0000950123-01-506851.txt : 20011009 0000950123-01-506851.hdr.sgml : 20011009 ACCESSION NUMBER: 0000950123-01-506851 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010825 FILED AS OF DATE: 20011001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GTECH HOLDINGS CORP CENTRAL INDEX KEY: 0000857323 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 050450121 STATE OF INCORPORATION: DE FISCAL YEAR END: 0223 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11250 FILM NUMBER: 1749460 BUSINESS ADDRESS: STREET 1: 55 TECNOLOGY WAY CITY: WEST GREENWICH STATE: RI ZIP: 02817 BUSINESS PHONE: 4013921000 MAIL ADDRESS: STREET 1: 55 TECHNOLOGY WAY STREET 2: LEGAL DEPARTMENT CITY: WEST GREENWICH STATE: RI ZIP: 02817 10-Q 1 y53545e10-q.txt GTECH HOLDINGS CORPORATION 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 25, 2001 Commission file number 1-11250 -------- GTECH Holdings Corporation -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 05-0450121 ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 55 Technology Way, West Greenwich, Rhode Island 02817 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (401) 392-1000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- At September 28, 2001, there were 28,738,251 shares of the registrant's Common Stock outstanding. 2 INDEX GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Page PART I. FINANCIAL INFORMATION Number ----------------------------------- ------ Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Income Statements 4-5 Consolidated Statements of Cash Flows 6 Consolidated Statements of Shareholders' Equity 7 Notes to Consolidated Financial Statements 8-12 Item 2. Management's Discussion and Analysis of Financial Condition 13-19 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 PART II. OTHER INFORMATION ------------------------------- Item 1. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 ---------- EXHIBITS --------
3 PART 1. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES (Unaudited) August 25, February 24, 2001 2001 ------------- ------------- ASSETS (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 5,204 $ 46,948 Trade accounts receivable 111,894 118,721 Sales-type lease receivables 8,716 8,722 Inventories 113,811 117,789 Deferred income taxes 26,850 26,850 Other current assets 17,678 18,798 ------------- ------------- TOTAL CURRENT ASSETS 284,153 337,828 SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 1,331,808 1,283,414 Less: Accumulated Depreciation (939,059) (922,080) ------------- ------------- 392,749 361,334 GOODWILL 119,814 122,325 OTHER ASSETS 95,027 116,673 ------------- ------------- TOTAL ASSETS $ 891,743 $ 938,160 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short term borrowings $ 2,903 $ 2,316 Accounts payable 46,046 49,267 Accrued expenses 67,030 65,571 Employee compensation 27,912 31,898 Advance payments from customers 89,883 55,418 Income taxes payable 67,386 64,573 Current portion of long-term debt 3,872 3,512 ------------- ------------- TOTAL CURRENT LIABILITIES 305,032 272,555 LONG-TERM DEBT, less current portion 362,653 316,961 OTHER LIABILITIES 37,164 29,883 DEFERRED INCOME TAXES 4,399 4,399 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, 45,731,140 and 44,507,315 shares issued, 28,992,608 and 34,257,527 shares outstanding at August 25, 2001 and February 24, 2001, respectively 457 445 Additional paid-in capital 215,540 183,294 Equity carryover basis adjustment (7,008) (7,008) Accumulated other comprehensive loss (101,351) (85,852) Retained earnings 512,887 479,305 ------------- ------------- 620,525 570,184 Less cost of 16,738,532 and 10,249,788 shares in treasury at August 25, 2001 and February 24, 2001, respectively (438,030) (255,822) ------------- ------------- 182,495 314,362 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 891,743 $ 938,160 ============= =============
See Notes to Consolidated Financial Statements - 3 - 4 CONSOLIDATED INCOME STATEMENTS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) Three Months Ended --------------------------------------- August 25, August 26, 2001 2000 ------------------- ------------------ (Dollars in thousands, except per share amounts) Revenues: Services $ 209,619 $ 204,209 Sales of products 26,965 23,399 ------------------ ----------------- 236,584 227,608 Costs and expenses: Costs of services 143,592 142,622 Costs of sales 23,663 29,615 ------------------ ----------------- 167,255 172,237 ------------------ ----------------- Gross profit 69,329 55,371 Selling, general and administrative 27,081 32,237 Research and development 8,336 13,351 Goodwill amortization 1,590 1,609 Special charge - 40,018 ------------------ ----------------- Operating expenses 37,007 87,215 ------------------ ----------------- Operating income (loss) 32,322 (31,844) Other income (expense): Interest income 1,224 1,044 Equity in earnings of unconsolidated affiliates 1,400 838 Other income (expense) (1,685) 1,754 Interest expense (6,429) (6,653) ------------------ ----------------- Income (loss) before income taxes 26,832 (34,861) Income taxes (benefit) 10,196 (13,595) ------------------ ----------------- Net income (loss) $ 16,636 $ (21,266) ================== ================== Basic earnings (loss) per share $ .56 $ (.61) ================== ================== Diluted earnings (loss) per share $ .55 $ (.61) ================== ==================
