate. The Company, believing the claims made by Sazka to be without merit, filed a Memorandum in Reply and Counterclaim disputing such claims and raising counterclaims for breach of contract by Sazka. In March 2001, the Company entered into an agreement with Sazka which, among other things, resolved the arbitration. Under the agreed settlement, Sazka dropped its demand for liquidated damages, paid to the Company certain disputed amounts which it had previously withheld and agreed to extend the term of the contract. The Company in turn agreed to reduce its fee and to provide certain additional equipment and services under its contract with Sazka. 32 34 In February 1999, the Company was sued by a Florida corporation called EIG Gaming International, Inc. ("EIG"), in the Circuit Court of the Eleventh Judicial Circuit of Florida. The Company removed the case to the U.S. District Court for the Southern District of Florida, where it is captioned EIG Gaming International, Inc. v. GTECH Corporation, Case No. 99-1808-Civ-Jordan. In its complaint EIG alleges that it entered into a Letter of Intent with the Company pursuant to which it would assist the Company to obtain the lottery contract for Peru in return for a percentage of the lottery's receipts. EIG further contends that it secured the Peruvian contract for the Company but that the Company thereupon declined to pursue it. Plaintiff claims damages exceeding $80 million. The Company vigorously denies plaintiff's allegations, to which it believes it has good defenses, and, in November 2000, moved for summary judgment. That motion is pending. In April 2001, the court entered an order tentatively scheduling a trial in the case during July 2001. At the present time, the Company is unable to predict the outcome, or the financial statement impact, if any, of this lawsuit. For further information respecting legal proceedings, see 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 F of Notes to Consolidated Financial Statements included in this report. The Company also is subject to certain other 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 2001. ADDITIONAL INFORMATION The following information is furnished in this Part I pursuant to Instruction 3 to Item 401(b) of Regulation S-K: 33 35 EXECUTIVE OFFICERS OF THE COMPANY The Executive Officers of Holdings as of April 1, 2001 are: Name Age Position - ---- --- -------- Howard S. Cohen 54 Chief Executive Officer (since March 2001). Previously, Mr. Cohen was President and Chief Executive Officer of Bell & Howell, a leading information solutions and services provider, from January 2000 to January 2001; President, Chief Executive Officer and Chairman of Sidus Systems, Inc., a Toronto Canada based systems integrator, contract manufacturer and distributor, from 1998 to 2000; and President, Chief Executive Officer, and Chief Operating Officer of Peak Technologies Group, a systems integrator of data capture, printing, service solutions and software products, from 1996 to 1998. Prior to this, Mr. Cohen was President of OCE Systems, Inc., a U.S. subsidiary of the Netherlands-based OCE Corporation, which specializes in printing systems and reprographic equipment, from 1992 to 1996. David J. Calabro 51 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. Marc A. Crisafulli 32 Senior Vice President and General Counsel (since March 2001). Previously, Mr. Crisafulli was an associate (from September 1994 through June 2000) and a partner (from July 2000 through March 2001) of the Providence-based law firm of Edwards & Angell, LLP where he practiced as a commercial trial lawyer. Jean-Pierre Desbiens 50 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. 34 36 Kathleen E. McKeough 50 Senior Vice President of Human Resources (since May 2000). Previously, Ms. McKeough was Senior Vice President of Human Resources of Allied Domecq Retailing U.S., a subsidiary of Allied Domecq, a leading producer and distributor of wines and spirits and owner of quick-service restaurants, from 1996 to 1999, and prior to that was Chief Financial Officer and Treasurer of Allied Domecq Retailing U.S. from 1994 to 1996. Jaymin B. Patel 33 Senior Vice President and Chief Financial Officer since January 2000. Previously, beginning in 1994 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. Antonio Carlos Rocha 52 Senior Vice President of Marketing (since February 2001). Previously, Mr. Rocha served as President of GTECH Brasil Lda, the Company's Brazilian subsidiary, from January, 1996 during which time the Company obtained the contract to provide online lottery services to Caixa Economica Federale, which operates Brazil's National Lottery. Prior to this, Mr. Rocha was Chairman of the Executive Committee of AT&T Brazil from July 1993 until late 1995, and President of NCR Brazil from April 1991 to July 1993. Donald L. Stanford 50 Senior Vice President, with responsibility for technology, for more than five years. Donald R. Sweitzer 53 Senior Vice President - Public Affairs 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 the Political Director of the Democratic National Committee from April 1993 through January 1995, and served as the Finance Director of this same body from April 1985 through January 1989. 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 35 37 shareholders of Holdings will be included in Holdings' definitive proxy statement relating to its scheduled July 2001 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission. 36 38 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 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 1/2 Third Quarter (August 29 - November 27, 1999) $26 $19 3/8 Fourth Quarter (November 28, 1999 - February 26, 2000) $23 1/8 $19 3/8
FISCAL 2001 HIGH LOW - ----------- ---- --- First Quarter (February 27 - May 27, 2000) $23 $17 7/8 Second Quarter (May 28 - August 26, 2000) $23 1/2 $17 5/8 Third Quarter (August 27 - November 25, 2000) $19 1/4 $15 3/8 Fourth Quarter (November 26, 2000 - February 24, 2001) $27 3/4 $18 1/4
The closing price of the Common Stock on the New York Stock Exchange on April 10, 2001 was $29.26. As of April 10, 2001, there were approximately 900 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 and, from time to time, to execute repurchases of shares of Holdings' Common Stock under the Company's open market share repurchase program. Further, Holdings is a holding company and its operations are conducted through the Company and its 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. 37 39 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.
Fiscal Year Ended ------------------------------------------------------------------------ February 24, February 26, February 27, February 28, February 22, 2001 2000 1999 1998 (a) 1997 ------------ ----------- ------------ ------------ ------------ (Dollars in thousands, except per share amounts) OPERATING DATA: Revenues: Services $ 856,475 $ 860,419 $ 887,395 $ 868,522 $ 789,534 Sales of products 80,068 150,379 85,528 122,045 114,738 ------------ ------------ ------------ ------------ ------------ Total 936,543 1,010,798 972,923 990,567 904,272 Gross Profit: Services (b) 292,380 305,110 297,630 266,940 239,332 Sales of products 5,224 48,426 25,703 48,230 47,297 ------------ ------------ ------------ ------------ ------------ Total 297,604 353,536 323,333 315,170 286,629 Special charges (credit) (c) 42,270 (1,104) 15,000 99,382 --- Operating income 81,905 180,000 141,720 44,104 127,091 Interest expense, net of interest income 21,569 25,523 23,326 24,578 16,388 Net income 43,148 93,585 89,063 27,214 77,803 PER SHARE DATA: Basic $ 1.25 $ 2.58 $ 2.17 $ .65 $ 1.81 Diluted 1.25 2.58 2.16 .64 1.80 OTHER DATA: Earnings before depreciation, amortization, interest, taxes and other special and noncash charges $ 305,223 $ 361,126 $ 376,158 $ 347,099 $ 326,054 Cumulative number of lottery terminals shipped (d) 434,139 408,906 377,857 360,202 316,614 Number of lottery terminals sold 5,570 13,293 4,921 11,963 13,609 Number of lottery customers at year-end 83 82 81 78 79 BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 65,273 $ 28,253 $ 3,755 $ 27,371 $ 36,914 Total assets 938,160 891,023 874,215 1,023,812 956,541 Long-term debt, less current portion 316,961 349,400 319,078 453,587 382,499 Shareholders' equity (f) 314,362 296,576 283,906 345,210 358,133
- ---------------------------------------- (a) 53-week year. (b) Fiscal years prior to 2001 have been reclassified to present goodwill amortization as a single operating expense line item in the Consolidated Income Statements. (c) The impact of the special charges (credit) on earnings per share on a diluted basis was $0.74, $(0.02), $0.22 and $1.44, in fiscal 2001, 2000, 1999 and 1998, respectively. 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. (f) In March 2001, after the close of its 2001 fiscal year, the Company repurchased five million shares of its Common Stock for $130.0 million. 38 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 or expects to be engaged, (ii) the future operating and financial performance of the Company, (iii) the ability of the Company to retain existing business and to obtain and retain new business, and (iv) the results and effects of legal proceedings and investigations. Such forward-looking statements reflect management's assessment based on information currently available, but are not guarantees and are subject to risks and uncertainties 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 subsequent press releases and Form 10-Q's and other reports and filings with the Securities and Exchange Commission. General The Company operates on a 52- to 53-week fiscal year ending on the last Saturday in February and fiscal 2001 ended on February 24, 2001. 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 2002 will be in a range of $160 million to $170 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 has entered into agreements which permit bill payments over its Brazilian and Chilean lottery networks. In addition, the Company continues to develop, and where permitted, market, its UWin! internet based platform through which international providers of government-sponsored lottery products and services may offer interactive games. 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 of lottery contracts and related matters. In light of the fact that such investigations frequently are 41 conducted in secret, the Company would not necessarily know of the existence of an investigation which might involve the Company. Because the Company's reputation for integrity is an important factor in its business dealings with lottery and other government agencies, if government authorities were to make an allegation of, or if there were to be a finding of, improper conduct on the part of or attributable to the Company in any matter, such an allegation or finding could have a material adverse effect on the Company's business, including its ability to retain existing contracts and to obtain new or renewal contracts. In addition, continuing adverse publicity resulting from these investigations and related matters could have such a material adverse effect. See Note F 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. All references to the Consolidated Financial Statements of the Company and Notes thereto, are to the Consolidated Financial Statements of the Company 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 24, February 26, February 27, 2001 2000 1999 ------------------------------------------------------------------------------------ (Dollars in thousands) Revenues: Services $ 856,475 91.5 % $ 860,419 85.1 % $ 887,395 91.2 % Sales of products 80,068 8.5 150,379 14.9 85,528 8.8 ------------ ---------- ------------- ---------- ------------ -------- Total 936,543 100.0 1,010,798 100.0 972,923 100.0 Costs and expenses: Costs of services (a)(b) 564,095 65.9 555,309 64.5 589,765 66.5 Costs of sales (a) 74,844 93.5 101,953 67.8 59,825 69.9 ------------ ---------- ------------- ---------- ------------ -------- Total 638,939 68.2 657,262 65.0 649,590 66.8 ------------ ---------- ------------- ---------- ------------ -------- Gross profit 297,604 31.8 353,536 35.0 323,333 33.2 Selling, general and administrative (b) 117,997 12.6 122,334 12.1 120,601 12.4 Research and development 49,267 5.3 46,053 4.6 40,158 4.1 Goodwill amortization (b) 6,165 0.6 6,253 0.6 5,854 0.6 ------------ ---------- ------------- ---------- ------------ -------- Operating expenses 173,429 18.5 174,640 17.3 166,613 17.1 Special charges (credit) 42,270 4.5 (1,104) (0.1) 15,000 1.5 Operating income 81,905 8.8 180,000 17.8 141,720 14.6 Other income (expense): Interest income 5,596 0.6 3,509 0.3 4,079 0.4 Equity in earnings of unconsolidated affiliates 3,167 0.3 2,843 0.3 7,113 0.7 Other income (expense) 7,232 0.8 (1,343) (0.1) 25,447 2.6 Interest expense (27,165) (2.9) (29,032) (2.9) (27,405) (2.8) ------------ ---------- ------------- ---------- ------------ -------- Income before income taxes 70,735 7.6 155,977 15.4 150,954 15.5 Income taxes 27,587 3.0 62,392 6.1 61,891 6.3 ------------ ---------- ------------- ---------- ------------ -------- Net income $ 43,148 4.6 % $ 93,585 9.3 % $ 89,063 9.2 % ============ ========== ============= ========== ============ ========
(a) Percentages are computed based on cost as a percentage of related revenue. (b) Fiscal years 2000 and 1999 have been reclassified to present goodwill amortization as a single operating expense line item in the Consolidated Income Statements. 43 Special Charges In fiscal 2001, the Company recorded special charges of $42.3 million ($25.8 million after-tax, or $0.74 per share) in connection with certain contractual obligations and a value assessment of the Company's business operations. The major components of the special charges consisted of $14.0 million for a workforce reduction that eliminated approximately 255 Company positions worldwide, $11.5 million for contractual obligations in connection with the departures in July 2000 of the Company's former Chairman and Chief Executive Officer and former President and Chief Operating Officer, $8.5 million for costs associated with the exit of certain business strategies and product lines and $8.3 million for the termination of consulting agreements and facility exit costs, net of gains on the disposition of Company aircraft. See Note P to the Consolidated Financial Statements. The Company realized approximately $12.0 to $13.0 million of pre-tax savings in fiscal 2001 from the value assessment. Beginning in fiscal 2002, the Company expects annual net pre-tax operating expense savings in the range of $30.0 to $32.0 million from the value assessment. Upcoming Significant Contract Rebids A significant portion of the Company's revenues and cash flow is derived from its portfolio of long-term online lottery service contracts, each of which in the ordinary course of the Company's business periodically is the subject of competitive procurement or renegotiation. Through fiscal 2003 (which ends in February 2003), several of the Company's larger contracts (including the National Lottery of Brazil and Texas, its two largest in fiscal 2001) are expected to be the subject of competitive procurements to select contractors to supply lottery goods and services upon the termination of the Company's current contracts. See Part I, Item 1, -- "Certain Factors That May Affect Future Performance -- Strengthening of Competition" and "Lottery Contract Awards and Related Significant Developments" herein for further information concerning these matters. Results of Operations COMPARISON OF FISCAL 2001 WITH 2000 Revenues for fiscal 2001 were $936.5 million, representing a $74.3 million, or 7.3%, decrease from revenues of $1.0 billion in fiscal 2000. Service revenues, including lottery and other services, in fiscal 2001 were $856.5 million, representing a $3.9 million, or 0.5%, decrease from the $860.4 million of service revenues in fiscal 2000. This decrease reflects a decline in domestic lottery service revenues, partially offset by an increase in international lottery service revenues. The Company's domestic lottery service revenues were $465.4 million in fiscal 2001, a decrease of 2.8% from the $478.8 million recorded in the same period of fiscal 2000. This decrease was 44 primarily due to the loss of online lottery contracts in Indiana, West Virginia, Vermont and New Hampshire and the loss of an instant ticket validation contract in New York. These decreases were partially offset by increases in lottery sales generated by a number of the Company's existing domestic customers, including Texas, New York and New Jersey. The Company's international lottery service revenues increased 4.5% in fiscal 2001 to $360.3 million compared with the $344.7 million recorded in the same period last year, primarily due to the launch of the national lotteries in South Africa and Morocco, along with growth in sales for existing customers in Brazil, Poland and Mexico and a contractual rate increase in Brazil. These increases were partially offset by the impact of the reduction in the dollar value of foreign currencies. Product sales in fiscal 2001 were $80.1 million, a decrease of $70.3 million from the $150.4 million of product sales in fiscal 2000. Prior year product sales included sales of an online lottery system to Israel, a new central system with instant ticket capabilities to Sweden, and equipment to South Africa. The Company sold approximately 5,600 lottery terminals in fiscal 2001, compared to approximately 13,300 lottery terminals in fiscal 2000. Gross margins on service revenues were 34.1% in fiscal 2001 compared to 35.5% in fiscal 2000, primarily driven by start-up losses on the lottery system installation in Morocco, along with additional costs incurred relating to the delayed start-up of the Colombia lottery that launched on January 17, 2001. Gross margins on product sales fluctuate depending on the mix, volume and timing of product sales contracts. Gross margins on product sales decreased from 32.2% in fiscal 2000 to 6.5% in fiscal 2001, primarily due to previously announced cost over-runs on the lottery system conversion the Company is implementing in New South Wales, Australia, and the lower volume of equipment sales to South Africa in fiscal 2001 compared to fiscal 2000. Selling, general and administrative expenses in fiscal 2001 were $118.0 million, representing a $4.3 million, or 3.5%, decrease from the $122.3 million incurred in fiscal 2000. This decrease was primarily attributable to cost reductions resulting from the value assessment, partially offset by non-cash charges associated with the implementation of the Company's Restricted Stock Plan in August 2000. As a percentage of revenues, selling, general and administrative expenses were 12.6% and 12.1% during fiscal 2001 and 2000, respectively. Research and development expenses in fiscal 2001 were $49.3 million, representing a $3.2 million, or 7.0%, increase over research and development expenses of $46.1 million in fiscal 2000. This increase reflects higher spending on the Company's central system software and interactive media offerings. As a percentage of revenues, research and development expenses were 5.3% and 4.6% during fiscal 2001 and 2000, respectively. Other income of $7.2 million in fiscal 2001 was comprised principally of the amortization of the gain on the sale of the Company's 22.5% equity interest in Camelot Group plc ("Camelot"), which the Company sold in April 1998, and which is being amortized over the remaining period of Camelot's first operating license, due to expire in September 2001. Other expense in fiscal 2000 of $1.3 million, was comprised of net foreign exchange losses associated with the Company's global asset protection and foreign exchange management programs designed to provide a degree of protection for future cash flows, partially offset by the amortization of the 45 gain on the sale of Camelot. The Company recorded $0.4 million of net foreign exchange gains in fiscal 2001, compared to $6.7 million of net foreign exchange losses in the prior year. Interest expense in fiscal 2001 was $27.2 million, a decrease of $1.8 million from interest expense of $29.0 million incurred during fiscal 2000. This decrease was primarily due to lower average debt outstanding under the Company's revolving credit facility. The Company's effective income tax rate decreased from 40% in fiscal 2000 to 39% in fiscal 2001, principally due 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. Weighted average shares in fiscal 2001 declined 1.7 million shares to 34.6 million shares as a result of the Company's share repurchase program. On March 19, 2001, after the end of its 2001 fiscal year, the Company repurchased 5 million shares of its common stock from Tiger Management, its largest shareholder, for $130.0 million. COMPARISON OF FISCAL 2000 WITH 1999 Revenues for fiscal 2000 were $1.0 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 6.1% decline in domestic lottery service revenues, partially offset by a 1.8% 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 6.1% decline in the Company's domestic service revenues. 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 1.8% 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 equipment sales to South Africa, an on-line lottery system to Israel and a new 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 33.5% in fiscal 1999 to 35.5% in fiscal 2000 due to improved margins from the Company's operations in Brazil. 46 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 the change in product mix. Selling, general and administrative expenses in fiscal 2000 were $122.3 million, representing a $1.7 million, or 1.4%, increase from the $120.6 million incurred in fiscal 1999. This increase was primarily attributable to the Company's bi-annual user's conference held during the second quarter of fiscal 2000. As a percentage of revenues, selling, general and administrative expenses were 12.1% and 12.4% 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 reflected development activities associated with the Company's next generation lottery operating system and terminals along with increased spending 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. Other expense in fiscal 2000 was $1.3 million and was comprised of net foreign exchange losses associated with the Company's global asset protection and foreign exchange management programs designed to provide a degree of protection for future cash flows, partially offset by the amortization of the gain on the sale of Camelot. 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 U.S. dollar. Other income of $25.4 million in fiscal 1999 was comprised principally of 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 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 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, along with higher average interest rates on the Company's outstanding debt. 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. 47 Changes in Financial Position, Liquidity and Capital Resources During fiscal 2001, the Company generated $252.0 million of cash from operations. This cash was used principally to fund the purchase of $136.9 million of systems, equipment and other assets relating to contracts, repurchase $19.6 million of the Company's common stock and repay $42.8 million of the Company's long-term debt. Inventories increased by $50.4 million, from $67.4 million at February 26, 2000 to $117.8 million at February 24, 2001, primarily due to spending related to product sales expected to be delivered during fiscal 2002 in France, Spain and China, along with inventory purchased for new system installations in New York and Ohio. Advance payments of $23.4 million have been received related to these product sales expected to be delivered in fiscal 2002. Current deferred income taxes increased by $11.0 million, from $15.9 million at February 26, 2000 to $26.9 million at February 24, 2001, primarily due to accrued expenses that are not currently deductible for income tax purposes. Other assets decreased by $28.5 million, from $145.2 million at February 26, 2000 to $116.7 million at February 24, 2001, primarily due to the return of deposits on a corporate aircraft which was sold in August 2000, along with the amortization of capitalized software. Accrued expenses increased by $11.8 million, from $43.3 million at February 26, 2000 to $55.1 million at February 24, 2001, primarily due to the additional cost to complete the lottery system conversion underway in New South Wales, Australia. The special charge accrual of $10.4 million at February 24, 2001 consists primarily of $7.9 million of severance payments remaining under the workforce reduction and $1.6 million of payments remaining under contractual obligations to former executives. Advance payments from customers increased by $22.0 million, from $33.4 million at February 26, 2000 to $55.4 million at February 24, 2001, primarily due to advances received from customers in France, Spain and China related to product sales expected to be delivered during fiscal 2002. Income taxes payable, that are reported net of income tax refunds receivable, increased by $15.2 million, from $49.4 million at February 26, 2000 to $64.6 million at February 24, 2001. This increase was primarily due to a $16.0 million income tax refund relating to the fiscal 2001 special charge, along with the timing of income tax payments. 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 2002 will be in a range of $220 million to $245 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. 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, to fund anticipated internal growth and to repurchase shares of the Company's Common Stock, from time to time, under the Company's open market share repurchase program in the foreseeable future. The Company is currently in discussions with its lenders to refinance its credit facility which is scheduled to expire in June 2002. 48 On March 19, 2001, the Company repurchased 5 million shares of its Common Stock from Tiger Management, its largest shareholder, for $130.0 million. This purchase was outside of the Company's open market share repurchase program. As of March 31, 2001 the Company had utilized approximately $63.3 million of its $400 million Credit Facility, including $13.6 million of letters of credit issued under the Credit Facility. 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 2001. 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 24, 2001, and February 26, 2000, the estimated fair value of the Company's fixed rate debt, as determined by an independent investment banker, approximated $305.7 million and $293.9 million, respectively. At February 24, 2001, a hypothetical 10% increase in interest rates would change the estimated fair value of the Company's fixed rate debt to $300.1 million and a hypothetical 10% decrease in interest rates would change the estimated fair value of the Company's fixed rate debt to $311.5 million. Comparatively, at February 26, 2000, after taking into consideration $150.0 million of interest rate swaps, 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. A hypothetical 10% adverse or favorable change in interest rates applied to variable rate debt would not have a material affect on current earnings. The Company uses various techniques to mitigate the risk associated with future changes in interest rates, including entering into interest rate swaps and the private placement of fixed rate debt. In February 2000, the Company entered into two interest rate swaps with an aggregate notional amount of $150.0 million that provided interest rate protection over the period February 25, 2000 to May 15, 2007. The swaps effectively entitled the Company to exchange fixed rate payments for variable rate payments. On February 1, 2001, the Company sold the two interest rate swaps for $13.0 million. The Company has deferred the recognition of the gain on the sale as a component of long-term debt and is recognizing such gain ratably over the period February 2001 through May 2007. 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 securing payment from its customers in U.S. dollars, by sharing risk with its customers, by utilizing foreign currency borrowings, by leading and lagging receipts and payments and by entering into foreign currency exchange and option contracts. In addition, a significant portion of the costs attributable to the Company's 49 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 24, 2001 and February 26, 2000, a hypothetical 10% adverse change in foreign exchange rates would result in a translation loss of $14.6 million and $16.3 million, respectively, that would be recorded in the equity section of the Company's balance sheet. At February 24, 2001 and February 26, 2000, a hypothetical 10% adverse change in foreign exchange rates would result in a net transaction loss of $3.4 million in both years that would be recorded in current earnings after considering the effects of foreign exchange contracts currently in place. At February 24, 2001, a hypothetical 10% adverse change in foreign exchange rates would result in a net reduction of cash flows from anticipatory transactions in fiscal 2002 of $21.2 million. Comparatively, at February 26, 2000, 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 $12.1 million in fiscal 2001. The percentage of fiscal 2001 and fiscal 2000 anticipatory cash flows that were hedged varied throughout each fiscal year, but averaged 51% in fiscal 2001 compared to 73% in fiscal 2000. As of February 24, 2001, the Company had contracts for the sale of foreign currency of approximately $94.8 million (primarily Spanish pesetas, Australian dollars and pounds sterling) and the purchase of foreign currency of approximately $65.5 million (primarily pounds sterling), compared to 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) at February 26, 2000. 50 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's market risk disclosures are included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" above. 51 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 52 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 24, 2001 and February 26, 2000 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended February 24, 2001. 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 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 provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GTECH Holdings Corporation and subsidiaries at February 24, 2001 and February 26, 2000 and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 24, 2001, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Boston, Massachusetts March 27, 2001 53 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
February 24, February 26, 2001 2000 --------------------------- (Dollars in thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 46,948 $ 11,115 Trade accounts receivable 118,721 115,358 Sales-type lease receivables 8,722 10,110 Inventories 117,789 67,418 Deferred income taxes 26,850 15,853 Other current assets 18,798 19,346 --------- --------- TOTAL CURRENT ASSETS 337,828 239,200 SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 361,334 375,918 GOODWILL 122,325 130,710 OTHER ASSETS 116,673 145,195 --------- --------- TOTAL ASSETS $ 938,160 $ 891,023 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short term borrowings $ 2,316 $ 1,620 Accounts payable 49,267 53,103 Accrued expenses 55,140 43,278 Special charge 10,431 -- Employee compensation 31,898 30,057 Advance payments from customers 55,418 33,438 Income taxes payable 64,573 49,382 Current portion of long-term debt 3,512 69 --------- --------- TOTAL CURRENT LIABILITIES 272,555 210,947 LONG-TERM DEBT, less current portion 316,961 349,400 OTHER LIABILITIES 29,883 27,363 DEFERRED INCOME TAXES 4,399 6,737 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, 44,507,315 and 44,171,315 shares issued; 34,257,527 and 34,804,004 shares outstanding at February 24, 2001 and February 26, 2000, respectively 445 442 Additional paid-in capital 183,294 176,750 Equity carryover basis adjustment (7,008) (7,008) Accumulated other comprehensive loss (85,852) (69,493) Retained earnings 479,305 437,830 --------- --------- 570,184 538,521 Less cost of 10,249,788 and 9,367,311 shares in treasury at February 24, 2001 and February 26, 2000, respectively (255,822) (241,945) --------- --------- 314,362 296,576 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 938,160 $ 891,023 ========= =========
See Notes to Consolidated Financial Statements 54 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
Fiscal Year Ended ----------------------------------------------------- February 24, February 26, February 27, 2001 2000 1999 ---------------- ----------------- ----------------- (Dollars in thousands, except per share amounts) Revenues: Services $ 856,475 $ 860,419 $ 887,395 Sales of products 80,068 150,379 85,528 ---------------- ----------------- ----------------- 936,543 1,010,798 972,923 Costs and expenses: Costs of services 564,095 555,309 589,765 Costs of sales 74,844 101,953 59,825 ---------------- ----------------- ----------------- 638,939 657,262 649,590 ---------------- ----------------- ----------------- Gross profit 297,604 353,536 323,333 Selling, general and administrative 117,997 122,334 120,601 Research and development 49,267 46,053 40,158 Goodwill amortization 6,165 6,253 5,854 Special charges (credit) 42,270 (1,104) 15,000 ---------------- ----------------- ----------------- Operating income 81,905 180,000 141,720 Other income (expense): Interest income 5,596 3,509 4,079 Equity in earnings of unconsolidated affiliates 3,167 2,843 7,113 Other income (expense) 7,232 (1,343) 25,447 Interest expense (27,165) (29,032) (27,405) ---------------- ----------------- ----------------- Income before income taxes 70,735 155,977 150,954 Income taxes 27,587 62,392 61,891 ---------------- ----------------- ----------------- Net income $ 43,148 $ 93,585 $ 89,063 ================ ================= ================= ---------------- ----------------- ----------------- Basic earnings per share $ 1.25 $ 2.58 $ 2.17 ================ ================= ================= ---------------- ----------------- ----------------- Diluted earnings per share $ 1.25 $ 2.58 $ 2.16 ================ ================= =================
See Notes to Consolidated Financial Statements 55 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Equity Additional Carryover Outstanding Common Paid-in Basis Shares Stock Capital Adjustment ---------------- ---------------- ------------------ --------------- (Dollars in thousands) Balance at February 28, 1998 41,284,146 $ 439 $ 171,302 $ (7,008) Comprehensive income: Net income - - - - Other comprehensive income (loss), net of tax: Foreign currency translation - - - - Net gain on derivative instruments - - - - 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) Comprehensive income: Net income - - - - Other comprehensive income, net of tax: Foreign currency translation - - - - Net gain on derivative instruments - - - - 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) Comprehensive income: Net income - - - - Other comprehensive income (loss), net of tax: Foreign currency translation - - - - Net loss on derivative instruments - - - - Unrealized gain on investments - - - - Comprehensive income Director stock compensation - - 92 - Treasury shares repurchased (1,105,200) - - - Shares reissued under employee stock purchase and stock award plans 222,723 - - - Shares issued upon exercise of stock options 336,000 3 6,452 - ---------------- ---------------- ------------------ --------------- Balance at February 24, 2001 34,257,527 $ 445 $ 183,294 $ (7,008) ================ ================ ================== =============== Accumulated Other Comprehensive Retained Treasury Income (Loss) Earnings Stock Total ------------------ ----------------- ------------------ ----------------- (Dollars in thousands) Balance at February 28, 1998 $ (42) $ 255,955 $ (75,436) $ 345,210 Comprehensive income: Net income - 89,063 - 89,063 Other comprehensive income (loss), net of tax: Foreign currency translation (85,094) - - (85,094) Net gain on derivative instruments 294 - - 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 $ (84,842) $ 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 - - 15,223 Net gain on derivative instruments 126 - - 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 $ (69,493) $ 437,830 $ (241,945) $ 296,576 Comprehensive income: Net income - 43,148 - 43,148 Other comprehensive income (loss), net of tax: Foreign currency translation (16,004) - - (16,004) Net loss on derivative instruments (447) - - (447) Unrealized gain on investments 92 - - 92 ----------------- Comprehensive income 26,789 Director stock compensation - - - 92 Treasury shares repurchased - - (19,587) (19,587) Shares reissued under employee stock purchase and stock award plans - (1,673) 5,710 4,037 Shares issued upon exercise of stock options - - - 6,455 ------------------ ----------------- ------------------ ----------------- Balance at February 24, 2001 $ (85,852) $ 479,305 $ (255,822) $ 314,362 ================== ================= ================== =================
See Notes to Consolidated Financial Statements 56 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ---------------------------------------- February 24, February 26, February 27, 2001 2000 1999 ------------ ------------ ------------ (Dollars in thousands) OPERATING ACTIVITIES Net income $ 43,148 $ 93,585 $ 89,063 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 156,262 168,284 184,748 Intangibles amortization 11,968 10,839 8,719 Goodwill amortization 6,165 6,253 5,854 Special charges (credit) 42,270 (1,104) 15,000 Deferred income taxes provision (benefit) (13,335) 1,753 9,868 Termination of interest rate swap 12,970 --- --- Equity in earnings (losses) of unconsolidated affiliates, net of dividends received 1,343 (376) (3,117) Foreign currency transaction losses (gains) (970) 900 (8,650) Other 1,408 954 2,405 Changes in operating assets and liabilities, net of effects of acquisitions: Trade accounts receivable 956 (10,006) (10,716) Inventories (50,369) (5,659) (33,479) Special charge (23,426) (4,954) (26,105) Other assets and liabilities 63,580 (29,687) 52,692 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 251,970 230,782 286,282 INVESTING ACTIVITIES Purchases of systems, equipment and other assets relating to contracts (136,891) (128,618) (121,198) Acquisitions (net of cash acquired) -- (318) (19,687) Investments in and advances to unconsolidated affiliates (16,601) (16,209) (529) Cash received from affiliates 2,075 -- 1,906 Proceeds from sale of investments -- -- 84,904 Other (11,149) (19,198) (22,627) --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (162,566) (164,343) (77,231) FINANCING ACTIVITIES Net proceeds from issuance of long-term debt 95,908 221,500 117,706 Principal payments on long-term debt (138,737) (192,936) (254,768) Purchases of treasury stock (19,587) (98,747) (70,757) Proceeds from stock options 6,455 316 4,976 Other 5,236 2,114 (205) --------- --------- --------- NET CASH USED FOR FINANCING ACTIVITIES (50,725) (67,753) (203,048) Effect of exchange rate changes on cash (2,846) 4,696 (6,520) --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,833 3,382 (517) Cash and cash equivalents at beginning of year 11,115 7,733 8,250 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 46,948 $ 11,115 $ 7,733 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest payments (net of amounts capitalized) $ 26,937 $ 28,697 $ 27,574 Income tax payments 44,297 66,883 24,945 Income tax refunds (18,701) (662) (13,345)
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. Goodwill amortization, that was included in cost of services and selling, general and administrative expense in prior periods has been presented as a single line item in the Consolidated Income Statements. Industry Segment and Nature of Operations: The Company operates in one reportable 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 2001, 2000 and 1999 were 52-week years. 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 (as defined in Note F) are recorded as a reduction in revenue in the period in which it is determined that they are probable and estimable. Revenues from product sales or sales-type leases are recognized when installation is complete and the customer accepts the product, when acceptance is a stipulated contractual term. In those instances where the Company is not responsible for installation, revenue is recognized when the product is shipped. Product sales under long-term contracts are recorded under the percentage of completion method. Costs and estimated gross margins are recorded as sales as work is completed and accepted by the customer by utilizing the most recent estimates of cost to complete. Adjustments in estimates are made in the period in which the information necessary to make the adjustment becomes available. If the current contract estimate indicates a loss, provision is made for the estimated loss when it becomes known and quantifiable. Effective November 26, 2000, the Company adopted Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". SAB 101 summarizes the Securities and Exchange Commission's views regarding the application of generally accepted accounting principles to selected revenue recognition issues. The adoption and implementation of SAB 101 did not have a material effect on the results of operations or financial position of the Company. 58 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED) 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 U.S. 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 $434,000, $(6,683,000) and $15,268,000 in fiscal 2001, 2000 and 1999, respectively, which 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 U.S. 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. 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 related Interpretations. The Company has not recognized any compensation expense for stock option grants. Derivatives: The Company uses derivative financial instruments principally to manage the risk of foreign currency exchange rate and interest 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" ("FAS 133"). 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 provide a degree of protection to the Company against foreign exchange risk on its variable service revenues at fair value in its Consolidated Balance Sheets. 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 Sheets at fair value 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. 59 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED) 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. Trade Accounts Receivable: Trade accounts receivable are reflected net of allowances for doubtful accounts and liquidated damages of $7,373,000 and $3,187,000 at February 24, 2001 and February 26, 2000, respectively. Inventories: Inventories include amounts related to the Company's long-term service contracts and product sales contracts, including product sales under long-term contracts, and are stated at the lower of cost (first-in, first-out method) or market. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts. Inventory allowances were $6,708,000 and $5,142,000 at February 24, 2001 and February 26, 2000, respectively. Inventory manufactured or assembled by the Company for its long-term service contracts is transferred to systems, equipment and other assets relating to contracts upon shipment. Systems, Equipment and Other Assets Relating to Contracts: Systems, equipment and other assets relating to contracts are stated on the basis of cost. The cost less any salvage value is depreciated over the base contract term, not to exceed ten years, using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. 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 $36,393,000 and $44,291,000 at February 24, 2001 and February 26, 2000, respectively. Related amortization expense amounted to $19,018,000, $17,167,000 and $12,821,000 in fiscal 2001, 2000 and 1999, respectively, and is included in cost of services or cost of sales in the Company's Consolidated Income Statements. 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. During fiscal 2001, 2000 and 1999, the Company recorded charges of $4,236,000, $1,000,000 and $18,165,000, respectively, relating to impairments of certain long-lived assets. 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 24, 2001 and February 26, 2000, accumulated amortization was $40,850,000 and $36,271,000, 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. During fiscal 2001, the Company reduced goodwill by $2,220,000 to reflect impairment associated with a prior acquisition. Accumulated Other Comprehensive Income: Accumulated other comprehensive income as of February 24, 2001, included $(85,917,000), $(27,000) and $92,000 related to foreign currency translation, net loss on derivative instruments and unrealized gain on investments, respectively. Accumulated other comprehensive income as of February 26, 2000, included $(69,913,000) and $420,000 related to foreign currency translation and net gain on derivative instruments, respectively. 60 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The acquisition was accounted for using the purchase method of accounting, whereby the purchase price was 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 Europrint and its wholly owned subsidiaries in its consolidated results since the date of acquisition. Pro forma information has not been provided because the acquisition was not material to the Company's operations. NOTE C - INVENTORIES Inventories consist of:
February 24, 2001 February 26, 2000 ----------------- ----------------- (Dollars in thousands) Raw materials $ 45,689 $ 23,623 Work in progress 57,210 42,701 Finished goods 14,890 1,094 -------------------- -------------------- $ 117,789 $ 67,418 ==================== ====================
NOTE D - SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS Systems, equipment and other assets relating to contracts consists of:
February 24, 2001 February 26, 2000 ----------------- ----------------- (Dollars in thousands) Land and buildings $ 5,259 $ 5,259 Computer terminals and systems 1,122,286 1,069,541 Furniture and equipment 116,098 110,734 Contracts in progress 39,771 46,221 -------------------- -------------------- 1,283,414 1,231,755 Less accumulated depreciation and amortization 922,080 855,837 -------------------- -------------------- $ 361,334 $ 375,918 ==================== ====================
61 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E - LONG-TERM DEBT Long-term debt consists of:
February 24, 2001 February 26, 2000 ----------------- ----------------- (Dollars in thousands) Revolving credit facility $ ---- $ 45,000 7.75% Series A Senior Notes due 2004 150,000 150,000 7.87% Series B Senior Notes due 2007 150,000 150,000 Deferred gain on interest rate swaps 12,810 ---- Other 7,663 4,469 -------------------- -------------------- 320,473 349,469 Less current portion 3,512 69 -------------------- -------------------- $ 316,961 $ 349,400 ==================== ====================
The Company has an unsecured revolving credit facility of $400,000,000 expiring in June 2002 (the "Credit Facility"). At February 24, 2001, there were no outstanding borrowings under the Credit Facility. 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 24, 2001, under the most restrictive covenants, the Company had available $141,476,000 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 and to repurchase shares of the Company's Common Stock, from time to time, under the Company's open market share repurchase program. 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. The Company had, at February 24, 2001, $12,117,000 of letters of credit issued and outstanding under the Credit Facility and $65,512,000 of letters of credit issued and outstanding outside of the Credit Facility. The total weighted average annual cost for all letters of credit was 0.6%. At February 24, 2001, long-term debt matures as follows:
Fiscal Year (Dollars in thousands) ----------- 2002 3,512 2003 3,991 2004 3,991 2005 153,991 2006 2,553 2007 2,075 2008 150,360
Long-term debt includes a deferred gain on the sale of interest rate swaps. (See Note O for additional information.) 62 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F - 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. Legal Matters As publicly reported 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 the 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 "Irish NLC"), issued a Request for Proposals respecting online and instant ticket lottery goods and services, and in September 1992 the Company, which was then the incumbent provider of lottery goods and services to the Irish NLC under an agreement awarded to the Company in 1987, submitted a Proposal to the Irish NLC in response to the Irish NLC's Request for Proposals. In November 1992, the Irish NLC selected the Company to provide online and instant ticket goods and services to the Irish NLC under the terms of the competitive procurement and, following negotiations, a definitive agreement was entered into between the Irish NLC and the Company in March 1993. In calendar 1999, the Tribunal requested that the Company provide various documents regarding the Company's business in Ireland, which the Company has done, and the Company has been 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 Irish 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 Irish NLC and was not intended to and did not influence the Irish NLC's decision to renew the Company's contract. No charges of wrongdoing have been brought against the Company in connection with the Moriarty investigation, and the Company does not believe that it has engaged in any wrongdoing in connection with this matter. However, since this investigation is 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 its ultimate scope and whether the government authorities will assert claims resulting from this investigation 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 a government authority were to make an allegation, or if there were to be a finding, of improper conduct on the part of or attributable to the Company in any matter, including in respect of the Moriarty investigation, 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 this investigation and related matters could have such a material adverse effect. 63 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F - COMMITMENTS AND CONTINGENCIES-(CONTINUED) Since July 1994, the United Kingdom National Lottery has been operated under a license held by Camelot Group plc ("Camelot"), and the Company has been a supplier of lottery goods and services to Camelot for the lottery. As publicly reported, in or around April or May 2000, the United Kingdom National Lottery Commission (the "NLC"), the regulator of the United Kingdom National Lottery, commenced an investigation into a lottery terminal software malfunction in the United Kingdom in which, under certain rare circumstances, a duplicate transaction was recorded on the Company's central system while only one ticket was presented to the retailer. The software malfunction resulted in a relatively small amount of overcharges to lottery retailers with respect to the duplicate transactions and a relatively small amount of overpayments or underpayments to certain prizewinners. The Company first identified this software malfunction in the United Kingdom in June 1998 and corrected the malfunction in July 1998, but without notifying Camelot or the NLC, as it should have done. The Company fully cooperated with the NLC's investigation and undertook to implement a number of measures respecting its corporate compliance and governance functions and software development processes in the wake of the investigation. The Company has also agreed to reimburse United Kingdom lottery players and retailers for any financial losses incurred by virtue of the software malfunction. As has also been publicly reported, the developments described above took place in the context of a competitive procurement respecting the award by the NLC of a new license to operate the National Lottery with effect from October 1, 2001. In 1999, the NLC established a competitive procedure for the award of the new license, and two bidders, Camelot and The People's Lottery ("TPL"), subsequently submitted bids for the new license. Camelot's bid was supported by agreements with the Company pursuant to which the Company had contracted to continue to supply lottery goods and services to Camelot during the term of the new license in the event that Camelot was awarded the new license. In August 2000, the NLC announced that it had decided that the NLC would proceed on the basis of a new procedure under which it would negotiate exclusively with TPL for one month. Promptly after the NLC's announcement, Camelot initiated legal proceedings in the United Kingdom challenging the legality of the NLC's decision to initiate a new procedure of negotiation with TPL to the exclusion of Camelot. In September 2000, the High Court of Justice (Queen's Bench Division) overturned the NLC's August 2000 decision to negotiate exclusively with TPL and directed that the NLC enter into an exclusive negotiation period with Camelot so as to afford Camelot the same opportunity granted to TPL to improve its bid to address the NLC's concerns. As part of the improved Camelot proposal for the new license, the Company entered into technology transfer and training arrangements with Camelot providing for the transfer to Camelot of the Company's National Lottery equipment, facilities and U.K. technology employees, a technology transfer to Camelot (after a period of training), and a grant to Camelot exclusive rights to operate the Company's gaming system software in the U.K. for the term of the new license. Under these new arrangements, the Company will license its software and provide a range of support services to Camelot for which the Company expects to receive compensation during the term of the new license in the range of $40,000,000 to $45,000,000 per year commencing in fiscal year 2003. The Company also anticipates receiving revenues of approximately $65,000,000 with respect to the sale to Camelot of new terminals prior to the commencement of the new license term. The Company further agreed to negotiate a technology transfer and a related software license for the exclusive use by Camelot under the new license of the internet gaming applications of the Company's UWin! subsidiary. In December 2000, the NLC announced its decision to award a new seven-year license to operate the National Lottery to Camelot and that it will grant Camelot an interim license to cover the period from October 1, 2001 through January 30, 2002 in order to provide a twelve-month conversion period prior to the beginning of the new license. TPL has not protested the NLC's decision to award the new license to Camelot and the period in which a protest must be made has since lapsed. 64 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F - COMMITMENTS AND CONTINGENCIES-(CONTINUED) In April 2001, the NLC issued a report of its investigation into the above described lottery software terminal malfunction. The NLC report states that its investigation of the lottery software incident had established breaches of Camelot's license, including in respect of the failure of the Company to give proper notification before rectifying the software fault. The report further states that Camelot has agreed to pay pounds sterling 115,000 (approximately $175,000) into the National Lottery prize fund as compensation for underpayments to players resulting from the software malfunction, and that Camelot has undertaken to identify the amounts by which individual retailers have been overcharged. The NLC has declined, however, to fine Camelot with respect to breaches of its license resulting from (or revealed by the NLC investigation of) the software incident. The NLC report summarizes the steps taken and to be undertaken by the Company in the wake of investigation of the lottery software malfunction (including the measures implemented by the Company with respect to its corporate compliance and governance functions and software development processes and the technology transfer arrangements, as described above) and concludes, in light of these steps, that the Company sufficiently addressed the NLC's ongoing concerns about whether it is a "fit and proper" body for purposes of involvement in the operation of the National Lottery. Payment by the Company of amounts: (i) to reimburse Camelot for payments with respect to underpayments to United Kingdom players and overcharges of retailers, as described above, (ii) to reimburse Camelot with respect to any other out-of-pocket costs incurred by Camelot with respect to the lottery terminal software malfunction, and (iii) to reimburse other customers of the Company with respect to effects of the lottery terminal software malfunction outside the United Kingdom, which amounts have been accrued in the accompanying financial statements, are not expected to have a material adverse effect on the Company's consolidated financial position or results of operation. As publicly reported, in August 2000, a shareholder class action lawsuit on behalf of all persons who purchased Company stock during the period from April 11, 2000 to July 25, 2000, was brought against the Company, the Company's former Chairman and Chief Executive Officer, William Y. O'Connor, and the Company's current Chairman, W. Bruce Turner, in the U.S. District Court of Rhode Island relating to various Company announcements made between April 11, 2000 and July 25, 2000. The complaint filed in the case, Sandra Kafenbaum, individually and on behalf of all others similarly situated, v. GTECH Holdings Corporation, William Y. O'Connor and W. Bruce Turner, generally alleges that the defendants violated federal securities laws (including Section 10(b) of the Securities Exchange Act of 1934) by making allegedly false and misleading statements (including statements alleged to be overly optimistic respecting certain lottery contract awards to the Company and respecting the Company's prospects in certain non-lottery business lines and investments), while failing to disclose in a timely manner certain allegedly material adverse information that it purportedly had a duty to disclose (including an alleged inability to close certain contract awards and as to certain alleged cost overruns). The complaint seeks to recover monetary damages from the Company and the individual defendants. In February 2001, the plaintiffs filed an amended complaint which added Steven P. Nowick, the Company's former President and Chief Operating Officer, as an individual defendant. In addition, the amended complaint expands the purported class of plaintiffs to include all persons who purchased common stock of the Company during the period from July 13, 1998 through August 29, 2000. The type of relief sought in the amended complaint is similar to that sought in the original action. The Company believes that it has good defenses to the claims made in this lawsuit and intends to file a motion to dismiss the amended complaint as to all of the defendants. At the present time, however, the Company is unable to predict the outcome, or the financial statement impact, if any, of this lawsuit. As publicly reported, in May 2000, Sazka, a.s., a lottery customer of the Company in the Czech Republic ("Sazka"), filed a Request for Arbitration with the International Arbitral Centre of the Austrian Federal Economic Chamber of Commerce in Vienna, Austria, seeking to arbitrate certain business and contractual issues under the Company's online lottery contract with Sazka. Sazka sought damages valued at approximately $2,600,000 in connection with alleged delays in the recent extensive expansion of the lottery sales network. Sazka also sought a determination that its online contract with the Company would expire approximately two years earlier than the date on which the Company maintained its contract would terminate. The Company, believing the claims made by Sazka to be without merit, filed a Memorandum in Reply and Counterclaim disputing such claims and raising counterclaims for breach of contract by Sazka. In March 2001, the Company entered into an agreement with Sazka which, among 65 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F - COMMITMENTS AND CONTINGENCIES-(CONTINUED) other things, resolved the arbitration. Under the agreed settlement, Sazka dropped its demand for liquidated damages, paid to the Company certain disputed amounts which it had previously withheld and agreed to extend the term of the contract. The Company in turn agreed to reduce its fee and to provide certain additional equipment and services under its contract with Sazka. In February 1999, the Company was sued by a Florida corporation called EIG Gaming International, Inc. ("EIG"), in the Circuit Court of the Eleventh Judicial Circuit of Florida. The Company removed the case to the U.S. District Court for the Southern District of Florida, where it is captioned EIG Gaming International, Inc. v. GTECH Corporation, Case No. 99-1808-Civ-Jordan. In its complaint EIG alleges that it entered into a Letter of Intent with the Company pursuant to which it would assist the Company to obtain the lottery contract for Peru in return for a percentage of the lottery's receipts. EIG further contends that it secured the Peruvian contract for the Company but that the Company thereupon declined to pursue it. Plaintiff claims damages exceeding $80,000,000. The Company vigorously denies plaintiff's allegations, to which it believes it has good defenses, and, in November 2000, moved for summary judgment. That motion is pending. In April 2001, the court entered an order tentatively scheduling a trial in the case during July 2001. At the present time, the Company is unable to predict the outcome, or the financial statement impact, if any, of this lawsuit. The Company also is subject to certain other 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 G - STOCK-BASED COMPENSATION PLANS Under various stock-based compensation plans, officers and other key employees of the Company may receive grants of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights and performance awards and nonemployee members of the Company's Board of Directors automatically are granted annual stock options and may elect to receive stock in lieu of directors' fees. The Company is authorized to grant up to 5,240,000 shares of Common Stock under these plans and, at February 24, 2001, 3,026,250 stock options and restricted stock had been granted. All current outstanding shares are nonqualified stock options and restricted stock. The stock options granted under these plans are to purchase Common Stock at a price not less than fair market value at the date of grant. Employee stock 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 stock options are exercisable approximately one year after date of grant and expire 10 years after date of grant. Both employee and nonemployee directors' stock options are subject to possible earlier exercise and termination in certain circumstances. During fiscal 2001, the Company awarded 387,250 shares of restricted stock to officers and certain key employees, with a weighted average fair value at the date of grant of $19.00 per share. The fair value of the restricted stock award is being charged to expense over the vesting period. Grants generally vest within two years from the date of grant. Recipients of restricted stock do not pay any cash consideration to the Company for the shares. During fiscal 2001, the Company recorded noncash charges to operations of $4,549,000 as compensation expense related to restricted stock. The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock option grants, whereby no compensation expense is deducted in determining net income. Had compensation expense for stock option grants under the plans been determined pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company's net income would have decreased accordingly. Using the Black-Scholes option pricing model, the Company's pro forma net income and pro forma weighted average fair value of options granted, with related assumptions, are as follows:
Fiscal Year Ended -------------------------------------------------------------------------------- February 24, 2001 February 26, 2000 February 27, 1999 ----------------------- ------------------------ ---------------------- Pro forma net income (in thousands) $ 39,269 $ 89,936 $ 85,797 Pro forma basic earnings per share $ 1.14 $ 2.48 $ 2.09 Pro forma diluted earnings per share $ 1.13 $ 2.48 $ 2.09 Pro forma weighted average fair value per share of options granted $ 7.00 $ 10.00 $ 15.00 Expected life (in years) 4.4 5.4 5.3 Risk-free interest rates 6.12% 5.21% 5.77% Volatility factors of the expected market price of the Common Stock .34 .35 .40 Dividend yield --- --- ---
The effects on fiscal 2001, 2000 and 1999 pro forma net income and earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net income for future years because of the vesting period of the stock options and the potential for issuance of additional stock options in future years. 67 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G - STOCK-BASED COMPENSATION PLANS-(CONTINUED) The Company's stock option activity and related information is summarized as follows:
Fiscal Year Ended -------------------------------------------------------------------------------------------- February 24, 2001 February 26, 2000 February 27, 1999 ------------------------------- --------------------------- --------------------------- 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 2,824,175 $ 27.71 2,083,300 $ 29.26 1,501,550 $ 25.13 Granted 1,279,000 19.78 1,075,500 24.79 1,012,500 34.04 Exercised (336,000) 19.21 (18,750) 16.88 (228,750) 22.30 Forfeited (472,800) 25.08 (315,875) 28.62 (202,000) 30.46 ------------- ------------ ------------ Outstanding at end of year 3,294,375 $ 25.87 2,824,175 $ 27.71 2,083,300 $ 29.26 ============= ============ ============ Exercisable at end of year 1,681,750 $ 28.30 1,176,800 $ 26.62 890,550 $ 24.22 ============= ============ ============
Exercise prices for stock options outstanding under the plans as of February 24, 2001 are summarized as follows:
Weighted Average ------------------------- Weighted Remaining Average Range of Options Contractual Exercise Options Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price ------------------------ ----------- ------------ ---------- ----------- ---------- $16.88 - $22.19 1,037,250 8.6 $ 19.25 163,500 $ 18.48 $22.25 - $25.31 838,500 7.9 $ 24.86 415,125 $ 24.96 $25.69 - $35.28 1,418,625 6.0 $ 31.32 1,103,125 $ 31.02 --------- --------- 3,294,375 1,681,750 ========= =========
NOTE H - EMPLOYEE STOCK PURCHASE PLAN 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. 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 24, 2001, 212,807 shares of Common Stock had been issued under the Plan. 68 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE I - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Fiscal Year Ended ----------------------------------------------------------- February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars and shares in thousands, except per share amounts) Numerator: Net income $ 43,148 $ 93,585 $ 89,063 Denominator: Weighted average shares - Basic 34,564 36,217 40,957 Effect of dilutive securities: Employee stock options and unvested restricted shares 91 43 188 --------------- --------------- --------------- Weighted average shares - Diluted 34,655 36,260 41,145 =============== =============== =============== Basic earnings per share $ 1.25 $ 2.58 $ 2.17 =============== =============== =============== Diluted earnings per share $ 1.25 $ 2.58 $ 2.16 =============== =============== ===============
69 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 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) United States $ 13,455 $ 93,848 $ 51,773 Foreign 57,280 62,129 99,181 ---------------- ---------------- ------------- $ 70,735 $ 155,977 $ 150,954 ================ ================ =============
Significant components of the provision for income taxes were as follows:
Fiscal Year Ended -------------------------------------------------------- February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) Current: Federal $ 10,634 $ 12,375 $ 3,135 State 3,101 5,780 4,448 Foreign 27,187 42,484 44,440 --------------- ---------------- --------------- Total Current 40,922 60,639 52,023 --------------- ---------------- --------------- Deferred: Federal $ (17,149) $ (129) $ 14,216 State (931) 107 2,521 Foreign 4,745 1,775 (6,869) --------------- ---------------- --------------- Total Deferred (13,335) 1,753 9,868 --------------- ---------------- --------------- Total Provision $ 27,587 $ 62,392 $ 61,891 =============== ================ ===============
Significant components of the Company's deferred tax assets and liabilities were as follows:
February 24, 2001 February 26, 2000 ----------------- ----------------- (Dollars in thousands) Deferred tax assets: Accruals not currently deductible for tax purposes $ 19,956 $ 14,034 Tax credits 7,517 --- Special charges 3,822 --- Cash collected in excess of revenue recognized 3,690 5,398 Inventory reserves 2,207 2,788 Other 3,750 5,578 ------------- ------------ 40,942 27,798 Deferred tax liabilities: Depreciation (15,070) (15,553) Other (3,421) (3,129) ------------- ------------- (18,491) (18,682) ------------- ------------- Net deferred tax assets $ 22,451 $ 9,116 ============= ============
70 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 $5,977,000 at February 24, 2001. 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 $598,000. At February 24, 2001, the Company had $7,517,000 of tax credit carryforwards which will begin to expire in fiscal year 2020 if not utilized. 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 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- Federal income tax using statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.0 2.5 3.0 Equity in earnings of unconsolidated affiliates --- .4 --- Nondeductible expenses 2.9 1.7 1.6 Goodwill 3.4 1.1 1.1 Tax credits (2.5) (1.0) (.8) Other (1.8) .3 1.1 ----------------- ------------------ ------------------ 39.0% 40.0% 41.0% ================= ================== ==================
71 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K - TRANSACTIONS WITH RELATED PARTIES The Company has a 10% interest in Uthingo Management Proprietary Limited ("Uthingo"), which is accounted for using the equity method. Uthingo is a corporate joint venture that holds the license to operate the South African National Lottery. Sales of products and services to Uthingo were $28,236,000 and $41,845,000 in fiscal 2001 and 2000, respectively. At February 24, 2001 and February 26, 2000 the Company had trade receivables of $6,355,000 and $12,092,000 and loans receivable of $4,791,000 and $9,151,000 from Uthingo. Prior to February 24, 2001, the Company had a 50% interest in each of four joint ventures with Full House Resorts, Inc, ("Full House"). The joint ventures with Full House are engaged in the financing and development of Native American and other casino gaming ventures. At February 24, 2001 and February 26, 2000, the Company had a promissory note receivable ("Note") from Full House of $3,000,000. The Note bears interest at the prime rate due monthly. The principal balance on the Note was due on January 25, 2001. On March 30, 2001, after the close of its 2001 fiscal year, the Company sold its interest in three of the four joint ventures with Full House for cash consideration of $1,800,000 which approximated carrying value. In connection with this transaction, the Company amended the terms of the Note to extend the maturity date until January 25, 2002. The Company paid rent of $3,510,000, $3,510,000 and $2,612,000 to West Greenwich Technology Associates Limited Partnership (which is 50% owned by the Company and 50% owned by an unrelated third party), in fiscal 2001, 2000 and 1999, respectively, for the Company's West Greenwich, Rhode Island corporate headquarters and research and development and main production facility. Rent payments will escalate to $3,531,000 beginning March 1, 2004. Prior to February 2001, the Company held a 40% interest in Lottery Technology Enterprises ("LTE"). The Company's interest is now 1%. LTE is a joint venture comprised of 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. Sales of products and services to LTE were $2,125,000, $3,598,000 and $4,155,000 in fiscal 2001, 2000 and 1999, respectively. At February 24, 2001 and February 26, 2000, the Company had receivables of $2,893,000 and $682,000, respectively, from LTE. 72 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 24, 2001:
Fiscal Year (Dollars in thousands) ----------- 2002 $ 31,614 2003 28,699 2004 15,445 2005 12,504 2006 11,245 Thereafter 34,959 ------------------ Total minimum lease payments $ 134,466 ==================
Rental expense for operating leases was $31,632,000, $31,412,000 and $28,358,000 for fiscal 2001, 2000 and 1999, respectively. NOTE M - EMPLOYEE BENEFITS The Company has two defined contribution 401(k) retirement savings and profit sharing plans (the "Plans") covering substantially all 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. For periods prior to January 1, 2001, the employer matching contribution was equal to 50% of the amount that the employee elected to defer, up to a maximum matching contribution of 2 1/2% of the employee's base pay. Effective January 1, 2001, and subject to Board of Director approval, the Company increased the matching contribution for the U.S. Plan to 100% on the first 3% and 50% on the next 2% that the employee elects to defer, up to a maximum matching contribution of 4% of the employee's base pay. Participants are 100% vested at all times in the amounts they defer and the Company's matching contributions on these amounts. 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. Employees become 100% vested in these profit sharing contributions one year from their hire date. Benefits under the Plans generally will be paid to participants upon retirement or in certain other limited circumstances. In fiscal 2001, 2000, and 1999, the Company recorded expense under these Plans of $6,559,000, $5,840,000, and $7,070,000, 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 2001, 2000, and 1999 the Company recorded expense under this plan of $266,000, $275,000, and $415,000, respectively. 73 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. The "All Other" category (as reported below) is comprised of the Company's Transactive and IGI/Europrint subsidiaries (See Note P for additional information regarding the Company's Transactive subsidiary). The composition of the "All Other" category for all periods presented was changed during fiscal 2001 to reflect a value assessment of the Company's business whereby the Company's Dreamport business unit was consolidated into the Lottery segment. The Company's business segment data is summarized below:
Lottery All Other Consolidated -------------- --------- ------------ (Dollars in thousands) February 24, 2001 ----------------- OPERATING DATA: Revenues from external sources $ 889,522 $ 47,021 $ 936,543 Net operating profit after income taxes 85,708 3,570 89,278 Interest income 5,548 48 5,596 Equity in earnings of unconsolidated affiliates 3,167 --- 3,167 Depreciation 155,329 933 156,262 Intangibles amortization 11,968 --- 11,968 Goodwill amortization 5,006 1,159 6,165 BALANCE SHEET DATA (AT END OF PERIOD): Segment assets 896,010 42,150 938,160 CASH FLOW DATA: Capital expenditures 136,804 87 136,891 February 26, 2000 ----------------- OPERATING DATA: Revenues from external sources $ 956,054 $ 54,744 $ 1,010,798 Net operating profit after income taxes 113,651 1,528 115,179 Interest income 3,466 43 3,509 Equity in earnings of unconsolidated affiliates 2,843 --- 2,843 Depreciation 167,446 838 168,284 Intangibles amortization 10,839 --- 10,839 Goodwill amortization 5,094 1,159 6,253 BALANCE SHEET DATA (AT END OF PERIOD): Segment assets 852,766 38,257 891,023 CASH FLOW DATA: Capital expenditures 128,392 226 128,618
74 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA-(CONTINUED)
Lottery All Other Consolidated -------------- --------- ------------ (Dollars in thousands) February 27, 1999 ----------------- OPERATING DATA: Revenues from external sources $ 917,284 $ 55,639 $ 972,923 Net operating profit after income taxes 112,694 608 113,302 Interest income 3,968 111 4,079 Equity in earnings of unconsolidated affiliates 7,113 --- 7,113 Depreciation 184,003 745 184,748 Intangibles amortization 8,719 --- 8,719 Goodwill amortization 5,082 772 5,854 BALANCE SHEET DATA (AT END OF PERIOD): Segment assets 834,988 39,227 874,215 CASH FLOW DATA: Capital expenditures 120,616 582 121,198
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 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) Net operating profit after income taxes $ 89,278 $ 115,179 $ 113,302 Reconciling items, net of tax: Interest expense (16,571) (17,419) (16,169) Special (charges) credit (25,785) 662 (8,850) Other (3,774) (4,837) 780 -------------------- --------------------- ---------------- Net income $ 43,148 $ 93,585 $ 89,063 ==================== ===================== ================
The Company's geographic data is summarized below:
Fiscal Year Ended ------------------------------------------------------------------ February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) Revenues from external sources: United States $ 522,132 $ 530,193 $ 570,548 Brazil 127,015 117,639 118,611 Other foreign 287,396 362,966 283,764 -------------------- --------------------- ----------------- $ 936,543 $ 1,010,798 $ 972,923 ==================== ===================== =================
Revenues are attributed to countries based on the location of the customer. 75 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA-(CONTINUED)
Fiscal Year Ended ------------------------------------------------------------------ February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) Systems, equipment and other assets relating to contracts: United States $ 185,717 $ 216,498 $ 260,585 Brazil 68,309 58,104 63,015 Other foreign 107,308 101,316 73,961 ------------------- --------------------- ----------------- $ 361,334 $ 375,918 $ 397,561 =================== ===================== =================
For fiscal 2001, 2000 and 1999, the aggregate revenues from Caixa Economica Federal in Brazil represented 12.1%, 10.7% and 11.2% of the Company's consolidated revenues, respectively. For fiscal 1999, the aggregate revenues from the Company's lottery operations in the state of Texas represented 10.6% of the Company's consolidated revenues. No other customer accounted for more than 10% of the consolidated revenues in such years. 76 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 at February 26, 2000 approximate fair value due primarily to its variable interest rate characteristics and its short-term tenure. At February 24, 2001, the Company had no outstanding borrowings under the Credit Facility. At February 24, 2001 and February 26, 2000, the estimated fair value of the Senior Notes as determined by an independent investment banker approximated $305,732,000 and $293,942,000, respectively. Foreign Currency Exchange Contracts At February 24, 2001, the Company had contracts for the sale of foreign currency of $94,820,000 (primarily Spanish pesetas, Australian dollars, and pounds sterling) and the purchase of foreign currency of $65,501,000 (primarily pounds sterling), compared to 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) at February 26, 2000. 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 24, 2001 and February 26, 2000. The Company had minimal exposure to loss from nonperformance by the counterparties to its forward exchange contract agreements at the end of fiscal 2001 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 provided interest rate protection over the period February 25, 2000 to May 15, 2007. The swaps were designated as fair value hedges and effectively entitled the Company to exchange fixed rate payments for variable rate payments. Accordingly, the fair value of the swaps was recorded as an asset and the carrying value of the underlying debt was adjusted by an equal amount in accordance with FAS 133. On February 1, 2001, the Company sold the two interest rate swaps for $12,970,000. Under FAS 133, the carrying value of debt has been increased by $12,970,000, the fair value of the swaps prior to termination. This amount will be amortized as a reduction of interest expense over the period February 2001 through May 2007 on an effective yield basis. 77 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE P - SPECIAL CHARGES In the fourth quarter of fiscal 1998, the Company recorded a $99,382,000 special charge which consisted principally of costs to exit the electronic benefit transfer (EBT) business conducted by the Company's Transactive subsidiary ("Transactive"), costs associated with a worldwide workforce reduction and contractual obligations in connection with the departures of the Company's former Chairman and Vice-Chairman from the Company. 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 U.S. Department of Justice commenced a legal action seeking to enjoin the consummation of the transaction, on anti-trust 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 diluted share) in the fourth 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. In fiscal 2001, the Company recorded special charges of $42,270,000 ($25,785,000 after-tax, or $0.74 per diluted share) in connection with certain contractual obligations and a value assessment of the Company's business operations. The major components of the special charges consisted of $13,958,000 for a workforce reduction that eliminated approximately 255 Company positions worldwide, $11,518,000 for contractual obligations in connection with the departures in July 2000 of the Company's former Chairman and Chief Executive Officer and former President and Chief Operating Officer, $8,536,000 for costs associated with the exit of certain business strategies and product lines and $8,258,000 for the termination of consulting agreements and facility exit costs, net of gains on the disposition of Company aircraft. A summary of the special charge activity is as follows:
Exit of Certain Business Disposition Worldwide Executive Strategies of EBT Workforce Contractual and Product Business Reduction Obligations Lines Other Total ----------- ---------- ----------- ---------------- -------- ---------- (Dollars in thousands) Balance at February 28, 1998 $ 5,929 $ 12,280 $ 8,513 $ --- $ 6,909 $ 33,631 Change in estimate 13,601 (2,948) (20) --- 4,367 15,000 Cash expenditures (3,662) (7,868) (8,493) --- (6,082) (26,105) Noncash charges (14,241) --- --- --- (2,227) (16,468) ----------- ---------- ----------- ---------- ---------- ---------- Balance at February 27, 1999 1,627 1,464 --- --- 2,967 6,058 ----------- ----------- ----------- ---------- ---------- ---------- Change in estimate (930) (37) --- --- (137) (1,104) Cash expenditures (697) (1,427) --- --- (2,830) (4,954) ----------- ---------- ----------- ---------- ---------- ---------- Balance at February 26, 2000 --- --- --- --- --- --- ----------- ---------- ----------- ---------- ---------- ---------- Special charges --- 13,958 11,518 8,536 8,258 42,270 Cash expenditures --- (6,032) (9,965) (4,140) (3,289) (23,426) Noncash charges --- --- --- (4,396) (4,017) (8,413) ----------- ---------- ----------- ---------- ---------- ---------- Balance at February 24, 2001 $ --- $ 7,926 $ 1,553 $ --- $ 952 $ 10,431 =========== ========== =========== ========== ========== ==========
78 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Q - QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for fiscal 2001 and 2000:
First Second Third Fourth Quarter Quarter Quarter Quarter ------------- -------------- ------------- ------------- (Dollars in thousands, except per share amounts) Fiscal year ended February 24, 2001: Service revenues $ 222,631 $ 204,209 $ 213,827 $ 215,808 Sales of products 19,367 23,399 7,204 30,098 Gross profit 83,424 55,371 68,421 90,388 Net income (loss) 20,229 (21,266) 18,287 25,898 Basic earnings (loss) per share $ .58 $ (.61) $ .53 $ .76 Diluted earnings (loss) per share $ .58 $ (.61) $ .53 $ .75 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 80,630 82,664 90,065 100,177 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
The Company recorded special charges of $40,018,000 and $2,252,000 in the second and fourth quarters of fiscal 2001, respectively (See Note P). Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly basic earnings per share in fiscal 2001 and the sum of the quarterly basic and diluted earnings per share in fiscal 2000 do not equal the total computed for the year. Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. Goodwill amortization, that was included in cost of services and selling, general and administrative expense in prior periods has been presented as a single line item in the Consolidated Income Statements. NOTE R - SUBSEQUENT EVENT On March 19, 2001, the Company repurchased 5,000,000 shares of its Common Stock from its largest shareholder for $130,000,000. 79 ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 80 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 July 2001, 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. 81 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statement Schedules and Exhibits: Page(s) Report of Ernst & Young LLP, Independent Auditors The following consolidated financial statements of GTECH Holdings Corporation and subsidiaries are included in Item 8: Consolidated Balance Sheets at February 24, 2001 and February 26, 2000 Consolidated Income Statements Fiscal year ended February 24, 2001, Fiscal year ended February 26, 2000, and Fiscal year ended February 27, 1999 Consolidated Statements of Shareholders' Equity-- Fiscal year ended February 24,2001, Fiscal year ended February 26, 2000, and Fiscal year ended February 27, 1999 Consolidated Statements of Cash Flows-- Fiscal year ended February 24, 2001, Fiscal year ended February 26, 2000, and Fiscal year ended February 27, 1999 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. 82 (3) EXHIBITS: -------- 3.1 Restated Certificate of Incorporation of Holdings, as amended (incorporated by reference to Exhibit 3.1 to the Form S-l 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 (incorporated by reference to Exhibit 3 of Holdings' 10-Q for the quarterly period ended August 26, 2000). 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 Agreement dated March 5, 2001 between Holdings and Howard S. Cohen.* +10.2 Amendment to Agreement dated March 28, 2001 between Holdings and Howard S. Cohen.*
83 10.3 Agreement dated August 9, 2000 between Holdings and W. Bruce Turner (incorporated by reference to Exhibit 10.3 of Holdings' 10-Q for the quarterly period ended August 26, 2000).* 10.4 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).* 10.5 First Amendment to Employment Agreement dated as of April 6, 1998 by and among GTECH, Holdings and William Y. O'Connor. (incorporated by reference to Exhibit 10.11 of Holdings' 1998 10-K).* 10.6 Severance Agreement and Release dated as of July 5, 2000 by and among GTECH, Holdings and William Y. O'Connor (incorporated by reference to Exhibit 10.1 of Holdings' 10-Q for the quarterly period ended August 26, 2000).* 10.7 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).* 10.8 Resignation and Acceptance dated July 5, 2000 by and between Steven P. Nowick and Holdings (incorporated by reference to Exhibit 10.2 of Holdings' 10-Q for the quarterly period ended August 26, 2000).* 10.9 Form of Agreement, relating to a potential change of control involving Holdings, entered into between Holdings and, respectively, certain members of senior management (incorporated by reference to Exhibit 10.5 of Holdings' 2000 10-K).* +10.10 List of signatories to Agreement relating to potential change of control involving Holdings and certain members of senior management, with the respective dates of such Agreements.* 10.11 GTECH Corporation Executive Perquisites Program (incorporated by reference to Exhibit 10.6 of Holdings' 2000 10-K).* +10.12 List of participants in GTECH Corporation Executive Perquisites Program.* 10.13 Form of Executive Separation Agreement (incorporated by reference to Exhibit 10.18 of Holdings' 1996 10-K).* +10.14 Schedule of Recipients of Executive Separation Agreement. 10.15 Supplemental Retirement Plan effective January 1, 1992 (incorporated by reference to Exhibit 10.8 of Holdings 2000 10-K).* +10.16 List of Participants in Supplemental Retirement Plan.*
84 10.17 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.). 10.18 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). 10.19 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). 10.20 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 (incorporated by reference to Exhibit 10.12 of Holdings' 2000 10-K). +10.21 Amendment to Agreement between Caixa Economica Federale and RACIMEC Informatica Brasileira S.A. (predecessor to GTECH Brasil Holdings, S.A.). 10.22 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.). 10.23 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). 10.24 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). 10.25 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).*
85 10.26 1996 Non-Employee Directors' Stock Option Plan (incorporated by reference to Exhibit 10.2 of Holdings' 10-Q for the quarterly period ended May 31, 1997).* +10.27 First Amendment to the 1996 Non-Employee Directors' Stock Option Plan.* 10.28 1997 Stock Option Plan (incorporated herein by reference to the Appendix of Holdings' 1997 Notice of Annual Meeting and Proxy Statement).* 10.29 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). 10.30 Income Deferral Plan - 1998 (incorporated by reference to Exhibit 10 of the Holdings' 10-Q for the quarterly period ended November 28, 1998).* 10.31 1999 Non-Employee Directors' Stock Option Plan (incorporated by reference to the Appendix of Holdings' 1999 Notice of Annual Meeting and Proxy Statement).* +10.32 First Amendment to the 1999 Non-Employee Directors' Stock Option Plan.* 10.33 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).* 10.34 Holdings' 2000 Restricted Stock Plan and Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.4 of Holdings' 10-Q for the quarterly period ended August 26, 2000).* 10.35 Holdings' 2000 Omnibus Stock Option and Long-Term Incentive Plan (incorporated by reference to Holdings' Proxy Statement filed on September 22, 2000).* +21.1 Subsidiaries of the Company. +23.1 Consent of Ernst & Young, LLP.