See Notes to Consolidated Financial Statements - 4 - 5 CONSOLIDATED INCOME STATEMENTS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) Six Months Ended -------------------------------------- August 25, August 26, 2001 2000 ------------------ ----------------- (Dollars in thousands, except per share amounts) Revenues: Services $ 420,170 $ 426,840 Sales of products 51,379 42,766 ------------------ ----------------- 471,549 469,606 Costs and expenses: Costs of services 288,084 285,385 Costs of sales 43,600 45,426 ------------------ ----------------- 331,684 330,811 ------------------ ----------------- Gross profit 139,865 138,795 Selling, general and administrative 56,651 64,798 Research and development 15,969 26,277 Goodwill amortization 3,063 3,218 Special charge - 40,018 ------------------ ----------------- Operating expenses 75,683 134,311 ------------------ ----------------- Operating income 64,182 4,484 Other income (expense): Interest income 3,254 2,969 Equity in earnings of unconsolidated affiliates 2,575 2,094 Other income 493 2,441 Interest expense (12,851) (13,688) ------------------ ----------------- Income (loss) before income taxes 57,653 (1,700) Income taxes (benefit) 21,908 (663) ------------------ ----------------- Net income (loss) $ 35,745 $ (1,037) ================== ================= Basic earnings (loss) per share $ 1.19 $ (.03) ================== ================= Diluted earnings (loss) per share $ 1.16 $ (.03) ================== =================
See Notes to Consolidated Financial Statements - 5 - 6 CONSOLIDATED STATEMENTS OF CASH FLOWS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) Six Months Ended --------------------------------------- August 25, August 26, 2001 2000 ---------------- ------------------ (Dollars in thousands) OPERATING ACTIVITIES Net income (loss) $ 35,745 $ (1,037) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 81,277 81,248 Intangibles amortization 4,630 6,327 Goodwill amortization 3,063 3,218 Special charge - 40,018 Equity in losses of unconsolidated affiliates, net of dividends received (442) (1,130) Other 3,982 998 Changes in operating assets and liabilities: Trade accounts receivable 20,119 12,087 Inventories 3,978 (5,541) Special charge (4,850) (11,628) Other assets and liabilities 39,729 (17,951) ---------------- ------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 187,231 106,609 INVESTING ACTIVITIES Purchases of systems, equipment and other assets relating to contracts (118,096) (66,641) Investments in and advances to unconsolidated subsidiaries 3,187 (11,684) Other (1,738) (7,597) ---------------- ------------------ NET CASH USED FOR INVESTING ACTIVITIES (116,647) (85,922) FINANCING ACTIVITIES Net proceeds from issuance of long-term debt 181,000 38,000 Principal payments on long-term debt (136,255) (56,466) Purchases of treasury stock (186,293) (1,530) Proceeds from stock options 32,258 203 Other (1,346) 1,066 ---------------- ------------------ NET CASH USED FOR FINANCING ACTIVITIES (110,636) (18,727) Effect of exchange rate changes on cash (1,692) (3,117) ---------------- ------------------ DECREASE IN CASH AND CASH EQUIVALENTS (41,744) (1,157) Cash and cash equivalents at beginning of period 46,948 11,115 ---------------- ------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,204 $ 9,958 ================ ==================
See Notes to Consolidated Financial Statements - 6 - 7 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - (Unaudited) GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Equity Additional Carryover Outstanding Common Paid-in Basis Shares Stock Capital Adjustment ----------- -------------- ---------------- ------------- (Dollars in thousands) Balance at February 24, 2001 34,257,527 $ 445 $ 183,294 $ (7,008) Comprehensive income: Net income - - - - Other comprehensive loss, net of tax: Foreign currency translation - - - - Net loss on derivative instruments - - - - Unrealized loss on investments - - - - Comprehensive income Treasury shares repurchased (6,649,100) - - - Shares reissued under employee stock purchase and stock award plans 160,356 - - - Shares issued upon exercise of stock options 1,223,825 12 32,246 - ----------- -------------- ---------------- ------------- Balance at August 25, 2001 28,992,608 $ 457 $ 215,540 $ (7,008) =========== ============== ================ =============