- --------------------------- + 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. 86 (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. 87 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 April 23, 2001. GTECH HOLDINGS CORPORATION By: /s/ Howard S. Cohen ----------------------------------------------- Howard S. Cohen, Chief Executive Officer 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/ Howard S. Cohen Chief Executive Officer (principal executive officer) and Director April 23, 2001 - ------------------------------------ Howard S. Cohen /s/ Jaymin B. Patel Senior Vice President & Chief Financial Officer (principal financial April 23, 2001 - ------------------------------------ officer) Jaymin B. Patel /s/ Robert J. Plourde Vice President and Corporate Controller (principal accounting April 23, 2001 - ------------------------------------ officer) Robert J. Plourde
88
SIGNATURE TITLE DATE /s/ Willam Bruce Turner - ------------------------------------- Willam Bruce Turner Director, Chairman of the Board April 23, 2001 /s/ Robert M. Dewey, Jr. Director April 23, 2001 - ------------------------------------ Robert M. Dewey, Jr. /s/ Burnett W. Donoho Director April 23, 2001 - ------------------------------------ Burnett W. Donoho /s/ Philip R. Lochner, Jr. Director April 23, 2001 - ------------------------------------ Philip R. Lochner, Jr. /s/ Moore Director April 23, 2001 - ------------------------------------ The Rt. Hon. Lord Moore of Lower Marsh, P.C. /s/ Emmett Paige - ------------------------------------- Lt. Gen. (Ret.) Emmett Paige, Jr. Director April 23, 2001 /s/ Anthony Ruys Director April 23, 2001 - ------------------------------------ Anthony Ruys
EX-10.1 2 y48042ex10-1.txt AGREEMENT 1 EXHIBIT 10.1 AGREEMENT THIS AGREEMENT, dated as of March 5, 2001, by and between GTECH HOLDINGS CORPORATION and GTECH CORPORATION, each a Delaware corporation (collectively, the "Company"), and HOWARD S. COHEN ("Executive"). WHEREAS, the Company desires to retain the services of Executive on the terms and conditions provided in this Agreement; and WHEREAS, Executive, understanding and accepting the terms and conditions of employment set forth herein, desires to render such services on such terms and conditions. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto hereby covenant and agree as follows: 1. DEFINITIONS. Capitalized terms used in this Agreement and not otherwise defined herein shall have the following meanings: "ACT" means the Securities Exchange Act of 1934, as amended to date. "AFFILIATE" shall mean any joint venture or other entity in which the Company or any of its subsidiaries has an equity interest of at least 20%. "AVERAGE CASH COMPENSATION" means the average Base Salary and Performance Bonus paid or payable to Executive annually (including in Base Salary for this purpose any elective salary reductions made by the Executive and contributed by the Company on Executive's behalf to the Company's retirement plans) for the most recent full years of employment up to a maximum of three years. "BOARD" means the Board of Directors of GTECH Holdings Corporation. "CAUSE" means any of the following: (i) any willful failure by Executive to substantially perform his duties; (ii) Executive's engaging in serious misconduct which is injurious to the Company or breaching any of the Company's ethics and compliance policies (unless, in its sole discretion, the Board determines that the breach is immaterial, inadvertent and subject to cure under Section 8(b) hereof without harm to the Company) as from time to time implemented by the Company; (iii) any material breach by Executive of the terms of Sections 4(c), 10, 11 or 14(a) hereof; (iv) Executive's having been convicted of, or pleading nolo contendere to, a crime that constitutes a felony or is a gaming or gambling-related offense; or 2 (v) Executive's abuse of illegal drugs or other controlled substances or his habitual intoxication. "CHANGE IN CONTROL" means the happening of any of the following: (i) 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 30% or more of the combined voting power of the Company's then outstanding securities; (ii) 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 (iii) 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. "CHANGE OF CONTROL DATE" means the date on which a Change in Control occurs, provided however that if a Change in Control occurs and if 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 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 the "Change of Control Date" shall mean the date immediately prior to the date of such termination. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the Compensation Committee of the Board. "COMMON STOCK" means the Common Stock, par value $.01 per share, of the Company. "DISABILITY" means the inability (as determined by the Board in its sole discretion after affording Executive a reasonable opportunity to present his case) of Executive to render his agreed-upon, full-time services to the Company due to physical and/or mental infirmity. "EFFECTIVE DATE" means March 12, 2001. 2 3 "GOOD REASON" means any of the following events: (i) the Assignment to Executive of duties, responsibilities and/or reporting relationship that are materially inconsistent with those associated with Executive's position as stated in Sections 4(a) and 4(b) hereof, excluding any interim relieving of Executive's duties pursuant to Section 8(b); (ii) the Company's failure to pay Executive any amounts otherwise vested and due hereunder or under any plan or policy of the Company; (iii) a reduction in the title of Executive or in the authorities, duties or responsibilities of Executive; (iv) any material breach of this Agreement by the Company; (v) failure to extend this Agreement (for a minimum of one year on the same or better terms respecting annual compensation and benefits, excluding one-time awards of restricted stock or stock options) at least 90 days prior to the end of the Term or the end of any extended term, as the case may be; or (vi) failure to appoint Executive to the Board within 30 days of the date hereof or removal or failure to reelect Executive as a director; or (vii) failure to obtain the shareholder approval contemplated by Section 6(c)(iii) by the completion of the next annual shareholder meeting. "PERFORMANCE BONUS" means the actual amount of a performance bonus awarded by the Committee to Executive with respect to the relevant fiscal year in accordance with Section 5(b) hereof, including the portion of the Performance Bonus paid in stock equivalent (but excluding the portion of the stock award representing a discount beyond the cash equivalent made in conjunction with the payment of the Performance Bonus). "PRORATED PERFORMANCE BONUS" means the portion of the Performance Bonus, if any, which becomes due after a termination of this Agreement under Sections 5(c) or 9(b) hereof. The Prorated Performance Bonus will be calculated as follows: the Committee shall (a) determine the Performance Bonus to which Executive would have been entitled, had Executive remained employed for the entire fiscal year, in accordance with Section 5(b)(i) hereof; (b) divide that amount by 52 to produce a Weekly Amount; and (c) multiply the Weekly Amount by the number of weeks during the relevant fiscal year that Executive was employed by the Company. "SENIOR EXECUTIVES" means the executives which sit on the Corporate Leadership Council (i.e. senior vice presidents) of the Company. 3 4 2. EMPLOYMENT OF EXECUTIVE. The Company hereby agrees to employ Executive, and Executive agrees to be employed by the Company, to render services to the Company and its subsidiaries, affiliates and divisions for the period, at the rate of compensation and upon the other terms and conditions set forth in this Agreement. 3. TERM. The term of Executive's engagement hereunder shall commence on Effective Date, and shall continue for a term of three years (the "Term"). The Term is subject to earlier termination as hereinafter provided in Section 8 hereof, and the compensation, benefits, etc., if any, payable upon termination shall be as set forth in Section 9 hereof. 4. POSITION AND DUTIES. (a) Position. During the Term, Executive shall be retained and shall serve as Chief Executive Officer of the Company. During the Term, Executive also agrees to serve, if elected, as a director and/or officer of any subsidiary or Affiliate of the Company. (b) Duties. During the Term, Executive shall have the authority and power to perform such duties consistent with his position as Chief Executive Officer as designated by the Board, and shall report only to the Board or any committees thereof at the request of the Board. Executive shall not be required without his consent to undertake responsibilities not commensurate with his position. Executive shall comply fully and promptly with the various policies, procedures and rules governing employees promulgated and/or as amended from time to time by the Company and any applicable subsidiary or Affiliate of the Company (including, without limitation, the Company's Ethical Conduct and Conflicts of Interest Policy and Government Affairs Policies and Procedures) and with any applicable disclosure and other requirements of any governmental authority and of any other entity with which the Company, its subsidiaries and Affiliates are doing or propose to do business. Except for illness, vacations, and holidays in accordance with then-current Company policy, and (subject to the approval of the Board) reasonable leaves of absence, Executive shall devote his full business time, attention, skill, undivided loyalty and best efforts to the faithful performance of his duties hereunder; provided, however, that Executive may (i) with the approval of the Board, serve on corporate, civic and charitable boards and committees, (ii) deliver lectures and fulfill speaking engagements, and (iii) manage personal investments, so long as such activities do not interfere with the performance of Executive's responsibilities. (c) Principal Place of Employment. Executive's principal place of employment shall be at the Company's principal offices (currently located in West Greenwich, Rhode Island) or at such other location as the Company hereafter reasonably may require. Executive agrees to reside within fifty (50) miles of the Company's principal offices. Within 120 days after the Effective Date of this Agreement, Executive 4 5 shall make his best efforts to move his family to his new residence as described in the preceding sentence, it being understood that such move must be accomplished not later than 180 days after the Effective Date. (d) Nomination as Director. Assuming the Term has not been terminated, the Board agrees to appoint Executive to the Board and it is contemplated that Executive will be nominated for election to the Board at the next Annual Meeting of the shareholders and will stand for reelection at each of the Company's subsequent Annual Meetings at which Executive's term as a director is scheduled to expire, and Executive agrees, subject to Section 8(d) hereof, to continue to serve as a director if elected. 5. COMPENSATION AND REIMBURSEMENT OF EXPENSES. (a) Base Salary. For all services rendered by Executive in all capacities with the Company, its subsidiaries and Affiliates during the Term, the Company shall pay or cause to be paid to Executive as compensation a salary at an annual rate of $525,000 (the "Base Salary"), payable in equal installments not less frequently than monthly. (b) Performance Bonus. (i) With respect to each fiscal year of the Company during the Term commencing with fiscal year 2002 ending February 25, 2002, Executive shall be eligible to earn a Performance Bonus at the discretion of the Committee. The amount of the Performance Bonus, if any, for a given fiscal year shall be determined by the Committee in accordance with the performance metrics included in the GTECH Management Incentive Plan as approved annually by the Board in its sole discretion for all Senior Executives. Under the Plan, Executive's performance will be measured against an established set of targets for each fiscal year, and depending upon performance against those targets, Executive will be eligible to receive a bonus in the range of 0% to 200% of Base Salary. The annual target Performance Bonus will be 100% of Base Salary. (ii) Any Performance Bonus awarded to Executive by the Committee shall be paid not later than 30 days following payment of bonus amounts to Senior Executives Bonus payments for GTECH are normally made in April/May of each year for the preceding fiscal year ending in February, and Executive shall receive his Performance Bonus not later than June 15 for such preceding fiscal year. Executive's Performance Bonus, if any, for any given fiscal year shall be paid by the Company in a mix of cash and discounted restricted stock, at the discretion of the Committee, which shall determine annually (a) the maximum amount of bonus allowed in discounted restricted stock, not to exceed 30% of the Performance Bonus (with the understanding that it will not exceed 20% for the fiscal year 2002), (b) the magnitude of the discount, and (c) the vesting terms under the Omnibus Stock Plan for GTECH, it being understood that the portion of the Performance Bonus paid in stock in lieu of the cash payment shall vest immediately, subject to transfer restrictions as established by the Committee that 5 6 apply generally to performance bonus stock awards for other Senior Executives, and the portion of any stock award representing a discount beyond the Performance Bonus equivalent shall cliff vest as established by the Committee (with the understanding that the vesting period will not exceed two years for fiscal year 2002). (iii) Nothing contained in this Agreement constitutes a guarantee that the Committee will award Executive a Performance Bonus for any given fiscal year. (c) Change of Control. (i) In the event Executive's employment is terminated by the Company for any reason other than Cause, or in the event Executive resigns for Good Reason, after the Change of Control Date, the Company will pay Executive, as liquidated damages, a lump sum cash payment in lieu of the severance payments provided under Section 9(b) hereof, payable within ten (10) days of Executive's termination, equal to two and ninety-nine hundredths (2.99) times the sum of (A) 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 Executive's behalf to the Company's retirement plan, any non-qualified plan, or a plan meeting the requirements of Section 125 of the Code), plus (B) the total Performance Bonus paid or payable to the Executive from the Company for the most recent full fiscal year of the Company, plus (C) the maximum amount allowable under the Executive Perquisite Program during the most recent calendar year of the Company. In addition, Company shall pay Executive within 10 days after such termination (i) his Base Salary accrued through the date of such termination at the rate in effect immediately prior to such date; (ii) any accrued but unpaid Performance Bonus under Section 5(b) hereof for the prior fiscal year; (iii) any Prorated Performance Bonus up to the date of such termination calculated by reference to Executive's target Performance Bonus, as determined by the Committee for the current fiscal year; and (iv) any other amounts to which Executive is entitled under the terms of Sections 5 and 6 hereof up to the date of such termination. (If the date of such termination is within 12 months of the Effective Date, the Performance Bonus will be the target Performance Bonus for fiscal year 2002 as set forth in Section 5(b)(i) hereof.) The payment of any Performance Bonus or Prorated Performance Bonus after such termination shall be made in cash, notwithstanding the provisions of Section 5(b)(ii) hereof. (ii) In the event of a termination described in Section 5(c)(i) above, Executive, together with Executive's dependents and beneficiaries, will become fully vested in and continue following Executive's termination to participate fully in, at no additional cost to Executive, all life insurance plans, accident and health plans and other welfare plans, maintained or sponsored by the Company immediately prior to the termination, at the same level and subject to terms at 6 7 least as favorable to Executive as in effect immediately prior to termination (or the full value thereof in cash) from the Company, until the third anniversary of termination. Executive will also become fully vested in the retirement plans, 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 plans and the non-qualified plans over the last three fiscal years. (iii) 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 (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. (iv) All determinations required to be made under this Section 5(c), 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(c), shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Subject to the remainder of this Section 5(c), 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 2806 and Section 4999 of the Code at the time of the initial 7 8 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 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 (so as to fully extinguish Executive's tax liability for the Payments including all interest and penalties). (v) 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 Executive 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: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) 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, (C) cooperate with the Company in good faith in order effectively to contest such claim, and (D) 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 8 9 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. (vi) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5(c) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination 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. (vii) Notwithstanding anything to the contrary contained herein, if Executive is dismissed by the Company for Cause, Executive will not be entitled to the payments or benefits provided under Section 5(c) hereof. (viii) After a Change of Control occurs, if Executive resigns for Good Reason, Executive shall receive the compensation and benefits described in Section 9(b) hereof. (d) Reimbursement of Expenses. Consistent with the Company's established policies, the Company shall pay or reimburse Executive for all reasonable and necessary travel and other expenses of Executive incurred by Executive in performing his duties hereunder upon receipt of appropriate written substantiation of such expenses. 9 10 (e) Indemnification for Incremental Rhode Island Income Tax Liability. In the event Executive incurs incremental Rhode Island State income tax liability (as compared with that of Illinois) respecting deferred income Executive receives resulting from the sale of Peak Technologies to Moore Corporation as a direct result of Executive's relocation to Rhode Island, the Company shall make Executive whole with respect to such incremental Rhode Island income tax liability, including a gross-up amount necessary to offset any and all applicable federal, state and local excise, income or other taxes incurred by Executive by reason of the Company's payments pursuant to this Section 5(e). Within 10 days after the Effective Date, Executive shall provide Company with full documentation concerning the deferred income from the transaction described above. 6. BENEFITS. (a) Other Arrangements. The payments provided in this Section 6 hereof are in addition to any benefits to which Executive may be, or may become, entitled under any benefit plan, program or arrangement (excluding any increase in salaries, generally) of the Company for which Senior Executives are or may become eligible. (b) Benefits. Except as otherwise expressly provided herein, Executive shall be entitled to receive, during the Term, benefits substantially similar to the level of benefits provided generally to Senior Executives under any such benefit plan, program or arrangement, subject to Executive's meeting the eligibility requirements of such plans, programs or arrangements, and in the case of benefit plans, programs or arrangements providing for discretionary grants or awards, to the discretion of the Board or applicable Committee. (c) Stock Options. Executive shall receive the following stock options in accordance with the following terms and conditions: (i) On the Effective Date, the Company shall grant to Executive options to purchase 200,000 shares of Common Stock under the Company's 2000 Omnibus Stock Option and Long-Term Incentive Plan (the "2000 Plan"), subject to Executive's execution of the Company's standard option agreement as described below. (ii) Executive shall be eligible for consideration by the Committee for annual grants of stock options under the 2000 Plan or any successor plan, in the sole discretion of the Committee. Nothing contained in this Agreement constitutes a guarantee that the Committee will award Executive additional stock options beyond those specifically described in Section 6(c)(i) of this Agreement. (iii) All grants of options under this Agreement are subject to and conditioned upon the Company obtaining all necessary shareholder approvals, which Company shall use all reasonable efforts to obtain. Each time Executive receives a grant of stock options pursuant to this Section 6(c), he shall be asked to 10 11 enter into the Company's standard Non-Qualified Stock Option Agreement (the "Option Agreement") which shall set forth the terms and conditions governing the grant and exercise of the Options including such terms as are set forth in this Section 6(c) and which Option Agreement with respect to the option grants under the 2000 Plan shall be substantially similar to the Option Agreement attached hereto as Appendix D. The terms and provisions of the options provided for in this subsection (c) shall be essentially as set forth in Appendix A hereto. The Company shall use its best efforts to file, and cause to be effective under the Securities Act of 1933, as amended, a registration statement on Form S-8 (or a comparable form) with respect to the shares (or other rights) granted or issued as provided for or referenced in this Agreement or, if applicable, issuable upon exercise of rights so provided or referenced, but the Company shall not be obligated to register any such shares or rights for resale. The Company will also use its best efforts to ensure that each grant provided for under Appendix A or referenced above shall meet the requirements for exemption under Rule 16b-3 under the Act. (d) Restricted Stock. On the Effective Date, the Company shall grant to Executive 30,000 shares of Restricted Stock (the "Restricted Shares") under the Company's 2000 Restricted Stock Plan (the "Restricted Stock Plan"), subject to Executive's execution of the Company's Restricted Stock Agreement. The Restricted Shares shall vest as follows: 10,000 shares vest 12 months after the Effective Date, 10,000 shares vest 24 months after the Effective Date and 10,000 vest 36 months after the Effective Date. The Restricted Shares, after vesting, may be transferred only in accordance with the terms and conditions of the Restricted Stock Plan. (e) Certain Specific Benefits and Arrangements. Without limiting the generality of subsection (a) and (b) above (except as may otherwise be specified in Appendix B hereto), Executive shall be entitled to the specific benefits and arrangements set forth in Appendix B hereto. (f) Indemnification. The Company shall defend and hold Executive harmless to the fullest extent permitted by applicable law in connection with any claim, action, suit, investigation or proceeding arising out of or relating to performance by Executive of services for, or action of Executive as a director, officer or employee of the Company or any parent, subsidiary or Affiliate of the Company, or of any other person or enterprise at the Company's request. Expenses incurred by Executive in defending a claim, action, suit or investigation or criminal proceeding shall be paid by the Company in advance of the final disposition thereof upon the receipt by the Company of an undertaking by or on behalf of Executive to repay said amount unless it shall ultimately be determined that Executive is entitled to be indemnified hereunder; provided, however, that this shall not apply to a non-derivative action commenced by the Company against Executive. 11 12 7. BENEFITS PAYABLE DURING TERM UPON DISABILITY. (a) Disability Benefits. In the event of Disability of Executive during the Term of his employment hereunder, the Company shall continue to pay Executive the compensation and extend to him the benefits provided in Sections 5 and 6 hereof during the period of Disability, subject to Section 9(c) hereof and to the extent permitted by applicable law, provided that in the event of Executive's Disability for an aggregate period of time exceeding 150 calendar days in any 12 consecutive month period during the Term, the Company, at its election, may terminate the Term of Executive's employment, and Executive shall receive the compensation as set forth in Section 9(b) hereof. (b) Services During Disability. During the Term, notwithstanding any Disability, Executive shall, to the extent that he is physically and mentally able to do so, furnish information and assistance to the Company, and, in addition, upon the reasonable request in writing on behalf of the Board, or a senior executive officer designated by the Board, from time to time, he shall make himself available to the Company, its subsidiaries and Affiliates to undertake reasonable assignments consistent with his position and his physical and mental health. In the event of such Disability, Executive shall resign from the Board. 8. TERMINATION OF EMPLOYMENT. (A) Expiration and Earlier Termination. Executive's Term of employment shall terminate upon expiration of the Term and shall be subject to earlier termination: (i) upon the death of Executive; (ii) at the election of the Company in the event of Executive's Disability (as provided in Section 7(a) hereof); (iii) upon discharge of Executive by the Company for Cause; and (iv) upon discharge of Executive without Cause or resignation of Executive. (b) Certain Obligations of the Company. The Company shall give the Executive not less than 60 days prior written notice of any intended termination of Executive's employment by the Company for Cause (other than for the reasons set forth in clauses (ii) and (iv) of the definition of Cause in Section 1 hereof) or without Cause. In the event of such a proposed termination for Cause, such notice shall specify the grounds for such termination, and the Company shall only be entitled to terminate the Executive for such Cause if the Executive shall have failed to cure the grounds for such termination within said 60-day notice period and Executive shall have been afforded an opportunity to address the Board, with legal counsel, to argue against such termination. However, after giving such notice and before Executive is afforded the opportunity to 12 13 address the Board, the Company may relieve Executive of his duties on an interim basis. The Company may immediately terminate Executive's employment by written notice in the event of the occurrence of any of the events set forth in clauses (ii) and (iv) of the definition of Cause in Section 1 hereof. (c) Certain Obligations of Executive. Executive shall give the Company not less than 60 days prior written notice of any intended termination by Executive of Executive's employment. In the event of a proposed resignation for Good Reason, such notice shall specify the grounds for such resignation, and Executive shall only be entitled to terminate his employment for Good Reason if the Company shall have failed to correct the specified grounds within said 60-day notice period and, upon cure thereof by the Company, such event shall no longer constitute Good Reason. Executive shall not be entitled to terminate for Good Reason unless he has given notice to the Company of his intention so to terminate within 60 days following the occurrence of the event alleged to constitute such Good Reason. Notwithstanding the foregoing, in the event that Executive has given the Company notice of his intention to resign, the Board may elect to have such resignation become effective immediately or at such other date, not later than the effective date specified in the notice, as the Board may determine. (d) Upon termination of the Term for any reason, Executive (unless otherwise requested by a majority of the independent directors of the Board) concurrently shall resign any directorships and officer or employee positions which he holds with the Company, its subsidiaries and Affiliates. 9. COMPENSATION, BENEFITS, ETC. UPON, AND EFFECTS OF, TERMINATION. (a) Death, Discharge for Cause and Resignation for Other than Good Reason. If the Term of Executive's employment is terminated by reason of his death, discharge for Cause or resignation for other than Good Reason, the Company shall pay or cause to be paid to Executive or his estate, as the case may be, at the time such payment is due (i) his Base Salary accrued through the effective date of such termination at the rate in effect immediately prior to such termination (ii) any accrued but unpaid Performance Bonus under Section 5(b) hereof for the prior fiscal year (to be paid at the same time Senior Executives receive performance bonuses for that fiscal year as set forth in Section 5(b)(ii) hereof) and (iii) any other amounts to which Executive is entitled under the terms of Sections 5 and 6 hereof up to the effective date of such termination. In the event of such termination of employment for Cause or resignation for other than Good Reason under this Section 9(a), all unvested stock options and unvested shares of restricted stock, as they are scheduled to vest in accordance with Appendix A and Section 6(d) hereof, respectively, shall be forfeited by Executive. (b) Disability, Discharge Without Cause and Resignation for Good Reason. If the Term of Executive's employment is terminated by the Company by reason of his Disability as provided in Section 7(a) hereof, by the Company without Cause or by reason of Executive's resignation for Good Reason, the Company shall pay to Executive 13 14 or his estate, as the case may be, the following: (i) his Base Salary accrued through the effective date of such termination at the rate in effect immediately prior to such termination (ii) an amount equal to one year of Average Cash Compensation; (iii) any accrued but unpaid Performance Bonus under Section 5(b) hereof for the prior fiscal year; (iv) a Prorated Performance Bonus, if any; and (v) any other amounts to which Executive is entitled under the terms of Sections 5 and 6 hereof up to the effective date of such termination. If Executive's employment is terminated for any reason under this Section 9(b) within 12 months of the Effective Date, the Average Cash Compensation shall be the Base Salary plus the target Performance Bonus for fiscal year 2002 as set forth in Section 5(b)(i) hereof. The payments required under this Section 9(b) shall be made by the Company after such termination as follows: the Base Salary component of Average Cash Compensation shall be paid in equal bi-weekly installments over one year, the Performance Bonus component of Average Cash Compensation shall be paid within 14 days, and the Prorated Performance Bonus, if any, shall be paid at the same time Senior Executives are paid performance bonuses for the respective fiscal year. Any such Prorated Performance Bonus shall be paid in cash, notwithstanding the provisions of Section 5(b)(ii) hereof. (c) In the event this Agreement in terminated in accordance with Section 9(b) hereof, the Company shall continue, for a period of one year following such Termination, the benefits described in Sections 4, 6 and 8 of Appendix B, and shall continue the medical benefits described in Section 5 of Appendix B for the Term, as if the agreement had not been terminated, plus continue such medical coverage for an additional period of one year. In addition, in the event this Agreement is terminated in accordance with Section 9(b) hereof, Executive shall become fully vested in the retirement plans, all non-qualified plans and in all benefits accrued under all other employee benefit plan (e.g., matches under the 401 (k) plan). Executive also shall be entitled, to the extent not inconsistent with this Agreement, to receive such additional benefits, if any, as he may be entitled to under the express terms of the applicable benefit plans (other than bonus and severance plans) of the Company, its subsidiaries and Affiliates, and to whatever medical coverage, if any, as is required to be provided by applicable law. (d) Reductions, Forfeitures, etc. Notwithstanding the foregoing: (i) any payments or benefits required to be paid or provided to Executive pursuant to Section 7(a) in the event of Executive's Disability shall be reduced to the extent that comparable payments or benefits are received by Executive during such period under the Company's disability plan, as in effect from time to time, (ii) without limiting any other rights the Company may have, any payments or benefits required to be paid or provided to Executive under this Agreement shall be forfeited to the Company by Executive if Executive shall breach any of his obligations under Sections 10(b) or 11 hereof, except as may otherwise be required by applicable law, and (iii) except as otherwise provided above, the payments and benefits required by this Section 9 shall be made or provided at such times as they would have been paid or provided if Executive's employment had not been terminated. 14 15 (e) Full Settlement. In the event of the termination of Executive's employment, the payments and other benefits provided for by this Agreement (and as otherwise provided under the express terms of any compensation or benefit plans of the Company, its subsidiaries or Affiliates, to the extent not inconsistent with this Agreement, or as may otherwise be required by applicable law) shall constitute the entire obligation of the Company, its subsidiaries and Affiliates to Executive for compensation and benefits and shall also constitute full and complete settlement of any claim under law or in equity that the Executive might otherwise assert against the Company, its subsidiaries or Affiliates, for compensation and benefits. Executive has no duty to mitigate respecting other employment after the termination of this Agreement and shall be entitled to receive the amounts described in this Section 9 irrespective of whether Executive obtains other employment immediately following such termination. 10. CERTAIN OBLIGATIONS OF EXECUTIVE. Executive further covenants with the Company as follows and expressly agrees that the provisions of Sections 10 and 11 are material obligations to the Company and the breach of those provisions will constitute material breaches of this Agreement. As used in Sections 10 and 11, the term the "Company" shall include GTECH Holdings Corporation and its subsidiaries and Affiliates. (a) Assistance in Litigation. During the Term, and for a period of three years thereafter subject to reasonable accommodation of Executive's then business schedule, Executive, upon reasonable notice, shall furnish such information and proper assistance to the Company as may reasonably be required in connection with any litigation in which the Company is, or may become, a party or in connection with any investigation or review by any governmental agency of which the Company is or may become a subject. The Company shall compensate Executive at a reasonable hourly rate, plus reimburse all expenses incurred, for any such assistance provided by Executive after the Term. (b) Confidential Information. Executive shall not knowingly use for his own benefit or disclose or reveal to any unauthorized person, during or after the Term, any trade secret or other confidential information relating to the Company, including any customer lists, customer needs, price and performance information, processes, specifications, hardware, software, firmware, programs, devices, supply sources and characteristics, business opportunities, marketing, promotional, pricing and financing techniques, and other information relating to the business of the Company; provided that such restriction on confidential information shall not apply to information which is (i) proven to be generally available in the industry, (ii) disclosed in published literature or (iii) obtained by Executive after the Term from a third party without binder of secrecy. Executive agrees that, except as otherwise agreed by the Company, he will return to the Company, promptly upon the request of the Board or any executive officer designated by the Board, any physical embodiment of such confidential information. In the event Executive is requested by any legal process to disclose Confidential Information, Executive shall immediately inform the Company and shall permit the Company an 15 16 opportunity to oppose such process, it being understood that Executive's compliance with legal process, after the Company's reasonable opportunity to oppose such process, does not constitute a violation of this Section 10(b). (c) Proprietary Creations. All rights, title and interest in and to any ideas, inventions, technology, processes, know-how, works, hardware, software, firmware, programs, devices, trade secrets, trade names, trademarks or service marks, which Executive may conceive, create, organize, prepare or product during the period of his employment with the Company and which relate to the business of the Company, and all rights, title and interest in and to any patents, patent applications, copyright registrations and copyright applications resulting there from, shall be owned by the Company, and Executive agrees to execute instruments or documents, to provide evidence and testimony, and to otherwise assist the Company in establishing, enforcing and maintaining such rights, title and interest of the Company during and after the Term. (d) Authorization. Executive does hereby irrevocably constitute, authorize, empower and appoint the Company, or any of its officers, such Executive's true and lawful attorney (with full power of substitution and delegation) in Executive's name, and in Executive's place and stead, or in the Company's name, to take and do such action, and to make, sign, execute, acknowledge and deliver any and all instruments or documents which the Company, from time to time, may deem desirable or necessary to vest in the Company, its successors and assigns, any of the rights, title or interest granted pursuant to clause (ii) above for the use and benefit of the Company, its successors and assigns. 11. NON-COMPETITION. (a) During the Term and for two years following termination of Executive's employment (irrespective of the reason for such termination), Executive shall not engage or propose to engage, directly or indirectly (which includes owning, managing, operating, controlling, being employed by, acting as a consultant to, giving financial assistance to, participating in or being connected in any material way with any business or person so engaged) in any Lottery Business anywhere in the world, including without limitation in any business which competes or proposes to compete with any Lottery Business in which the Company was engaged or proposed to be engaged anywhere in the world; provided, that Executive's ownership as a passive investor of less than one percent of the issued and outstanding stock or equity, or $100,000 principal amount of any debt securities, of any corporation, partnership or other entity so engaged shall not by itself be deemed to constitute such engagement by Executive. As used herein, the "Lottery Business" shall mean the provision of products or services of every nature relating to the operation of all manner of lotteries however and wherever conducted, but does not include traditional gaming activities not of the type and nature customarily operated by governments. (b) Further, for a period of two years following termination of Executive's employment (irrespective of the reason for such termination), Executive shall not (i) 16 17 disturb or interfere with any business relationship between the Company and any of its customers, suppliers or other business associates, or (ii) solicit or cause to be solicited any officer, employee or customer of the Company to terminate such person's relationship with the Company or to take other action which is materially injurious to the Company. 12. TAX WITHHOLDING. The Company may withhold from any benefits payable under this agreement all Federal, State, City, or other taxes as shall be required pursuant to any law or governmental regulations or ruling. 13. EFFECT OF PRIOR AGREEMENTS. This Agreement, including the Exhibit and Appendices hereto, contains the entire understanding between the parties hereto with respect, to the matters covered herein and supersedes any prior agreement, condition, practice, custom, usage and obligation with respect to such matters insofar as any such prior agreement, condition, practice, custom, usage or obligation might have given rise to any enforceable right. 14. GENERAL PROVISIONS. (a) Certain Representations and Warranties of Executive. Executive represents to the Company that (i) the execution and performance of this Agreement by Executive and his employment hereunder does not and will not constitute a breach of or violate any contract, agreement, obligation or understanding, oral or written, or order of any court or governmental authority to which he is a party or by which he is bound; (ii) the employment and other personal background information provided by Executive to Company is true and correct in all material respects and (iii) to the best of Executive's knowledge, there is no factor relating to him or his family not previously disclosed in writing to the Company which could reasonably be expected, if he were a senior executive officer or director of the Company, to disqualify the Company, its subsidiaries or Affiliates from, or materially jeopardize their chances of, obtaining lottery contracts or other contracts in the businesses in which they are engaged or propose to engage. (b) Non-assignability and Inurement. Neither this Agreement nor any rights or interest hereunder shall be assignable by Executive, his beneficiaries, or legal representatives without the Company's prior written consent (it being understood that all payments to which Executive is entitled hereunder shall inure to the benefit of his estate or legal heirs). (c) Binding Agreement. This Agreement shall be binding upon, and accrue to the benefit of, Executive and the Company and their respective heirs, executors, administrators, successors and permitted assigns, including, in the case of the Company, any person or entity acquiring all or substantially all of the Company's assets. 17 18 (d) Amendment of Agreement. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (e) Remedies. Executive acknowledges and agrees that the possible restrictions on his activities which may occur as a result of his performance of his obligations under Sections 10 and 11 hereof are required for the reasonable protection of the Company, its subsidiaries and Affiliates, and Executive expressly acknowledges and agrees that such restrictions are fair and reasonable for that purpose. Executive further expressly acknowledges and agrees that damages alone will be an inadequate remedy for any breach or violation by him of this Agreement and that the Company, its subsidiaries and Affiliates, in addition to all other remedies at law or in equity, shall be entitled as a matter of right to injunctive relief, including specific performance, with respect to any such breach or violation, in any court of competent jurisdiction including, without limitation, any state or federal court in Rhode Island. If any of the provisions of such Sections are held to be in any respect an unreasonable or unlawful restriction upon Executive, then they shall be deemed to extend only over the maximum period of time, geographic area, and/or range of activities as to which they may be enforceable. (f) Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. (g) Severability. If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not so held invalid, and each such other provision shall to the full extent consistent with law continue in full force and effect. (h) Notices. For the purposes of this Agreement, notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when hand delivered or mailed by United States certified or registered express mail, return receipt requested, postage prepaid, if to Executive, addressed to the address set forth on the signature page of this Agreement with a copy to his counsel, Michael Tuchman, Esq., Levelfeld Pearlstein Glassberg Tuchman Bright Goldstein & Schwartz LLC, 33 West Monroe Street, 21st Floor, Chicago, Illinois 60603; if to the Company, addressed to GTECH Holdings Corporation, 55 Technology Way, West Greenwich, Rhode Island 02817 and directed to the attention of the Board with a copy to the General Counsel of the Company; if to a member of the Board, addressed to each member at his respective address on file with the General Counsel of the Company with a copy to the Company, or to such other address as either party may have furnished to the others in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 18 19 (i) Counterparts. This Agreement may be executed by facsimile and in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (j) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. (k) Headings. The headings of Sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. (1) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. In the event of any dispute hereunder, the prevailing party shall be entitled to recover all costs, including reasonable attorneys' fees, incurred in adjudicating such dispute. (m) Joint and Several Liability. Notwithstanding any other provision of this Agreement, each of GTECH Holdings Corporation and GTECH Corporation, and their successors and assigns, shall be jointly and severally liable for all obligations or any of them to Executive hereunder. In the event that a substantial portion of the assets of either Company are transferred to any other direct or indirect subsidiary or other Affiliate of the Company, whether in one transaction or a series of transactions, such Company, as applicable, shall cause (prior to or concurrently with each transfer) the transferee to become a signatory to this Agreement and to become jointly and severally liable for all obligations or any of them to Executive hereunder. (n) To the extent there is any conflict between the terms of this Agreement and the Option Agreement or the Restricted Stock Agreement respecting acceleration or vesting of stock options or restricted stock, the provisions of this Agreement shall supersede any other conflicting provisions in those agreements. 19 20 IN WITNESS WHEREOF, GTECH Holdings Corporation has caused this Agreement to be executed by their duly authorized officers, and Executive has signed this Agreement, all as of the day and year first above written. GTECH HOLDINGS CORPORATION Attest: /s/ By: /s/ _________________________ ________________________________ Name: Name: Title: Title: GTECH CORPORATION Attest: /s/ By: /s/ _________________________ ________________________________ Name: Name: Title: Title: Witness: HOWARD S. COHEN /s/ /s/ _________________________________ ___________________________________ Address: 680 North Shore Drive Chicago, Illinois 60611 21 APPENDIX A SUMMARY OF TERMS OF STOCK OPTIONS The stock options to be granted under Section 6(c) of the Agreement are to be granted pursuant to the 2000 Plan (or any successor plan, as the case may be) and are subject to the terms and conditions of that plan and the terms and conditions of the Option Agreement. The following is a summary of the provisions of the stock options provided for in Section 6(c) of this Agreement: Nature of Options - Nonqualified unless otherwise determined by the Committee. Exercisability - Options shall become exercisable (i.e. vest) in four equal installments over four years (as set forth in the 2000 Plan) from the dates of grant of the particular option or at the expiration of the Term under Section 3 of this Agreement, whichever is earlier, subject to possible acceleration under the terms of the applicable Stock Option Plan. In the event of a Change of Control as set forth in Section 5(c) of the Agreement, his outstanding options, whether or not they have vested on the Change of Control Date, shall accelerate and become vested in full on the Change of Control Date and shall remain exercisable for a period of one year. In the event of the Termination of this Agreement as a result of Executive's death or Disability or his resignation for Good Reason or termination without Cause, his outstanding options shall accelerate and become vested in full on the termination date and shall remain exercisable for a period of one year. Option Price - Fair market value at the date of the grant of the particular option. Term - Ten years from the date of grant of the particular option, subject to earlier termination in certain circumstances under the terms of the 2000 Plan. Termination of Employment - In the event Executive's employment is terminated, his outstanding options (i.e. options which have been granted but have not been exercised or terminated and have not expired), to the extent they are vested as of the date of termination or accelerate and vest under 22 this Agreement or the Applicable Stock Option Plan as a result of the termination, shall remain exercisable for a period of one year. Notwithstanding the foregoing, (i) with respect to Executive's options, if any, which may be incentive stock options under the Code, the exercisability period following termination of employment shall not exceed that permitted by the Code, (ii) the period of exercisability of options following termination of employment specified above is subject to possible reduction in certain circumstances under the terms of the applicable Stock Option Plan, and (iii) in no event shall any option be exercisable after the expiration of its term. Except as expressly provide above, in the Option Agreement or the Employment Agreement, upon termination of Executive's employment, his options, whether vested or unvested, shall immediately terminate and be of no further force and effect. 22 23 APPENDIX B SUMMARY OF CERTAIN BENEFITS AND ARRANGEMENTS 1. Relocation Expenses. The Company shall reimburse Executive for all relocation costs incurred by him in moving to Rhode Island, in accordance with the corporate relocation guidelines attached hereto as Appendix C. In addition, in the event Executive's employment is terminated by the Company for any reason other than Cause or Executive resigns with Good Reason, the Company shall reimburse Executive for all relocation costs incurred by him in moving back to Illinois, in accordance with Company policy, which shall be no less favorable than current Company policy. Notwithstanding anything to the contrary herein, in the event of a non-renewal of this Agreement after the natural expiration of the Term or any extension thereof Executive shall be entitled to the benefits of this Section. 2. Vacation. During the Term, Executive shall be entitled to a paid vacation of four weeks per year commencing to accrue on the date of Executive's employment hereunder. 3. Automobile Allowance. During the Term, the Company shall provide Executive with an automobile allowance in the monthly amount of $1,250 in accordance with the Company's automobile policy and in a manner consistent with other Senior Executives. 4. Life Insurance. During the Term (and thereafter as and to the extent expressly provided in the Agreement), Executive shall receive life insurance coverage in accordance with the Company's policy in a manner comparable to Senior Executives. 5. Medical. During the Term (and thereafter as and to the extent expressly provided in the Agreement), the Company shall provide Executive with medical insurance in a manner comparable to Senior Executives. Further, during the Term, the cost of Executive's annual physical examination (not to exceed $1,500.00) also shall be borne by the Company. 6. Perquisite Plan. During the Term, Executive shall be entitled to participate in the Company's Executive Perquisites Plan in a manner similar to Senior Executives, provided that the amount available to Executive under the Plan for calendar year 2001 ($27,500 before tax gross-up) shall be pro rated based upon the portion of the year he was retained by the Company. Benefits specifically numbered above in this Appendix B shall not be deemed to be provided under the Plan or subject to the Plan's cap. 7. Deferred Compensation; 401(k); SERP. During the Term, Executive shall be entitled to participate in the Company's 401 (k) retirement plan, deferred compensation plan and Supplemental Retirement Plan for Senior Executives Plan ("SERP") in a manner similar to Senior Executives. 24 8. Executive Tax Preparation. During the Term, Executive shall be entitled to tax preparation and financial planning services, at the Company's expense, up to a maximum annual expense of $5,000.00. 9. Attorneys Fees. The Company shall reimburse Executive for all reasonable attorneys fees incurred in the negotiation and finalization of this Agreement. 24 25 APPENDIX C RELOCATION GUIDELINES CORPORATE OFFICER - HOMEOWNER In order to qualify for GTECH Corporation's Relocation Policy the IRS 50 mile differential requirement must be met. This means that the distance from your new main job is at least 50 miles farther from your home than your old main job location. Prior approval from you Human Resources Regional Manager, for each relocation, is required and will ensure reimbursement under the relocation policy. Once approved all relocation services must be arranged through your Client Service Manager (CSM) of GTECH's third party relocation service company. The intent of the relocation policy is to provide reasonable financial assistance and relocation service resulting in housing arrangement comparable to the employees prior housing arrangements (e.g., house to house or apartment to apartment). Since each case of employee relocation is in some way unique, the necessity for guidelines and the use of individual discretion in applying them is required. Any variation from these guidelines must receive prior approval. EXECUTIVE HOMEOWNERS New hires/transferring Corporate Officers, who are homeowners and are eligible, will receive the following relocation assistance: 1. Travel Covered Under Relocation House Hunting Trip - A one time, round trip transportation to the new location for house hunting purposes - employee and spouse or *significant other included. * (throughout this document "significant other" refers to any person who currently resides with the relocated employee and will also relocate due to the employee's transfer) Final Move - One way transportation - to the new location - for the employee and family or significant other. 2. How to Arrange Your Air Travel, Hotel and Car Rental - All travel plans must be arranged by the employee through GTECH's designated travel agency - American Express Travel Agency is located at Corporate Headquarters in Rhode Island - Phone: 401-392-7575. Steps to take when booking a flight for House Hunting or for Final Move: - Explain to the Travel Agent that you want to arrange your flight for relocation. - The Travel Agent will coordinate flight, hotel and car rental with employee (Hotel and Car Rental will need to be secured with a credit card). - Once arrangements are complete, an itinerary will be faxed to the CSM for approval. - Once tickets have been approved, they will be mailed to employee prior to departure. 3. Pre-Move House Hunting Trip (Eligibility: Homeowner in current location. Requires prior approval.) Airfare: - One round trip offered to the new location for the employee and spouse or significant other - Travel must be arranged through GTECH's designated travel agency (see "How to arrange...") - Mid-sized rental car included - arrangements made through GTECH's designated travel agency 26 Automobile Travel: - Reimbursed at the current mileage to and from the new location Hotel: - Up to five night hotel stay for the employee and spouse or significant other - Hotel arrangements are to be made with GTECH's designated travel agency Expenses: - Expense Reports may be obtained through your CSM - Hotel expense will be reimbursed for up to five nights - Daily meal expenses will be reimbursed up to $45.00 per day/per adult - Reasonable costs for pet boarding/sitting will be reimbursed - All receipts must be submitted with expense reports for reimbursement to occur Real Estate/Broker Support: - Your client Service will provide you with contact information. 4. Final Transportation of Employee and Family to New Location (One Way) - Automobile mileage allowance is reimbursed at the most current corporate rate for travel to the new location. - One way air travel for the employee and family or significant other is covered by GTECH. - Final flight arrangements must be booked through GTECH's designated travel agency (see "How to Arrange..."). 5. Temporary Living - Temporary Living will be arranged through the employees' Client Service Manager. - GTECH will reimburse temporary living for the employee (Not to exceed 6 months). - GTECH will cover storage costs, while in the employee is in temporary living (Not to exceed 6 months). - Weekly living expenses** may be reimbursed for the family/significant other for a 6 month temporary living period (**Guidelines and Restrictions..."). - CAR: GTECH will either bear the cost of shipping the employee's car to the new location OR reimburse the employee for a mid-sized rental car (Not to exceed 6 months). 6. Incidental Expense Check - Once the employee begins work at the new location, an incidental expense check in the amount of one month of the annual salary is issued. - The incidental expense check is intended to cover any additional expenses not covered under the relocation policy. 7. Guidelines and Restrictions to Reimbursable Living Expenses - Reimbursable living expenses must be submitted to the CSM on a weekly expense report. - Expense reports may be obtained through employee's CSM. - Only those expenses that are accompanied by proper receipts will be refunded. - During the temporary living period, breakfast and lunch bills will not be reimbursable. - Lodging should be booked consecutively and recorded on the weekly expense report. - Monthly phone bills related to relocation should appear on the expense report - unless they are direct billed. - Entertainment expenses, such as cable or movie rentals, are not covered under relocation. 27 - Altering the original expense report in any way requires prior approval from the CSM - any additions made on the original expense report, without prior approval, will be subject to rejection and may not be reimbursed - prior approval by the Relocation Coordinator is advised. - Please check with your CSM for deadline dates on weekly expense reports. 