Accumulated Other Comprehensive Retained Treasury Income (Loss) Earnings Stock Total -------------- --------------- ---------------- --------------- (Dollars in thousands) Balance at February 24, 2001 $ (85,852) $ 479,305 $ (255,822) $ 314,362 Comprehensive income: Net income - 35,745 - 35,745 Other comprehensive loss, net of tax: Foreign currency translation (13,331) - - (13,331) Net loss on derivative instruments (2,132) - - (2,132) Unrealized loss on investments (36) - - (36) ------------ Comprehensive income 20,246 Treasury shares repurchased - - (186,293) (186,293) Shares reissued under employee stock purchase and stock award plans - (2,163) 4,085 1,922 Shares issued upon exercise of stock options - - - 32,258 ---------------- --------------- ---------------- -------------- Balance at August 25, 2001 $ (101,351) $ 512,887 $ (438,030) $ 182,495 ================ =============== ================ ===============
See Notes to Consolidated Financial Statements - 7 - 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of GTECH Holdings Corporation (the "Company"), the parent of GTECH Corporation, have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended August 25, 2001 are not necessarily indicative of the results that may be expected for the full fiscal year ending February 23, 2002. The balance sheet at February 24, 2001 has been derived from the audited financial statements at that date. For further information refer to the Consolidated Financial Statements and footnotes thereto included in the Company's fiscal 2001 Annual Report on Form 10-K. Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation.
NOTE B -- INVENTORIES August 25, February 24, 2001 2001 --------------- --------------- (Dollars in thousands) Inventories consist of: Raw materials $ 17,827 $ 45,689 Work in progress 87,077 57,210 Finished goods 8,907 14,890 --------------- --------------- $ 113,811 $ 117,789 =============== =============== NOTE C -- LONG-TERM DEBT August 25, February 24, 2001 2001 --------------- --------------- (Dollars in thousands) Long-term debt consists of: 7.75% Series A Senior Notes due 2004 $ 150,000 $ 150,000 7.87% Series B Senior Notes due 2007 150,000 150,000 Revolving credit facility 48,000 --- Deferred gain on interest rate swaps 11,773 12,810 Other 6,752 7,663 --------------- --------------- 366,525 320,473 Less current portion 3,872 3,512 --------------- --------------- $ 362,653 $ 316,961 =============== ===============
On June 22, 2001, the Company refinanced its revolving credit facility with a syndicate of nine banks led by The Bank of America, which provides for an unsecured revolving line of credit of $300 million maturing in June 2006 (the "Credit Facility"). At August 25, 2001, the weighted average interest rate for outstanding borrowings under the Credit Facility was 4.7%. - 8 - 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued) NOTE D -- INCOME TAXES The Company's effective income tax rate is greater than the statutory rate primarily due to state income taxes and certain expenses that are not deductible for income tax purposes. NOTE E -- COMMITMENTS AND CONTINGENCIES See "Legal Proceedings" in Part II, Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 herein. NOTE F--EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share:
Three Months Ended Six Months Ended -------------------------------- ------------------------------ August 25, August 26, August 25, August 26, 2001 2000 2001 2000 -------------- ---------------- ------------- --------------- (Dollars and shares in thousands, except per share amounts) Numerator: Net income (loss) $ 16,636 $ (21,266) $ 35,745 $ (1,037) Denominator: Weighted average shares-Basic 29,538 34,840 30,149 34,835 Effect of dilutive securities: Employee stock options and 703 --- 640 --- unvested restricted shares -------------- --------------- ------------- --------------- Weighted average shares-Diluted 30,241 34,840 30,789 34,835 ============== =============== ============= =============== Basic earnings (loss) per share $ .56 $ (.61) $ 1.19 $ (.03) ============== =============== ============= =============== Diluted earnings (loss) per share $ .55 $ (.61) $ 1.16 $ (.03) ============== =============== ============= ================
The diluted share base for the three months and six months ended August 26, 2000 excludes 64,000 and 85,000 shares, respectively, related to employee stock options and unvested restricted shares. These shares are excluded due to their antidilutive effect as a result of the Company's net loss during those periods. - 9 - 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued) NOTE G -- COMPREHENSIVE INCOME The following table sets forth the components of comprehensive income (loss):