8. Transfer of Household Goods Contact the Client Service Manager at least three weeks prior to the date that employee plans to move. The CSM will discuss specific moving needs with employee and will contact a moving carrier who is under contract with GTECH. The preferred carrier will then coordinate the move directly with employee. Billing is handled completely by GTECH. - GTECH will cover the cost of moving up to two operable automobiles and pet shipment. - Antiques (100 years +) and valuables are covered with a bona fide professional appraisal (reasonable appraisal costs are covered) completed and received by your CSM prior to the move. - Taking pictures of high value items is recommended. 9. Sale of a Home/Marketing Assistance Home Marketability Assistance will be provided by your CSM. All employees are eligible to receive a reasonably and customary commission (for the location) on the sale of their current home. Additionally an employee who is successful in finding a buyer for his/her home is eligible to receive an incentive payment of 2% of the selling price if the home is sold within 90 days from being listed or 1% if sold within 91 to 150 days. In order to qualify, the employee must contact GTECH's third-party relocation services company prior to listing the home. Also, the sale must be sold and closed utilizing the amended sale program - your CSM can explain. The payment will be made after the sale closes with the buyer and will not be grossed up for tax purposes. 10. Purchase of a Home Home Finding Assistance will be provided by your CSM. Under relocation, employee may receive home buying assistance up to six months after your relocation date. For instruction on reimbursement see "Good Faith Estimate" below. Coverage includes non-recurring closing fees such as: - Maximum of two points (2% - including loan origination and discount) - State and Local transfer taxes - Escrow Fee - Title Costs - Attorney's Fees - Standard structural pest inspection required by lender - Reasonable and customary general inspection costs for the area - Reasonable and customary radon inspection costs for the area - Appraisal Fee - Credit Report Fee - Any local one-time fee required for closing normally paid by the buyer, provided it is not a mortgage cost - VA Loan funding fee (reimbursed at the annual average rate) - Real Estate commissions on the purchase of a home will not be paid by GTECH - Home Warranties and Buyer's Inspection will not be reimbursed 11. Good Faith Estimate: Employees may receive an advance for covered closing costs by submitting a "Good Faith Estimate" to the CSM at least four weeks in advance. The Good Faith Estimate should be prepared by the title company or lender. **The employee must clear the advance by submitting the final closing statement and expense report to the relocation company within 15 days of closing. 28 12. Early Equity In the event that the relocated employee needs funds for a down payment for purchasing a new home prior to the closing on the present one, and the employee has secured a contract of sale on the present home, GTECH's third party provider will review with Human Resources the employee's specific needs and timing. Upon approval, the third party company will provide a bridge loan, based on a percentage of the equity in the home for a maximum of sixty days. This 60-day bridge loan will be interest free to the employee. The maximum loan amount will be equal to 95% of the contracted sale price, less all outstanding encumbrances on the property. The loan is due and payable at the time you sell your property. The third party company will make all arrangements for the advance. 13. Tax Treatment Employees will be tax protected on all covered relocation expenses (with the exception of the incentive payment offered as home marketing assistance) that result in taxable income to the employee. The initial tax protection will be computed at the supplemental wages rate. It is the employee's responsibility to keep receipts to substantiate deductible moving expenses on his/her tax return. The IRS requires all relocation expenses paid to on behalf of the employee be reported as income. To initiate the relocation process, a Relocation Authorization Form must be completed by the Hiring Manager and approval signed by the Department Vice President and sent to the appropriate Human Resources Regional Manager. Please understand, the purpose of GTECH's relocation policy is to provide assistance to the transferring employee. If you choose not to work within the relocation policy, follow the rules and/or recommendations, ALL relocation benefits will cease immediately. 29 RELOCATION POLICY - -------------------------------------------------------------------------------- CORPORATE OFFICER - HOMEOWNER - -------------------------------------------------------------------------------- Employee: ____________________________________________ Moving From: __________________ To: ___________________ Contact Information: WEICHERT RELOCATION 1625 State Route 10 Morris Plains, New Jersey 07950 Michelle Falcinelli Client Service Manager Toll Free # Off: 973-397-3536 Res: 908-859-3181 888-855-3306, Ext. 3536 Fax: 973-267-4957 E-mail: MFalcinelli@wrci.com Please review your Relocation Policy. If you have any questions, please contact your Client Service Manager from Weichert - GTECH's third party Relocation Service Company (contact information listed above). Upon review, please initial each numbered section, sign all designated areas and return to your Client Service Manager as soon as possible. Without a signed agreement in your relocation file, the relocation process will not begin. Therefore, GTECH will not incur or reimburse relocation expenses on your behalf. 30 - -------------------------------------------------------------------------------- RELOCATION AGREEMENT CORPORATE OFFICER - HOMEOWNER STATUS - -------------------------------------------------------------------------------- 1. "Relocation Costs" include all house hunting trip; shipment of goods and other moving expenses; travel; meals; temporary living (lodging, meals, etc.); home purchasing assistance expenses; closing costs and commissions paid by GTECH Corporation on the sale of my home; the incentive bonus for selling to an outside buyer; and if I sell my home to a relocation firm contracted by GTECH Corporation; or if I process an amended value sale (i.e. sale to an outside buyer) through a relocation firm contracted by GTECH Corporation. 2. If I remain a full-time GTECH Corporation employee for twenty-four (24) months, calculated from date of hire/transfer, I shall have no obligation to repay GTECH Corporation for the relocation costs incurred on my behalf. 3. If I voluntarily terminate my employment with GTECH Corporation within twenty-four (24) months, calculated from date of hire/transfer, I agree to repay GTECH Corporation for the relocation costs prorated over twenty-four (24) months. Formula to be used for calculation of repayment: Repayment = 24 - [number of months from Start Relocation Amount Date to Termination Date] X Costs --------------------------------- 24 4. Repayment to GTECH Corporation is due and payable in full on my Termination Date. Upon notice of my termination, I hereby authorize GTECH Corporation to use one or more of the following methods to affect repayment: (a) cash payment; (b) deduction from my salary, wages or bonuses due to me upon or after termination; (c) deduction from any monies held in any GTECH stock purchases plan; or (d) deduction from any other sums due to me from GTECH. 5. I understand that certain Home Sale Assistance Costs must be included in my gross income and are subject to taxes. I also understand that while I can deduct some of my expenses related to my relocation according to IRS guidelines, I must have receipts to show my actual expenses. I UNDERSTAND THAT IT IS MY RESPONSIBILITY TO KEEP ALL RECEIPTS, IN ORDER TO RESPOND TO AUDITS AND PAY MY INCOME TAXES. 6. I understand that this Relocation Agreement is not a contract of employment and does not guarantee future employment with GTECH Corporation. 7. If GTECH Corporation initiates a lawsuit to collect any monies due hereunder, I agree to pay reasonable attorney's fees and costs awarded by the court. 8. If I terminate involuntarily (except if a I am terminated for cause), I shall have no obligation to repay GTECH Corporation for these relocation costs. 9. GTECH Corporation's Relocation Agreement and Relocation Policy represent GTECH and any subsidiary of the GTECH Corporation. Please sign below and return to your Client Services Manager. Reimbursement will not take place until the necessary paperwork has been signed and returned to the relocation company. 31 I, __________________, have read and understand GTECH Corporation's Relocation Please Print Agreement and Guidelines. Signature: _____________________________________ Date:_____________________ EX-10.2 3 y48042ex10-2.txt AMENDMENT TO AGREEMENT 1 EXHIBIT 10.2 AMENDMENT TO AGREEMENT This Amendment to Agreement is entered into this 28th day of March, 2001, by and between GTECH HOLDINGS CORPORATION AND GTECH CORPORATION, each a Delaware corporation (collectively, the "Company"), and HOWARD S. COHEN ("Executive"). WHEREAS, the parties have entered into an agreement dated March 5, 2001 regarding the employment by the Company of the Executive (the "Agreement"); and WHEREAS, the parties desire to amend the Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Section 6(d) of the Agreement is hereby deleted and replaced by the following: "(d) Restricted Stock. On the Effective Date, the Company shall grant to Executive 30,000 shares of Restricted Stock (the "Restricted Shares") under the 2000 Plan (as defined in Section 6(c)(i) above), subject to Executive's execution of the Company's Restricted Stock Agreement. The Restricted Shares shall vest as follows: 10,000 shares vest 12 months after the Effective Date, 10,000 shares vest 24 months after the Effective Date and 10,000 vest 36 months after the Effective Date. The Restricted Shares, after vesting, may be transferred only in accordance with the terms and conditions of the 2000 Plan." 2. The parties acknowledge that the Executive has been appointed as President and Chief Executive Officer of the Company. The parties agree that in the event that the title and position of President is removed by the Board of Directors of the Company at any time during the Term of the Agreement, such removal shall not be considered "Good Reason" as defined in Section 1 of the Agreement. 3. Exhibit B, Section 6 of the Agreement is hereby deleted and replaced by the following: 6. Perquisite Plan. During the Term, Executive shall be entitled to participate in the Company's Executive Perquisites Plan in a manner similar to Senior Executives. Without limiting the foregoing, Executive shall be entitled to full perquisite benefits under the Plan during calendar year 2001. Benefits specifically numbered above in this Appendix B shall not be deemed to be provided under the Plan or subject to the Plan's cap." 2 4. Except as amended hereby, all other terms of the Agreement remain in full force and effect, and are hereby ratified and affirmed. IN WITNESS WHEREOF, GTECH Holdings Corporation and GTECH Corporation have caused this Amendment to Agreement to be executed by their duly authorized officers, and Executive has signed this Amendment to Agreement, all as of the day and year first above written. GTECH HOLDINGS CORPORATION Attest: /s/ By: /s/ ----------------------------- ---------------------------------- Name: Karen M. Connelly Name: Kathleen McKeough Title: Executive Assistant Title: Sr. Vice President, Human Resources GTECH CORPORATION Attest: /s/ By: /s/ ----------------------------- ---------------------------------- Name: Karen M. Connelly Name: Kathleen McKeough Title: Executive Assistant Title: Sr. Vice President, Human Resources Witness: HOWARD S. COHEN /s/ /s/ - ---------------------------------- ------------------------------------ Amy C. Fuller Howard S. Cohen PVD 428118 EX-10.10 4 y48042ex10-10.txt LIST OF SIGNATORIES TO AGREEMENT 1 EXHIBIT 10.10 Signatories to Agreement Respecting Change of Control Executive Officers Dates
Steven P. Nowick January 15, 1999 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 Marc Crisafulli March 29, 2001 Antonio Carlos Rocha April 2, 2001 Kathleen McKeough June 28, 2000
EX-10.12 5 y48042ex10-12.txt LIST OF PARTICIPANTS IN EXECUTIVE PREREQUISITES 1 EXHIBIT 10.12 GTECH HOLDINGS CORPORATION EXECUTIVE PERQUISITES PROGRAM PARTICIPANTS (A CALENDAR YEAR PLAN) David Calabro * Howard Cohen *** Marc A. Crisafulli *** Stephen Davidson ** Jean-Pierre Desbiens * James Hosker** Jean Marc Lafaille * Kathleen McKeough * William Middlebrook * Vino Mody ** Cynthia Nebergall ** Steven Nowick ** William O'Connor ** Jaymin Patel * William Pieri * Robert Plourde* Frederick Reis ** Antonio Carlos Rocha *** Donald Stanford * Donald Sweitzer * W. Bruce Turner * * Participant for all or a portion of both calendar years 2000 and 2001. **Participant for all or a portion of calendar year 2000, only. *** Participant for all or a portion of calendar year 2001, only. EX-10.14 6 y48042ex10-14.txt SCHEDULE OF RECIPIENTS EXECUTIVE SEPARATION AGRMT. 1 EXHIBIT 10.14 SCHEDULE OF RECIPIENTS OF EXECUTIVE SEPARATION AGREEMENT * David Calabro Marc A. Crisafulli Jean-Pierre Desbiens Kathleen McKeough Jaymin Patel Donald Sweitzer * Schedule sets forth only Executive Officers of the Company who are recipients. EX-10.16 7 y48042ex10-16.txt LIST OF PARTICIPANTS IN SUPPLEMENT RETIREMENT PLAN 1 EXHIBIT 10.16 GTECH HOLDINGS CORPORATION SUPPLEMENTAL RETIREMENT PLAN FISCAL 2001 PARTICIPANTS (A FISCAL YEAR PLAN) David Calabro Howard Cohen * Marc A. Crisafulli * Stephen Davidson Jean-Pierre Desbiens James Hosker Kathleen McKeough William Middlebrook Jaymin Patel William Pieri Robert Plourde Antonio Carlos Rocha * Donald Stanford Donald Sweitzer W. Bruce Turner * Eligible for participation after close of fiscal 2001. EX-10.21 8 y48042ex10-21.txt AGREEMENT 1 EXHIBIT 10.21 SERVICE RENDERING AGREEMENT MADE BETWEEN CAIXA ECONOMICA FEDERAL ON THE ONE HAND AND, ON THE OTHER HAND, THE COMPANY GTECH BRASIL LTDA., AS FOLLOWS: By the present instrument, the parties: CAIXA ECONOMICA FEDERAL, a financial institution under the form of a public company, founded and constituted according to the terms of the Decree-Law n degrees 759 of 08.12.69, and Decree n degrees 66.303 of 03.06.70, being presently ruled by the statute approved by the Decree n degrees 2943 of 01.20.1999, registered with the Federal Taxpayer identification number 00.360.305/0001-04, with headquarter at the SBS, Quadra 4, Lote 34, in Brasilia/DF, here represented by the National Supply Manager Mr. ADAUTO BARBOSA JUNIOR, Brazilian, married, Identification Number 292.752 - SSP/GO, and Tax Payer identification number 148.888.311-49, henceforth named CAIXA or CONTRACTOR, and GTECH BRASIL LTDA., with headquarters at Alameda Araguacema, 78 - Barueri - Sao Paulo, SP, registered with the Federal Taxpayer identification number 68.926.628/0001-00, here represented by its Director ANTONIO CARLOS LINO DA ROCHA, Brazilian, married, identification number 02.172.548 - IFP/RJ and Tax Payer identification number 098.425.197-91, resident and settled in the capital city Sao Paulo, henceforth simply named GTECH or CONTRACTED PARTY, Together named "Parties" or, separately, "Party", CONSIDERING: I. That the CONTRACTED PARTY is registered for supplying and rendering services to CAIXA, and that it already maintains in the Lottery Units of the CAIXA an installed network of terminals and applications in which collection, processing and transmission of data relating to lottery systems and some financial services are carried out in on-line real-time mode; II. That the CAIXA wants to add new terminals to its network of Lottery Units as well as to develop new applications, which will allow the availability of new financial services and the improvement of the existing lottery service system; III. That the interconnection of the teleprocessing network of the CAIXA with the network utilized by GTECH will allow the implementation of new products and/or applications in the area of lotteries and complementary financial services as well, specially the possibility to directly consult data and information contained in the network of the CAIXA; IV. That the CAIXA should maintain and optimize the services offered to its users, which can be done through making available an easy means of access to bank services via the 2 network of Lottery Units, thus enhancing the presence of the CAIXA as a social integration factor; V. That the now contracted services give origin to an increase of revenues for the CAIXA and allow cost reduction, yielding economic and strategic- corporate benefits, thus meeting the administrative principle of efficiency; VI. That the continuity, without interruption, of the performance of the now contracted services assures the maintenance of the contribution to increase the portion destined to subsidy for the development of social actions, thus accomplishing the administrative principle of public interest; VII. That the utilization of the network of Lottery Units as an alternative channel of the CAIXA will make feasible a better positioning of this institution in the market as a Retail Bank; VIII. That the extension and modernization of the bank services in Lottery Units would place the CAIXA in highly competitive conditions in relation to the Brazilian bank sector, a market where competition is more and more stirred up, mainly as a result of the recent increase of foreign investments in the sector; IX. That the CAIXA has no short term alternative for supplying the services presently foreseen and rendered by the CONTRACTED PARTY; X. That the estimated term for the complete substitution of the CONTRACTED network by the winner of the competent bidding to be carried out, will be up to January 2003; XI. That the need for the CAIXA to avoid a sudden interruption of the presently rendered services, which would cause enormous losses of a strategic and financial nature and for the CAIXA, in addition to social and economic- financial disadvantages for its customers and for the Braziliand population in general, which enjoys the social services subsidized by a significant portion of the income resulting from lottery market; XII. That the CONTRACTED PARTY, due to the fact that it has already a terminal and application network installed and in operation in the Lottery Units of the CAIXA, is the only able to continue providing the services uninterruptedly and at the best price for the CAIXA, while the preparation of the bidding is not finished, which will promote the implementation of the new service rendering model to be introduced; Decide to close the present Agreement of Service Rendering through direct contract based on Art. 25, caput, of the Law No. 8.666 of 06.21.93, having support on juridical opinion and justification as per Process No. 995303033/2000, and in view of the authorization by the Corporate Board of Directors of the CAIXA of 05.25.00, Act No. , being subject to the norms foreseen in the Law n degrees 8.666/93, in what it concerns, according to the clauses and conditions: -2- 3 1. DEFINITIONS Notwithstanding other significations which may be foreseen in this instrument, the terms listed below should be understood and interpreted as follows: 1.1 TRANSACTIONS TYPE 1 Transactions Type 1 will be considered those transactions carried out by the CONTRACTED PARTY for collection of lottery games. 1.2 TRANSACTIONS TYPE 2 Transactions Type 2 will be considered those transactions performed by the CONTRACTED PARTY to make payments of accounts of public service concessionaires, payments of collection blocks, residential instalment payment booklet, collection of INSS (social security contributions) and various conventions. 1.3 TRANSACTIONS TYPE 3 Transactions Type 3 will be considered those indicated in the paragraph below "At Short Term", as well as those listed in the paragraph "At Long Term". The implementation of the new "At Long Term" financial transactions will occur on the bases agreed upon, provided their structure and development costs are similar to those of the new "At Short Term" financial transactions. It should be pointed out that the transactions listed here serve as a reference for the transaction types which may be migrating to the lottery channel, being at the discretion of the CAIXA the decision for inclusion and/or modification of transactions to migrate to the lottery channel, provided that the development complexity of the application software supporting such transactions are similar to those foreseen for the transactions described here. We give below a list of the new financial transactions which will migrate to the lottery channel, at short and long terms: AT SHORT TERM: UP TO SEPTEMBER 2000 Draft with Card (Account Current and Savings Account) Deposit with Card (Account Current and Savings Account) Balance and Statement Payment of INSS (social security) Capitalization paper Easy Draft PIS - payment of bonus and profit - this financial transaction, at the discretion of the CAIXA, may be implemented along the year 2001. AT LONG TERM: STARTING FROM JANUARY 2001 PIS - Inquiries through Card FGTS - Draft -3- 4 FGTS - Requisition for draft Unemployment insurance - Inquiries FGTS - Balance of bound accounts Credit cards FGTS - Register alteration forms Transfer of values among accounts Blocking/cancellation of astray/stolen card Savings account opening Pledge renewal Pledge - Payment of loan Electoral justification 1.4 TRANSACTION TYPE STATEMENT It is a transaction inserted into Type 3, the remuneration of which varies according to the number of lines to be printed. 1.5 TRANSACTION TYPE 4 It is the transaction of declarations of those who are exempted from income tax, which are presented at the networkd of lottery houses, using the network of the CONTRACTED PARTY. 1.6 TRANSACTION TYPE 5 It is the sales transaction of authorized numbers for the qualification of prepaids. 1.7 PERIOD OF SUBSTITUTION The substitution period will be defined as the time period in which the winner of the bidding to be carried out will begin the installation of his network and simultaneously the CONTRACTED PARTY will begin to remove the installation of his processing terminals and systems. This period will be defined a posteriori between the CAIXA and the CONTRACTED PARTY. 1.8 PRESENT TRANSACTIONS They are transactions which are presently being collected at the Lottery Units by the Gtech network. We give below the listing of such transactions: LOTTERY PRODUCTS: Megasena Quina Supersena Lotomania Loteria Esportiva Bolao Federal Bolsa Federal -4- 5 Control of prize-winning tickets of Federal Lottery Control of prize-winning tickets of Instantaneous Lottery FINANCIAL PRODUCTS: Conventions with: Municipalities Concessionaires of public services (water, power, telephone...) Government Entities (IPVA, IPTU, DPVAT) Passwords for prepaid cards Bingo and similar games Capitalization titles (X-CAP) Declaration of those who are exempted from income tax GPS Habitation Bank collection PCI Savings account deposit 1.9 SERVICE SHOPS They are shops for technical service to the Lottery Units, and they are distributed all over the national territory, under the responsibility of the CONTRACTED PARTY. 2. PURPOSE 2.1 The present Contract purpose is to render following services: (i) development, implementation and operationability of the systems of Lotteries of the CAIXA in the "On-Line Real Time" mode; (ii) development, implementation and operationability of new products and services delegated by or agreed with the CAIXA; (iii) services relating to prize tickets of the Brazilian Federal Lottery and the Brazilian Federal Instantaneous Lottery; (iv) receipt of accounts of public service concessionaires and other payments made at the network of resellers; (v) collection, transmision and processing of financial transactions collected at the lottery units; (vi) services of receiving declarations of exempted from income tax; (vii) services of sales of authorized numbers for qualification of prepaids. 3. PRICE For the perfect execution of the services object of this Contract the CAIXA will pay to the CONTRACTED PARTY following values: 3.1 As a compensation for the performance of transactions Type 1, carried out in the CAIXA channel and transmitted and processed by the CONTRACTED PARTY, the CAIXA will pay to the CONTRACTED PARTY a commission equivalent to 5.75% (five point seventy-five per cent) of the collected gross value, deducted the additionals foreseen in law, calculated weekly. -5- 6 3.2 As a compensation for the accomplishment of each financial transaction of the Tipe 2, as defined in item 1.2 of DEFINITIONS, carried out in the CAIXA channel and transmitted and processed by the CONTRACTED PARTY, the CAIXA will pay to the CONTRACTED PARTY a fixed tariff of R$ 0.15 (fifteen cents of Real) per transaction. 3.3 As a compensation for the accomplishment of each financial transaction of the Tipe 3, as defined in item 1.3 of DEFINITIONS, carried out in the CAIXA channel and transmitted and processed by the CONTRACTED PARTY, the CAIXA will pay to the CONTRACTED PARTY a decreasing tariff, following scale being observed:
Up to 134,000,000 transactions per year: R$ 0.15 per transaction From 134,000,000 to 201,000,000 transactions per year: R$ 0.14 per transaction Over 201,000,000 transactions per year: R$ 0.13 per transaction
3.4 Invoicing will be issued weekly. 3.5 After the installation of the 6500 terminals mentioned in clause 7.1.1 has been concluded, and the qualification of same for the achievement of the financial transactions requested by the CAIXA, the counting of the term will start, during which the CAIXA assumes the obligation to assure the minimum remuneration equivalent to 100 million transactions Type 3 per year. 3.6 During the period mentioned in item 3.5 above, the CAIXA assumes the obligation to remunerate the transactions Type 3 according to the remuneration table mentioned in item 3.3 until conclusion of one year period, when the counting of the volumes of transactions Type 3 will start again. 3.7 Should it be found out that, at the end of the annual result calculation, duly homologated by the CAIXA, the remuneration to the CONTRACTED PARTY has been inferior to the 100 (hundred) million financial transactions of Type 3 (according to the paragraph DEFINITIONS), the CAIXA will assure to the CONTRACTED PARTY, for that annual period, the complement of its remuneration, for it to obtain a value equivalent to a volume of 100 (hundred) million financial transactions Type 3 in the period referred to. 3.8 The concession of the guaranty referred to in previous item will be rendered effective only out of the substitution period (observed the provision of the ATTACHMENT V) and provided that: (a) the 6500 (six thousand and five hundred) financial terminals mentioned in subparagraphs "i" and "ii" of subitem 7.1.1 below are duly installed in the present agents; (b) the CONTRACTED PARTY is complying with all obligations under this Contract, without limiting itself to the execution of all contracted services; (c) the terminals are installed and qualified to carry out all financial transactions, the technical specifications of which have been given to the CONTRACTED PARTY within the terms foreseen in this instrument. 3.8.1 During the period of the network substitution, the CAIXA will assure a Type 3 transaction volume proportional to the number of terminals of the CONTRACTED PARTY which are still operating the collection of these -6- 7 transactions, taking as a base the 100 million transactions warranted to the whole network of installed financial terminals. 3.8.2 From the 100 million Type 3 transactions warranted by the CAIXA will be deducted the transaction volumes which have not been carried out due to problems under responsibility of the the CONTRACTED PARTY. 3.9 As a compensation for the accomplishment of each financial transaction of the Tipe 4, as defined in item 1.5 of DEFINITIONS, carried out in the CAIXA channel and transmitted and processed by the CONTRACTED PARTY, the CAIXA will pay to the CONTRACTED PARTY a fixed tariff of R$ 0.20 (twenty cents of Real) per transaction, taking into consideration that a reduction or total elimination of critical transactions will be negotiated with the federal revenue. 3.10 As a compensation for the accomplishment of each financial transaction of Tipe 5, as defined in item 1.6 of DEFINITIONS, carried out in the CAIXA channel and transmitted and processed by the CONTRACTED PARTY, the CAIXA will pay to the CONTRACTED PARTY a fixed tariff of R$ 0.25 (twenty-fice cents of Real) per transaction, and the parties, in the interest of the CAIXA, will be engaged in negotiating a decreasing tariff table in terms of volume. 3.11 For statement type transactions, the remuneration will take into consideration the number of lines to be printed, as follows: up to 10 printed lines R$ 0.15 per statement; over 10 printed lines R$ 0.15 per statement, plus 0.0056 every three additional lines. 3.11.1 The CONTRACTED PARTY is obliged to assure/make available a maximum of (30) lines per statement. 3.12 The prices are unadjustable, an annual re-agreement being permitted which should have, as basic parameters, the quality and the prices in force in the market for the performance of the contracted services, under the legally accepted criteria. 3.13 The CONTRACTED PARTY remuneration will be calculated based exclusively on the transactions collected in the data communication network installed by the CONTRACTED PARTY itself. 4. PAYMENT FORM 4.1 The CAIXA will make weekly payment to the CONTRACTED PARTY, on the 3rd (third) working day subsequent to each week of effectively performed services. 4.1.1 The payment referred to in this item will be made through credit to the CONTRACTED PARTY account current in an agency of the CAIXA. -7- 8 4.1.2 The payment referred to in this item will only be made if the CONTRACTED PARTY is fully complying with all its contractual obligations and after proper checking and respective homologation, by the CAIXA, of following documents to be submitted by the CONTRACTED PARTY: (i) bill-invoice to be weekly issued by the CONTRACTED PARTY, corresponding to the total services rendered during the same period, concomitantly to the sales closing of the lottery games of each week; (ii) weekly reports generated by the lottery system; and (iii) documents proving acquittance of the liabilities to INSS (Social Security) and FGTS (Fund for Work Time), relating to the month immediately previous to the data foreseen for the payment referred to in this item. (iv) No payment will exempt the CONTRACTED PARTY from its liabilities and obligations, nor will it imply a definitive acceptance of the services. 4.2 In the case the payment term established in the previous subitem will be surpassed, the due value will be financially updated based on the financial index in force, from the date foreseen for payment up to the date of the effective payment. 5. PERIOD OF VALIDITY OF THE CONTRACT 5.1 The Contract will be in effect up to January 13, 2003, as from the date of its signature. 5.2 The term foreseen in item 5.1 can be extended at the exclusive discretion of the CAIXA, respected the limitations of legal nature, by a period necessary for the complete substitution of the CONTRACTED PARTY network with the network of the winner of the bidding to be carried out. 5.3 During the entire period of an eventual term extension, the same contractual conditions as described in this contract will be applied. 6. BUDGET RESOURCES The expenses resulting from the act of contracting will be charged on account of the budget allowance foreseen in the rubric "Expenses with Execution of Data Processing Services" - Account No. 53.03.11. 7. PERFORMANCE OF THE SERVICES 7.1 INSTALLATION OF THE TERMINALS 7.1.1 The CONTRACTED PARTY will supply and completely install following terminals: -8- 9 (i) 1,700 (one thousand and seven hundred) new terminals having the capacity to achieve lottery and financial transactions (as described in item "Definitions"), provided with optical readers, according to technical specifications presented in the ATTACHMENT I of this Contract, to be installed in the already existing Lottery Units; (ii) 4,800 (four thousand and eight hundred) new terminals without optical readers, according to technical specifications presented in the ATTACHMENT I of this Contract, having the capacity to achieve financial transactions (described in item "Definitions"), to be installed in the already existing Lottery Units; (iii) 800 (eight hundred) new terminals having the capacity to achieve lottery and financial transactions (as described in item "Definitions") in new Lottery Units, in cities already attended by the network, observed the provision in the ATTACHMENT I below, to be installed in new Lottery Units; (iv) 2,000 (two thousand) new terminals having the capacity to achieve lottery and financial transactions (as described in item "Definitions"), provided with optical readers, according to technical specifications presented in the ATTACHMENT I of this Contract, to be installed in the new Lottery Units, in conformity with the installation schedule presented in the ATTACHMENT 11 B. 7.1.2 The execution of the works of supply and installation of terminals referred to in subitems 7.1.1 above, should strictly observe the beginning and end terms specified in the "Installation Schedule of the Terminals" mentioned in ATTACHMENT II of this Contract. 7.1.3 The CONTRACTED PARTY, observed the provision of the ATTACHMENT VI, will develop and implement the physical connection of its processing center with the processing center of the CAIXA, so as to assure that the financial transactions can be carried out through the terminals to be installed in the data communication network of the CONTRACTED PARTY. 7.1.4 The CONTRACTED PARTY will develop and make available all application software necessary for the performance of the financial transactions of items 1.1, 1.2 and 1.3 of "DEFINITIONS", in up to 80 (eighty) net days starting from the date in which it receives the specifications of each new financial transaction, and the CAIXA will have an up to 10 (ten) net days term for the homologation of the applications software developed by the CONTRACTED PARTY. -9- 10 7.1.5 The CONTRACTED PARTY will also make available a pilot terminal, according to the technical specifications given in the ATTACHMENT I of this Contract, until June 10, 2000, for the beginning: (i) of the homologation process for the application software which are being developed; (ii) of the training of Lottery Undertakers, as established in this Contract. 7.1.6 The penalty imposed for eventual delays in the installation terms foreseen in this item will be proportional to the number of days in delay, and will be applied according to the provision of Clause 11 below. 7.1.7 Delays in the implementation of the connections between the Data Processing Center of the CONTRACTED PARTY and that of the CAIXA, which would delay the beginning of the operation of the terminals to be installed and/or impair the qualification of lottery or financial transactions, will subject the CONTRACTED PARTY to the same fine foreseen in the previous subitem. 7.1.8 Delays resulting from non-forwarding of addresses in a due time according to schedule attached, and from the agent unavailability to install and maintain, provided this is duly proved, will exempt the CONTRACTED PARTY from whatsoever responsibilities and/or penalties. 7.2 SYSTEM DEVELOPMENT 7.2.1 The CONTRACTED PARTY will develop its terminals for financial and lottery transactions collection according to specifications described in the ATTACHMENT I of this Contract, meeting the terms stipulated in the "Installation Schedule of the Terminals", presented in the ATTACHMENT II of this Contract. 7.2.2 The CONTRACTED PARTY will assure that the terminals developed according to previous item will be able to achive all financial and lottery transactions specified in item "DEFINITIONS" of this Contract. 7.2.3 The CONTRACTED PARTY will develop all necessary applications for the terminals to be qualified to perform desired transactions according to item "DEFINITIONS" of this Contract. 7.2.4 The CONTRACTED PARTY will assure that the terminals to be installed will be qualified to perform, in the maximum term of 90 (ninety) net days starting from the signature of this Contract, any of the financial and lottery transactions which are already presently carried out in the Lottery houses. 7.2.4.1 The CONTRACTED PARTY will also assure that the terminals to be installed will be qualified to perform financial transactions which present a structure similar to that of the transactions Type 1, 2, 3, 4, and 5, being -10- 11 sure that such terminals should be able to perform such transactions in up to 90 (ninety) net days starting from the date of presentation, by the CAIXA, of the specifications of the product to be developed. 7.2.4.2 Any alterations, which may cause a substantial impact on the time of development of the product specifications to be made available referred to in previous item, will imply a new term counting to be negotiated between the Parties, which can not exceed 90 (ninety) days. 7.2.4.3 The CONTRACTED PARTY will have a 10 (ten) net days term from the date of presentation of the technical specifications by the CAIXA, to express its opinion about the data sufficiency for the respective application development. Non-pronouncement by the CONTRACTED PARTY within this specified term will be considered, for contractual effect, as an indication of information sufficiency for the achievement of the application development works. 7.2.5 The penalty imposed for eventual delays in the terms for the development of foreseen applications will be proportional to the number of days in delay, and will be applied according to the provision of Clause 11 below. 7.2.6 Eventual problems or technical failures in the applications developed by the CONTRACTED PARTY, which may hinder their correct function and prevent the accomplishment of lottery or financial transactions, will be subjected to penalties according to Clause 11 below. 7.2.7 The CONTRACTED PARTY will carry out due corrections of the software applications, which may be deemed necessary to meet any legal or regulation obligation, within the term specified in the respective norm, with no additional cost for the CAIXA, during the period of validity of this Contract. 7.3 TRAINING 7.3.1 The CONTRACTED PARTY will give complete training to the Lottery Undertakers, according to the training program mentioned in the ATTACHMENT III, in the houses of the Lottery Units, at the time of the terminal installation, for them to be able and prepare their employees to operate the terminals and the applications to be developed. 7.3.1.1 Training should be given in a maximum term of 2 (two) net days starting from the installation date of the new terminals. 7.3.2 The penalty imposed to eventual delays in the schedule foreseen in previous item will be proportional to the number of days in delay, and will be applied according to provision in Clause 11 below. 7.3.3 Any failure caused by the CONTRACTED PARTY in the qualification training of the CAIXA and/or Lottery Undertakers for them to operate the terminals and -11- 12 applications, will be considered as a delay in the terminal installation, and will be subject to penalty as described in subitem 7.1.6 above. 7.4 SUPPORT AND MAINTENANCE SERVICES 7.4.1 The CONTRACTED PARTY will offer to the CAIXA and Lottery Undertakers, during the whole period of validity of this Contract, permanent suuport services and maintenance of the terminals and applications according to the Attachment IV, both for the already installed terminals as well as for those to be installed. 7.4.2 The penalty for eventual delays in the term foreseen in this item will be proportional to the number of days in delay, and will be applied according to provision in Clause 11 below. 7.5 SYSTEM PERFORMANCE 7.5.1 The CONTRACTED PARTY assures to the CAIXA that the network response time will meet the technical specifications mentioned in the ATTACHMENT VII. 7.5.2 The system performance deterioration, as per item 7.5.1, will subject the CONTRACTED PARTY to penalty to be calculated based on the number of days that the network performance (defined in the ATTACHMENT VII) has impaired a determined activity, in terms of volume of bets and/or financial transactions, compared with the normal collection volumes, based on the reality resulted for previous periods according to Clause "Penalties and Administrative Sanctions". 7.6 NETWORK DEACTIVATION AND SUBSTITUTION 7.6.1 The CONTRACTED PARTY will begin the deactivation process of the services of collection and processing of lottery and financial transactions, according to a term to be agreed upon by the Parties. 7.6.2 During the whole network deactivation and substitution process, the CONTRACTED PARTY will assure to the CAIXA the continuity, support, maintenance and perfect execution of all contracted services, until the network and system of the service rendering company which will replace it are duly installed and fully in operation. 7.6.3 The CONTRACTED PARTY undertakes to supply all consolidated data of the transactions Type 1, 2, 4 and 5 collected in its network to the service rendering company which will replace it, or to the CAIXA at discretion of this, according to a term to be agreed upon between the Parties. 7.6.4 The non-accomplishment of the provision of subitem 7.6.3 will subject the CONTRACTED PARTY to a fine equivalent to the totality of the remuneration calculated based on the totality of the transactions collected during the entire period in delay. -12- 13 7.6.5 The CAIXA may suspend or interrupt the remuneration of the CONTRACTED PARTY, without detriment to the commination of the fines foreseen in Clause 11, legal penalties and indemnification from losses and damages, in the case the CONTRACTED PARTY obstructs or tries to obstruct, in any way, the transition process to the new service rendering company, regardless of the effective process implementation. 7.6.6 The specifications for the interconnection of the networks belonging to the CAIXA and to the CONTRACTED PARTY are detailed in the ATTACHMENT VI of this Contract. 7.6.7 Notwithstanding the provision of item 7.6.3 above, the CONTRACTED PARTY should supply, whenever requested by the CAIXA, and immediately after each of these requests, all the history base of files relating to data of lottery and financial services processed by the CPNTRACTED PARTY for the CAIXA, in the already practiced formats, with no additional charge for the CAIXA. 7.7 NECESSARY INVESTMENTS The CONTRACTED PARTY will make all necessary investments for the faithful implementation and performance of the contracted services, including the costs for the supplying of terminals, development of applications, and for the respective installation and infrastructure services, development, operation, support and maintenance, as well as for all the adjustments necessary for the full and appropriate system functioning. 8. OBLIGATIONS OF THE CONTRACTED PARTY Following are the obligations of the CONTRACTED PARTY: I. maintain the whole lottery and financial services system "on-line real time", integrally delivering to the CAIXA all intelligence and respective logical and physical projects, and make it operational together with technicians of the CAIXA; II. assume all supplies necessary to the operation, such as leaflets, paper reels, printing tapes, etc., as well as operate and maintain the system implemented by it; III. maintain terminals, for purpose of audit and system follow-up, in the places indicated by the CAIXA; IV. maintain terminals and printers in the Head Office and Lottery Units of the Business Offices of the CAIXA; V. allow unrestricted access of employees indicated by the CAIXA to the intelligence and operation of the system, for purpose of audit; VI. maintain an attendance office, accredit technical representatives or assign resident technicians, so as to perform maintenance services and technical assistance to -13- 14 equipment which will be assigned for the service execution, in the terms and conditions established in this Contract; VII. immediately and in writing notify the CAIXA about any abnormality which may be found in the service execution; VIII. give the explanations which may be requested by the CAIXA, whose claims should be promptly attended to; IX. print on the leaflets, in all contests and with no charge to the CAIXA, the advertising determined by it; X. install the equipment and software necessary for the work development; Xl. install and maintain a safe communication network for terminal connection with the Data Processing Center of the CONTRACTED PARTY; XII. train the lottery undertakers and their employees, up to the limit of 06 (six) people per shop, in the operationality of the terminals; XIII. maintain assigned personnel in the Data Processing Center of the CONTRACTED PARTY and in the attendance shops, train and supply field services to the lottery undertakers; XIV. render marketing advisory service relating to new games, new software, administration in general and operation of the "on-line real time" system, the adoption of eventually suggested measures and attitudes being at the exclusive discretion of the CAIXA; XV. payment to its employees on due date and supply to the CAIXA, whenever requested, copy of the payrolls and of the collection bills of social security contribution, FGTS, PIS, tax withdrawn at source, if any, thus proving the inclusion of the employees assigned to the execution of the contracted services; XVI. take care that its employees behave with politeness and courtesy towards the CAIXA personnel, customers, visitors and other contracted people, being at the discretion of the CAIXA to require the removal and/or substitution of those whose behavior is deemed inconvenient; XVII. observe and have accomplished the work safety and medicine standards foreseen in the pertinent legislation and bank norms in force at the CAIXA; XVIII. maintain a head office or representation office in Brasilia/DF, and this condition should be proved in up to 10 (ten) days after the date of the Contract signature; XIX. maintain its superior in each place and shifts where the services will be performed, to coordinate, supervise and command the personnel assigned and resolve any questions pertinent to the execution of the services, for correction of adverse situations and for the immediate attendance to claims/requests of the CAIXA; -14- 15 XX. assume total responsibility for the equipment, furniture and utensils eventually placed at disposal for the service performance, assuring their integrity and indemnifying the CAIXA for the expenses for corrective maintenance resulting from misuse of same; XXI. supply to the CAIXA, observed the specifications indicated by it, formatted files for purposes of audit, whenever requested; XXII. inform the CAIXA, for the purpose of control of access to its buildings, the name and respective identification card number of the employees assigned to the service rendering; XXIII. inform the CAIXA, also for the purpose of control of access to its buildings, all occurrences of definitive removals and new employee engagements, those being informed within a term of 24 (twenty-four) hours and these up to the day of working beginning; XXIV. maintain its employees duly identified with name badge when in service in the CAIXA buildings; XXV. optimize the "on-line real time" system according to the instructions and folow-up of the System Area of the CAIXA; XXVI. answer for the losses, undue reproductions and/or adulterations which may occur in the magnetic documents and files during the period these are under its safekeeping; XXVII. supervise the perfect accomplishment of the services it is obliged to, being integrally up to it the resulting charges, this supervision being done independently from that which will be carried out by the CAIXA; XXVIII. accept the most comprehensive inspection from the CAIXA through its superior representatives, at any time during the period of validity of the Contract, being sure this inspection can be made in its installations, for the purpose of a strict accomplishment of the contractual obligations; XXIX. assume all expenses relative to the personnel and to the object of this Contract, excepting those foreseen in it as being on the responsibility of the CAIXA; XXX. assume all measures and obligations established in the specific legislation of work accidents when, on ocurrences of this kind, its employees are victims in the performance of the services or in connection with them, even though occurred in the buildings of the CAIXA; XXXI. provide necessary personnel for the operation of the Data Processing Centers of the Contracted Party and offer field services to repair the equipment installed in the "online real time" sales points; XXXII carry out the system tests with participation of the CAIXA; -15- 16 XXXIII. train CAIXA employees indicated by it as regards the operation and safety of the software system; XXXIV. maintain a subsystem which allows control and entry of ticket prizes of the Brazilian Federal Lottery and Brazilian Instantaneous Federal Lottery, according to conditions established by the CAIXA, and the receipt of accounts of public concessionaires and other payments and bank services made in the lottery channels; XXXV. promote and participate in meetings called together for discussion of points of view about work techniques and methods; XXXVI. operate the Date Processing Center of the CONTRACTED PARTY on days and times defined by the CAIXA; XXXVII. carry out preventive and corrective system equipment maintenance, so as to keep them in a perfect operation condition; XXXVIII. carry out maintenance of all software, including installation and tests of eventual alterations, according to modifications requested by the CAIXA; XXXIX. prepare, maintain and provide to the CAIXA operation information throughreports and magnetic means, in a periodicity to be defined, of all the activities relating to collected lottery transactions; same will eventually apply to the management information relating to the transactions Type 1, 2, 4 and 5; XL. maintain files and records to facilitate at any time inspections and audits of transactions and sales; XLI. maintain the system, user and operation manuals up-to-date, having them available for the CAIXA and accredited lottery people; XLII. install the new terminals, mentioned in the installation schedule in the Attachment II, in the addresses specified by the CAIXA, in the maximum term of 60 (sixty) net days starting from the information date by the CAIXA; XLIII. assume all expenses resulting from removal of goods from the buildings of the CAIXA, Business Offices and sales points for eventual substitution of the network of the CONTRACTED PARTY with that of the winner of the bidding to be carried out; XLIV. faithfully accomplish all contractual stipulations, specially the obligations foreseen in Clause 7 above, indemnifying the CAIXA from all and whatever loss which may be caused by it, its directors, employees, subcontractors or superiors, resulting from non-accomplishment of any contractual obligation, without detriment to imposed legal and contractual comminations; XLV. expand the data communication network, whenever the average response time exceeds the initially established; -16- 17 XLVI. treat the information (data) of the CAIXA in its computer environment, if so defined by the Contractor, for making feasible new products and services, assuring a high safety level and absolute secret; XLVII. maitain, during the whole execution of the Contract, all the qualification conditions required by law, in compatibility with the obligations assumed by it; XLVIII. at the request of the CAIXA, re-assign already installed lottery agents, with no charge, including to the lottery undertakers, observed the interstice of a 12 (twelve) month term; XLIX. be responsible for the re-assignment of terminals during the installation process of the terminals listed in the ATTACHMENT II, according to a composition plan of the platforms of the Lottery Units to be defined by the CAIXA; L. incorporate new financial services into its system, according to technical specifications provided by the CAIXA; LI. as from the receiving confirmation and validation of the numbers authorized for qualification of prepaid telephones in the "off-line" category, by the CONTRACTED PARTY to the Telecommunication Operators, such telephone numbers will be under the exclusive responsibility of the CONTRACTED PARTY, which will assure their integrity both in the central system maintenance as well as in the supply to the customer, having also to control the already commercialized PINS, of which the Telecommunication Operators will be informed through the CAIXA in the form foreseen in the own technical specification manual. At the time of making the "on-line" category available, this obligation will no more apply; LII. The CONTRACTED PARTY undertakes to install up to 446 equipment for bet collection existing in the network, until February 28, 2001, in locations to be defined by the CAIXA and in cities which take part in the presently installed network, with no charge to the CAIXA and its licencees. LIM The CONTRACTED PARTY undertakes to re-install the equipment mentioned in item 11.14 below in the maximum term of 30 (thirty) net days after the address comunication by the CAIXA. 9. RESPONSIBILITIES OF THE CONTRACTED PARTY 9.1 FOLLOWING ARE RESPONSIBILITIES OF THE CONTRACTED PARTY: I. be responsible for all and whatever damage caused to the CAIXA or to third parties, by itself, its directors, employees, subcontractors or superiors, resulting from the non-accomplishment of the contractual obligations, improper service performance, or failures in the system of equipment safety and rendered services, this responsibility not excluding or reducing the inspection or follow-up of the services by the CAIXA; and -17- 18 II. be responsible as regards the CAIXA for any kind of sanction, fine, penalty or any lawsuit which it may be subjected to due to the service rendering, as well as due to the laabor contracts of its employees, including social, work and social security charges, in addition to tax duties, even in the cases involving eventual judicial decisions, releasing the CAIXA from any solidarity or responsibility. 9.2 The CONTRACTED PARTY authorizes the CAIXA to deduct the value corresponding to the damages referred to directly from the invoices pertinent to payments which may be owed, or from the contractual guarantee, regardless of whatsoever judicial or extrajudicial procedure. 10. OBLIGATIONS OF THE CAIXA The CAIXA assumes the obligation to: I. make the due payments in the conditions established in this Contract; II. notify the CONTRACTED PARTY about any irregularity found in the execution of the services; III. give or withdraw credentials for sales points, establishing in contract, and at its discretion, the terms and conditions for credentials for each sales point; IV. inform the CONTRACTED PARTY the location addresses for the installation of the terminals in the lottery units; V. inspect the sales points for them to be legally licenced for the game sales and rendering of financial services through the terminals and communication equipment installed in its shop; VI. collect the sales product from each sales point; VII. promote the lottery games at its own discretion so as to keep the bettor interest, aiming at sales maximization; VIII. pay the due prizes of the lottery system; IX. provide the technical specifications of new financial products to be incorporated into the data comunication network of the CONTRACTED PARTY; X. accomplish the Installation Schedule of the Terminals supplied by the CAIXA, as established in the ATTACHMENT II, the CAIXA having the prerogative to modify the schedule referred to according to its operation requirements, provided that the installation in the altered locations has not yet been requested from the CONTRACTED PARTY; XI. homologate the applications developed by the CONTRACTED PARTY in the maximum term of 10 (ten) net days starting from their presentation by the CONTRACTED PARTY, under penalty that such applications be considered as tacitly homologated; -18- 19 XII. provide the necessary information to authorize the financial transactions, under the penalty of being obliged to pay for the transactions which are not concluded due to such contractual non-accomplishment by the CAIXA; XIII. delay in payment referred to in proposition I of this Clause will imply financial updating of the owed value according to the applicable legislation in force; XIV. inspect the sales point that they are equipped with alternating electric current dedicated line and adequate space for the installed terminals to regularly function; XV. inspect the sales point that they observe the timetable of attendance to the public as established by the CAIXA, observed the local municipal attitudes. 11. PENALTIES AND ADMINISTRATIVE SANCTIONS 11.1 For the full or partial Contract non-fulfillment, the CONTRACTED PARTY will be subjected to following sanctions, with no detriment to further applicable comminations: 1. admonition; II. fine; Ill. rescission of the Contract; IV. temporary suspension from participating in bidding and temporary impediment to bid with the CAIXA, for a term up to 02 (two) years; V. declaration of unability to participate in bidding and contract with the Public Administration. -19- 20 11.2 The admonition will be optionally applied, at the exclusive discretionof the CAIXA, as a censure warning preceding the fine, in the cases of infringements considered light, according to the exclusive interpretation and convenience of the CAIXA. 11.2.1 The CONTRACTED PARTY will be subjected to the fine of 3% (three per cent) on the value of his weekly remuneration, when occurring the third application of the admonition penalty. 11.3 The fines due to delay in the execution of the services will be applied based on the number of transactions which have not been completed as a result of the respective contractual non-fulfillment, the calculation forms described in the ATTACHMENT V of this Contract being observed, without detriment to the penalty application foreseen in subitem 7.6.4 above. 11.3.1 The fine referred to in this item will be composed of following parcels: (i) R$ 0,075 (seventy-face tenths of cents of Real) per foreseen and not performed financial transaction, observed the provision in the ATTACHMENT V; and (ii) 2,875% (two point eight hundred and seventy-five per cent) of the value, in Reais, corresponding to the amount of lottery games foreseen and not performed each day, observed the provision in the ATTACHMENT V. 11.4 The fines due to delays over 24 (twenty-four) hours in attending calls for corrective maintenance of the equipment assigned in the CAIXA or in the sales points will subject the CONTRACTED PARTY to a fine equal to 50% (fifty per cent), calculated on the total sales average of the last 4 (four) weeks of the sales point, and it will be collected double as much in the cases of relapse within 30 (thirty) net days. 11.5 The fines due to delays over 2 (two) working hours in attending calls for corrective maintenance in the Base Radio Stations (ERBs) will subject the CONTRACTED PARTY to a fine equal to 17% (seventeen per cent), calculated on the total sales average of the last 4 (four) weeks of the sales point, and it will be collected double as much in the cases of relapse within 30 (thirty) net days. 11.6 For the remote Base Radio Stations, the same attendance terms described in the item 11.5 above are at first agreed upon, the parties undertaking to later discuss longer terms for the attendance to such Base Radios. 