Three Months Ended Six Months Ended -------------------------------- ---------------------------- August 25, August 26, August 25, August 26, 2001 2000 2001 2000 -------------- ---------------- ------------- ------------- (Dollars in thousands) Net income (loss) $ 16,636 $ (21,266) $ 35,745 $ (1,037) Other comprehensive income (loss), net of tax: Foreign currency translation (3,567) 1,728 (13,331) (6,371) Net gain (loss) on derivative instruments (1,716) (321) (2,132) 26 Unrealized loss on investments (36) --- (36) --- -------------- --------------- ------------- ------------- Comprehensive income (loss) $ 11,317 $ (19,859) $ 20,246 $ (7,382) ============== ================ ============= ==============
NOTE H -- SEGMENT INFORMATION 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. 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. The Company's business segment data is summarized below:
Three Months Ended Six Months Ended ------------------------------- ------------------------------ August 25, August 26, August 25, August 26, 2001 2000 2001 2000 -------------- ------------- ------------- ------------- (Dollars in thousands) Revenues from external sources: Lottery $ 231,032 $ 217,567 $ 458,939 $ 448,190 All other 5,552 10,041 12,610 21,416 -------------- ------------- ------------- ------------- Consolidated $ 236,584 $ 227,608 $ 471,549 $ 469,606 ============== ============= ============= ============= Net operating profit after income taxes: Lottery $ 22,821 $ 8,749 $ 47,504 $ 34,308 All other (585) (497) (1,154) (597) -------------- ------------- ------------- ------------- Consolidated $ 22,236 $ 8,252 $ 46,350 $ 33,711 ============== ============= ============= =============
- 10 - 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued) A reconciliation of net operating profit after income taxes to net income (loss) as reported on the Consolidated Income Statements is as follows:
Three Months Ended Six Months Ended ------------------------------- ------------------------------ August 25, August 26, August 25, August 26, 2001 2000 2001 2000 -------------- ------------- ------------- ------------- (Dollars in thousands) Net operating profit after income taxes $ 22,236 $ 8,252 $ 46,350 $ 33,711 Reconciling items, net of tax: Special charge --- (24,411) --- (24,411) Interest expense (3,986) (4,058) (7,968) (8,350) Other (1,614) (1,049) (2,637) (1,987) -------------- ------------- ------------- ------------- Net income (loss) $ 16,636 $ (21,266) $ 35,745 $ (1,037) ============== ============= ============= =============
NOTE I -- SPECIAL CHARGES In fiscal 2001, the Company recorded special charges of $42.3 million 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. A summary of the special charge activity, which is included in accrued expenses in the Company's Consolidated Balance Sheets, is as follows:
Exit of Certain Worldwide Executive Business Workforce Contractual Strategies and Reduction Obligations Product Lines Other Total -------------- -------------- -------------- ------------ ------------ (Dollars in thousands) 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 Change in estimate (209) (55) --- 264 --- Cash expenditures (3,329) (329) --- (1,192) (4,850) -------------- -------------- ---------------- ------------ ------------ Balance at August 25, 2001 $ 4,388 $ 1,169 $ --- $ 24 $ 5,581 ============== ============== ================ ============ ============
The Company also recorded $5.1 million ($3.1 million after-tax, or $0.09 per share) of additional charges in the second quarter of fiscal 2001 principally associated with the Company's Restricted Stock Plan. These charges are included in selling, general & administrative expenses in the Company's Consolidated Income Statements. - 11 - 12 NOTE J -- STOCK REPURCHASE During the first six months of fiscal 2002, the Company repurchased 6,649,100 shares of its Common Stock for $186.3 million. NOTE K - NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company will apply the new accounting rules beginning in the first quarter of fiscal 2003 (the quarter ended May 25, 2002). The Company is currently evaluating the effect these new standards will have on the earnings and financial position of the Company. NOTE L - ASSET IMPAIRMENT During the second quarter of fiscal 2002, the Company wrote-off its $9.3 million cost method investment in the common stock of an Internet security developer. This amount is included in the other income (expense) line item in the Company's Consolidated Income Statements. - 12 - 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this section and elsewhere in this report are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Such statements may 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, in the Company's fiscal 2001 Form 10-K, 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 2002 ends on February 23, 2002. 