11.7 The system standstill for any reason during more than 2 (two) working hours, due to a fault not imputable to the CAIXA, will imply a fine application corresponding to 4% (four per cent) per standstill day, calculated on the total amount of weekly collection of the damaged lottery sales points, settled in the immediately previous week. 11.8 If a 20 (twenty) net days delay occurs in the execution of any contractual obligation due to a fault of the CONTRACTED PARTY, folloing may occur at the exclusive discretion -20- 21 of the CAIXA: (i) rescission of the Contract, without detriment to the legal and contractual comminations; or (ii) guarantee loss in favor of the CAIXA. 11.9 If eventual total or partial standstills of the equipment occur, involving hardware or software failures, which may cause eventual alterations of the times of drawing of lots and/or the non-inclusion into the system of the already made bets, due to a fault imputable to the CONTRACTED PARTY, this will assume all the charges supported by the CAIXA as a result of such adverse situations. 11.10 The fine collection will be made through deduction from the invoice payment, if this is presented after its application, or from the guarantee itself, or also directly collected from the CONTRACTED PARTY. 11.11 The sanctions foreseen in the propositions I (admonition), IV (temporary impediment to bid) and V (declaration of unability), of item 11.1, do not prevent the commination of the contractual fines, indemnification for losses and damages or penal sanctions of a legal nature. 11.12 Penalties will only be applicable to the CONTRACTED PARTY as regards the non-accomplishment of the obligations related to the implementation services of the connections between the DPC of the CONTRACTED PARTY and that of the CAIXA, causing delay in the beginning of the new terminal operation and/or in the new transaction qualification, in the case such delay is due to an act exclusively imputable to the CONTRACTED PARTY. 11.13 The delay in the implementation of the terminals considered in the schedule of the ATTACHMENT II B will subject the CONTRACTED PARTY to a fine corresponding to 6% (six per cent) of the average monthly collection of the already installed terminals, calculated based on the data of the last 6 (six) months. 11.14 The standstill, single or exclusively relating to the sales services of numbers of prepaid cards qualification, for more than 2 (two) hours, due to whatever reason which can evidently be imputable to the CONTRACTED PARTY, excepting the cases of acts of God, will imply a fine payment corresponding to 20% (twenty per cent) per standstill day, applied on the total amount of remuneration of the CONTRACTED PARTY for these services at the damaged lottery sales points, collected in the same day of the immediately previous week. 12. PENAL ILLICIT ACTS 12.1 The penal infringements, typefied in the Law No. 8.666/93, will be object of administrative and judicial procedure in the legally foreseen form, without detriment to the other applicable comminations. 13. CONTRACTUAL GUARANTEE -21- 22 13.1 For the purpose of this Contract execution, the CONTRACTED PARTY provides a guarantee in the form of caution money, in the amount of R$ 20,000,000.00 (twenty million Reais). 13.2 On the provided caution money will solely be applied the updating corresponding to the variation index of the savings account book for the lst day of the month, excluding the interest, proportionally calculated, when it is the case, counting from the deposit date up to its effective calculation. 13.3 The guarantee should be completed to its integrity, if it is the case, whenever a value relating to a contractual fine is deducted from it. 13.4 The guarantee will be released after the perfect accomplishment of the Contract, provided that all contracted terms, clauses and conditions are fulfilled. 13.5 The total or partial guarantee loss in favor of the CAIXA, due to non-fulfillment of the contractual obligations, will be made in full right, regardless of any fudicial or extrajudicial notice. 13.6 At any time, through communication to the CAIXA, the substitution of the guarantee may be accepted, under observation of the modalities foreseen in the Law No. 8666, of June 21, 1993. 14. INSPECTION 14.1 During the service execution, the CAIXA, directly or through the person indicated by it, has the right to inspect the faithful fulfillment of the Contract provisions. 14.4.1 The CAIXA will record in a report the deficiencies found in the service execution, notifying the CONTRACTED PARTY for the immediate correction of found irregularities, without detriment to the application of the penalties foreseen in this Contract and in the Law No. 8.666/93. 15. FISCAL INCIDENCES, CHARGES, INSURANCES, ETC. Following charges are exclusive responsibility of the CONTRACTED PARTY: I. all duties, taxes, improvement contributions, rates and prices owed to Federal, State and Municipal Treasury Revenues, resulting from the execution of the services object of this Contract; II. the contributions owed to the Social Security, INSS, FGTS, labor charges, insurance premia and charges resulting from work accidents, emoluments and other expenses which may be necessary for the execution of the services object of this Contract; III. all and whatever rate or emolument owed to any federal, state or municipal entity, resulting from the execution of the services object of this Contract. -22- 23 16. NON-FULFILLMENT AND RESCISSION OF THE CONTRACT 16.1 The total or partial non-fulfillment of the contract gives occasion to the Contract rescission, with the contractual consequences and those foreseen in Law. 16.2 Following motives give occasion to Contract rescission, regardless of notification or judicial or extrajudicial interpretation: I. total or partial non-fulfillment, by the CONTRACTED PARTY, of any of the obligations/responsibilities foreseen in this Contract; II. total or partial transfer of the Contract without the previous consent of the CAIXA; III. reiterated faults or defects in the execution of the services; IV. bankruptcy of the CONTRACTED PARTY; V. company dissolution; VI. the social alteration or the modification of the company objective or structure which, in the judgment of the CAIXA, may impair the execution of the Contract; VII. the slowness in its accomplishment, which brings the CAIXA to presume the nonexecution of the service; 16.3 Should the contractual rescission occur based on the provisions I and VII above, the Guarantee will revert in favor of the CAIXA, without detriment to further applicable indemnifications. 16.4 Independently of any judicial or extrajudicial procedure by the CAIXA, the rescission of the Contract will imply the retention and assumption of the credits resulting from Contract, up to the limit of the damages caused to the CAIXA, without detriment to the sanctions foreseen in this Contract and in Law, until complete indemnification from caused damages. 17. CONFIDENTIALITY 17.1 The CAIXA and the CONTRACTED PARTY are aware that they should, by themselves, their directors, employees, subcontractors or superiors, keep the most complete and absolute SECRET, as regards the data, about information or documents of any nature shown, handled or by any form or way they may take notice of, by reason of the services now contracted, therefore remaining, by force of law, civilly and criminally responsible for their undue disclosure, negligent or incorrect utilization, without detriment to the responsibility for losses and damages they may cause and the imposed contractual comminations. -23- 24 18. FINAL PROVISIONS 18.1 In the counting of the terms established in this Contract the beginning day will be excluded and the due day will be included. 18.2 The terms referred to in this Contract begin and expire only in working day of the CAIXA. 18.3 Any and whatever work achieved by the assigned people, directly or indirectly related with the signed Contract object, will be repassed to the CAIXA concomitantly to the development of its steps or phases, duly documented, on headletter paper of the CONTRACTED PARTY, in usual language and standard of the CAIXA. 18.4 During the period of validity of the Contract the CAIXA will have unrestricted access to the system, and the CONTRACTED PARTY should notify all details of the development, implementation and operationability, for purposes of management of the services object of the Contract. 18.5 In case of Contract rescission for a reason not assigned to the CAIXA, this reserves the right to keep the possession and continue utilizing the system with all the resources necessary for the lottery services maintenance, including the network and all hardware and software equipment which have been implemented by the CONTRACTED PARTY, for the necessary and sufficient period of time for the new contracting process, with no charges to the CAIXA. 18.6 The CONTRACTED PARTY is forbidden to use the Contract as caution or utilize it for any financial operation without previous and express authorization by the CAIXA. 18.7 The CAIXA will define an exclusive representative for interlocution with the CONTRACTED PARTY, who will be the SOLE authorized to negotiate questions relating to the supply comprehended by this Contract. 19. ACKNOWLEDGE OF THE RIGHTS OF THE CAIXA 19.1 The CONTRACTED PARTY acknowledges the rights of the CAIXA, in the case of administrative rescission foreseen in Art. 77 of the Law No. 8.666/93. 20. COURT The Judicial Section of the Federal Justice of the Federal District shall be competent to settle the questions resulting from this Contract. So, having as just and contracted, the CAIXA and the CONTRACTED PARTY sign the present term in 04 (four) copies of equal content and form, in the presence of the below signed witnesses. -24- 25 Brasilia-DF May 26, 2000 (Signed) ---------------------------- by CAIXA ECONOMICA FEDERAL (Signed) ---------------------------- by GTECH BRASIL LYDA. WITNESSES: ATTACHMENTS -25- 26 TECHNICAL SPECIFICATIONS OF THE NEW TERMINALS Installation Schedule of the Terminals Training Schedule Maintenance Period Fine Calculation Form Connection with the Data Processing Center of the CAIXA Network Response Time Projections of the Transaction Volumes ATTACHMENT I TECHNICAL SPECIFICATIONS OF THE NEW TERMINALS
HARDWARE COMPONENTS ------------------- CPU Processor: AMD K6-lI 450 MHz Memory: 64 MB Hard disk: 4.3 GB Ports: 1 parallel, 3 serial Boards: 1 multi-serial card with 3 ports Feed source: 110/220 Volts Dimensions: 420 mm (length = L) x 150 mm (width = W) x 350 mm (height = H) Weight: 6.0 kg Printer Characters: Bidirectional impact and authenticating printer, modified by the manufacturer to meet specific requirements such as reel width 3.25" and specific characters implemented in the firmware. Interface: Serial DB-9 Feed source: 110/220 Volts Dimensions: 220 mm L x 206 mm W x 120 mm H
-26- 27 Weight: 2.7 kg
OMR (OPTICAL MARK READER) - ------------------------- Reader: with: 3.25 inches, 12 channels, spacing among channels '/." Interface: Serial DB-9 Feed source: 110/220 Volts Dimensions: 185 mm L x 170 mm W x 105 mm H Weight: 4.1 kg (including source) No-break Capacity: 500 VA Interactive technology Input voltage: 110 or 220 Volts Monitor Features: 9" monochromatic Feed source: 110/220 Volts Dimensions: 245 mm L x 235 mm W x 220 mm H Weight: 3.5 kg Barcode Reader and CMC-7 Features: Half-automatic reader of CMC-7 and Barcode Interface: Serial RJ-45 Feed source: 110/220 Volts Dimensions: 220 mm L x 70 mm W x 90 mm H (without tray for documents) Weight: 480 grams Keyboards 1) Operator: 84 configurable keys Interface: Serial MINI DIM Dimensions: 270 mm L x 230 mm W x 80 mm H Weight: 535 grams 2) Customer: Keyboard PIN 12 keys with display LCD 2 x 16, Magnetic Card Reader Track 1-2, Serial Communication (DB-9), Triple Cryptograpgy DES and Smart Card Reader EMV compatible. Feed source: 110/220 Volts
-27- 28 FINANCIAL TERMINAL PRINTER - -------- Graphic, matricial printer 46/56 Document authentication CPU --- Operation System Windows NT workstation Gtech. Microprocessor AMD K6-II 450 MHz 64 Mbytes memory 4.3 Gbytes HD 4 ports multiserial board Total of ports Parallel - 01 BARCODE AND CMC --------------- 7 Serial - 07 READER ------ OPTICAL MARK READER - ------------------- Half-automatic Barcode CMC-7 Reader, Interface RS-232C RJ-45 Feed source full range Monitor 9" monochromatic ------------------------ MAGNETIC CARD READER KEYBOARD
-28- 29 ATTACHMENT II A INSTALLATION SCHEDULE OF THE TERMINALS
- ------------------------------------------------------------------------------------------------- Region D+90 D+120 D+150 D+180 D+210 D+240 Total - ------------------------------------------------------------------------------------------------- AC 5 5 - ------------------------------------------------------------------------------------------------- AL 52 52 - ------------------------------------------------------------------------------------------------- AM 44 44 - ------------------------------------------------------------------------------------------------- AP 2 2 - ------------------------------------------------------------------------------------------------- BA 100 100 102 37 339 - ------------------------------------------------------------------------------------------------- CE 100 62 20 182 - ------------------------------------------------------------------------------------------------- DF 0 - ------------------------------------------------------------------------------------------------- ES 50 65 13 128 - ------------------------------------------------------------------------------------------------- GO 100 150 100 19 45 414 - ------------------------------------------------------------------------------------------------- MA 61 8 69 - ------------------------------------------------------------------------------------------------- MG 450 357 109 1,016 - ------------------------------------------------------------------------------------------------- MS 61 8 69 - ------------------------------------------------------------------------------------------------- MT 57 8 65 - ------------------------------------------------------------------------------------------------- PA 52 34 10 96 - ------------------------------------------------------------------------------------------------- PB 64 8 72 - ------------------------------------------------------------------------------------------------- PE 50 100 35 22 207 - ------------------------------------------------------------------------------------------------- PI 47 47 - ------------------------------------------------------------------------------------------------- PR 250 248 61 559 - ------------------------------------------------------------------------------------------------- RJ 100 231 332 79 742 - ------------------------------------------------------------------------------------------------- RN 47 8 55 - -------------------------------------------------------------------------------------------------
-29- 30 - ------------------------------------------------------------------------------------------------- RO 25 25 - ------------------------------------------------------------------------------------------------- RR 3 3 - ------------------------------------------------------------------------------------------------- RS 239 206 59 504 - ------------------------------------------------------------------------------------------------- SC 220 25 245 - ------------------------------------------------------------------------------------------------- SE 30 26 56 - ------------------------------------------------------------------------------------------------- SP 980 1,029 280 2,289 - ------------------------------------------------------------------------------------------------- TO 15 15 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- TOTAL/ month 980 1,429 1,666 1,657 768 8000 7,300 - ------------------------------------------------------------------------------------------------- Accumulated Total 980 2,409 4,075 5,732 6,500 7,300 - -------------------------------------------------------------------------------------------------
REMARK: We consider D as the contract signature date. -30- 31 ATTACHMENT II B
- ------------------------------------------------------------------------------------------------- INSTALLATION SCHEDULE OF THE LOTTERY UNITS - ------------------------------------------------------------------------------------------------- 2000 Total - ------------------------------------------------------------------------------------------------- REGION JUN JUL AUG SEP OCT NOV DEC - ------------------------------------------------------------------------------------------------- AC 4 4 8 - ---------------------------------------------------------------------------------------------- AL 10 17 14 15 56 - ---------------------------------------------------------------------------------------------- AM 6 11 9 5 31 - ---------------------------------------------------------------------------------------------- AP 3 4 1 8 - ---------------------------------------------------------------------------------------------- BA 47 67 66 62 242 - ---------------------------------------------------------------------------------------------- CE 25 31 33 27 116 - ------------------------------------------------------------------------------------------------- ES 10 9 9 4 32 - ------------------------------------------------------------------------------------------------- GO 20 22 9 19 70 - ------------------------------------------------------------------------------------------------- MA 18 20 35 22 95 - ------------------------------------------------------------------------------------------------- MG 64 55 65 74 258 - ------------------------------------------------------------------------------------------------- MS 15 10 4 3 32 - ------------------------------------------------------------------------------------------------- MT 17 13 11 13 54 - ------------------------------------------------------------------------------------------------- PA 21 22 23 22 88 - ------------------------------------------------------------------------------------------------- PB 15 17 18 23 73 - ------------------------------------------------------------------------------------------------- PE 28 24 37 25 114 - ------------------------------------------------------------------------------------------------- PI 18 10 10 11 49 - ------------------------------------------------------------------------------------------------- PR 19 29 40 30 118 - ------------------------------------------------------------------------------------------------- RJ 3 2 1 5 11 - ------------------------------------------------------------------------------------------------- RN 13 18 15 24 70 - ------------------------------------------------------------------------------------------------- RO 2 4 2 4 12 - -------------------------------------------------------------------------------------------------
-31- 32 - ------------------------------------------------------------------------------------------------- RR 3 2 5 - ------------------------------------------------------------------------------------------------- RS 15 29 23 30 10 107 - ------------------------------------------------------------------------------------------------- SC 18 18 35 22 93 - ------------------------------------------------------------------------------------------------- SE 13 14 8 7 42 - ------------------------------------------------------------------------------------------------- SP 31 48 39 66 184 - ------------------------------------------------------------------------------------------------- TO 15 6 5 6 32 - ------------------------------------------------------------------------------------------------- TOTAL 331 331 334 334 335 336 2000 - -------------------------------------------------------------------------------------------------
-32- 33 ATTACHMENT III TRAINING SCHEDULE The Field Technician of the CONTRACTED PARTY should give instructions about the use of all peripherals, handling and operation cares of the new equipment. The instructions which the technician will give relating to this type of training take into account that the Undertaker has already knowledge of the lottery environment. According to this project, the training will take place immediately after the installation of the new equipment in the Lottery Unit, for up to 6 (six) employees, provided they are present on the installation date. DIDACTIC MATERIAL - Manual (it will be sent together with the equipment and delivered by the technician at the moment of the installation/training) - The Terminal itself installed in the Shop (with a stand-alone program, which will be deleted by the technician after the instructions have been concluded) PROPOSED PROGRAM - Presentation of the Terminal - Presentation of the Peripherals - Instructions for Printer Handling - Operation of the Keyboard (functions of the keys) - Operation of the Optical Reader - Operation of the Barcode and CMC-7 Reader - Operation of the Magnetic Card Reader - Guidelines for Receiving and Storing Consumables - Access to the Call Center Service OTHERS - After the training has been concluded, the Field Technician should run a deactivation routine of the stand-alone program, which will automatically enable the on-line program, letting the sales point ready to perform the transactions. - The Manual will be the support and consultation material for the lotttery undertaker durante his day by day work. -33- 34 ATTACHMENT IV MAINTENANCE PERIOD Mondays to Fridays from 9:00 a.m. to 5:00 p.m. Saturdays from 9:00 a.m. to 2:00 p.m. -34- 35 ATTACHMENT V FINE CALCULATION FORM In the case of the installation of new terminals and development of applications for the new financial transactions, the non-implementation within the terms agreed upon will imply a fine to be calculated based on the transactions which will be carried out in these terminals after their implementation. However, if the delay period is more than 30 net days, the transaction volume to be taken as a reference to be utilized for penalty purpose will be the transactions projected in the Attachment VIII. For the purpose of calculation of the fine to be applied, following three transaction types will be added: - - Transactions of lottery games - - Transactions of account payments - - New financial transactions The fine calculation will be as follows: 1 . Firstly, all the terminals which have been affected by the problem are identified. 2. Then, the period of the day and of the week is identified, during which each of these terminals remained inoperative. 3. Next, we will check to see how many transactions these terminals have performed in similar periods of the previous week, if in this week exceptional standstills for whatever reason have not been found. In the case exceptional standstills have occurred, we proceed back one week more until we find a week with no abnormality. 4. In the case it is a new terminal, a comparative calculation will be applied from already installed terminals in the same lottery house, or in the nearest lottery house, if we are speaking of a new lottery sales point. 5. Since all lottery and financial transactions have been accounted, which have been collected in the terminals referred to in the period used for comparison, then we will apply the fines specified in item "Penalties to the CONTRACTED PARTY". -35- EX-10.27 9 y48042ex10-27.txt FIRST AMENDMENT TO 1996 SOTCK OPTION PLAN 1 FIRST AMENDMENT TO THE GTECH HOLDINGS CORPORATION 1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN WHEREAS, GTECH Holdings Corporation (the "Corporation") adopted the GTECH Holdings Corporation 1996 Non-Employee Directors' Stock Option Plan (the "Plan") as a means whereby the Corporation may, through the grant of non-qualified stock options to purchase common stock of the Corporation to Non-Employee Directors, attract and retain capable outside directors; WHEREAS, the Plan may be amended by resolution of the Board of Directors of the Corporation (the "Board") in accordance with Section 9 of the Plan; WHEREAS, the Board has by resolution authorized the amendment of the Plan to extend the term of the options granted under the Plan. NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section 6 (c) is amended in its entirety to read as follows: (c) Term. Subject to earlier termination as provided in Sections 6(e), (f) and (g) and in Section 8 hereof, the term of each option shall be ten (10) years from the date of grant. 2. Except as amended above, the Plan remains in full force and effect and is in all other respects ratified and confirmed. IN WITNESS WHEREOF, the Corporation has executed this First Amendment as of the ____ day of __________, 2001. GTECH HOLDINGS CORPORATION By:_______________________________ Title:______________________________ EX-10.32 10 y48042ex10-32.txt FIRST AMENDMENT TO 1999 STOCK OPTION PLAN 1 EXHIBIT 10.32 FIRST AMENDMENT TO THE GTECH HOLDINGS CORPORATION 1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN WHEREAS, GTECH Holdings Corporation (the "Corporation") adopted the GTECH Holdings Corporation 1999 Non-Employee Directors' Stock Option Plan (the "Plan") as a means whereby the Corporation may, through the grant of non-qualified stock options to purchase common stock of the Corporation to Non-Employee Directors, attract and retain capable outside directors; WHEREAS, the Plan may be amended by resolution of the Board of Directors of the Corporation (the "Board") in accordance with Section 9 of the Plan; WHEREAS, the Board has by resolution authorized the amendment of the Plan to extend the term of the options granted under the Plan. NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section 6 (c) is amended in its entirety to read as follows: (c) Term. Subject to earlier termination as provided in Sections 6(e), (f) and (g) and in Section 8 hereof, the term of each option shall be ten (10) years from the date of grant. 2. Except as amended above, the Plan remains in full force and effect and is in all other respects ratified and confirmed. IN WITNESS WHEREOF, the Corporation has executed this First Amendment as of the ____ day of __________, 2001. GTECH HOLDINGS CORPORATION By: ---------------------------------- Title: ------------------------------- EX-21.1 11 y48042ex21-1.txt SUBSIDIARIES 1 EXHIBIT 21.1 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES GTECH Holdings Corporation GTECH Corporation GTECH Corporation Subsidiaries Affiliated Marketing Solutions, LLC (75%) Data Transfer Systems, Inc. DataTrans Sp. z.o.o. (Poland)(52% effective control) Dreamport, Inc. Dreamport International, Inc. Dreamport do Brasil Ltda. (Brazil) Dreamport Turfway LLC Dreamport Suffolk Corporation Environmental Paper Products, Inc. Cam Galaxy Group Ltd. (UK) (80%) 40% Europrint Holdings JSJ Ltd. (UK) (80%) 60% Ltd. (UK) GameScape, Inc. Gana De Mexico S.A. de C.V. (Mexico) GRYTEK Co. Ltd. (Poland) GTECH Asia Corporation GTECH Australasia Corporation GTECH Brasil Ltda (Brazil) GTECH Canada Computer Systems Corporation (Canada) GTECH Child Care Center GTECH Communicaciones Colombia Ltd. (99.99%) GTECH Computer Systems Sdn Bhd (Malaysia) GTECH Corporation (Utah) GTECH Cote d'Ivoire (Ivory Coast) GTECH Czech Republic Corporation 2 GTECH Corporation Subsidiaries (Cont.) GTECH Eastern Europe Sp. z o.o GTECH Eesti A.S. (Estonia) GTECH Espana Corporation GTECH Europe S.A. (Belgium) GTECH Far East Pte Ltd (Singapore) GTECH Foreign Holdings Corporation Online Transaction Technologies SARL a Associe Unique (Morocco) GTECH France S.A.R.L. (France) GTECH Gaming Subsidiary 2 Corporation GTECH Global Services Corporation Ltd. (Cyprus) GTECH GmbH (Germany) GTECH Ireland Corporation GTECH Italia Srl (Italy) GTECH Italy Corporation GTECH Latin America Corporation GTECH LIT Corporation (Lithuania) GTECH Management P.I. Corporation GTECH Mexico S.A. de C.V. (Mexico) GTECH Nevada Corporation GTECH Northern Europe Corporation GTECH Rhode Island Corporation GTECH South Africa Corporation GTECH Southern Africa (Pty) Ltd. (South Africa) GTECH Sweden AB GTECH Sweden Corporation GTECH Taiwan Corporation GTECH U.K. Limited (UK) GTECH U.K. Corporation GTECH Ukraine (Ukraine) GTECH Worldserv, Inc. GTECH Worldserv International, Inc. GTECH Worldwide Services Corporation LAC Corporation On-Line Lottery License and Lease B.V. (Netherlands) GTECH Avrasya Teknik Hizmetler ve Musavialik A.S. (Turkey) Oy GTECH Finland SB Industria E Comercio Ltd. (Brazil) Secure Gaming Technologies, LLC (67%) Siam GTECH Company Limited (Thailand) -2- 3 GTECH Corporation Subsidiaries (Cont.) Technology Risk Management Services, Inc. Transaction Strategies Inc. Transactive Corporation Uwin Corporation Uwin R&D Ltd. (Ireland) Uwin Network Operations Ltd. (Ireland) Uwin Ireland Operations (Ireland) VideoSite, Incorporated Watson Land Company -3- EX-23.1 12 y48042ex23-1.txt 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. 333-56106) pertaining to the GTECH Holdings Corporation 2000 Omnibus Stock Option and Long-Term Incentive Plan and the GTECH Holdings Corporation 1999 Non-Employee Directors' Stock Option Plan, in the Registration Statement (Form S-8 No. 333-42932) pertaining to the GTECH Holdings Corporation 2000 Restricted Stock Plan, 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 Statements (Forms 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, 2001, 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 24, 2001. ERNST & YOUNG LLP Boston, Massachusetts April 19, 2001 -----END PRIVACY-ENHANCED MESSAGE-----