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 $165 million to $175 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. 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 conducted in secret, the Company would not necessarily know of the existence of an investigation that 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 - 13 - 14 "Legal Proceedings" in Part II, Item 1 herein; and Part I, Item 1 - "Certain Factors That May Affect Future Performance - Maintenance of Business Relationships and Certain Legal Matters", Part I, Item 3 - "Legal Proceedings" and Note F to the Consolidated Financial Statements in the Company's fiscal 2001 Annual Report on Form 10-K, for further information concerning these matters and other contingencies. 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, as measured by annual revenues, (including the National Lottery of Brazil, California and Georgia), 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. In addition, the Texas lottery contract, which was the Company's second largest contract (based on annual revenues) in fiscal 2001, expires in August 2002. The Texas Lottery solicited bids for the new Texas lottery contract, and during the second quarter of fiscal 2002, the Company was selected to enter into negotiations for a new lottery operations and services contract for the Texas Lottery's integrated online and instant-ticket games. See Part I, Item 1 -- "Certain Factors That May Affect Future Performance - Strengthening of Competition" and "Lottery Contract Awards and Related Significant Developments" in the Company's fiscal 2001 Annual Report on Form 10-K for further information concerning these matters. Effect of New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company will apply the new accounting rules beginning in the first quarter of fiscal 2003 (the quarter ended May 25, 2002). The Company is currently evaluating the effect these new standards will have on the earnings and financial position of the Company. Prior Year Special and Additional Charges In the second quarter of fiscal 2001, the Company estimated and recorded a $40.0 million special charge, or $0.70 per diluted share, in connection with certain contractual obligations and a value assessment of the Company's business operations. The Company also recorded as part of selling, general & administrative expenses, additional charges of $5.1 million, or $0.09 per diluted share, in the fiscal 2001 second quarter, primarily attributable to the implementation of the Company's restricted stock plan. - 14 - 15 Results of Operations Second Quarter Revenues for the second quarter of fiscal 2002 were $236.6 million, representing a $9.0 million, or 3.9%, increase over revenues of $227.6 million in the second quarter of fiscal 2001. Service revenues, including lottery and other services, in the fiscal 2002 second quarter were $209.6 million, representing a $5.4 million, or 2.6%, increase over service revenues of $204.2 million in the second quarter of fiscal 2001. This increase reflected higher domestic lottery service revenues, partially offset by lower international service revenues and the expiration of certain electronic benefit transfer contracts that the Company is in the process of winding down. The Company's domestic lottery service revenues were $126.1 million in the second quarter of fiscal 2002, an increase of 15.6% over the $109.1 million recorded in the same period of fiscal 2001. This increase was primarily driven by higher same store sales, along with higher multi-state jackpot activity. The Company's international lottery service revenues in the second quarter of fiscal 2002 were $80.8 million, a 7.9% decrease from the $87.7 million recorded in the second quarter of fiscal 2001, primarily due to the combined effect of contractual rate changes and the impact of the reduction in the dollar value of foreign currencies, primarily in Brazil. This decrease was partially offset by an increase in sales by several of the Company's international lottery customers and the launch of the national lottery in Colombia. Had average foreign exchange rates in the second quarter of the prior year prevailed in the second quarter of this year, the Company estimates that international service revenues for the fiscal 2002 second quarter would have been $91.3 million, or approximately 4% higher than reported in the second quarter of last year. Product sales in the second quarter of fiscal 2002 were $27.0 million, an increase of $3.6 million over the $23.4 million of product sales in the second quarter of fiscal 2001. Product sales in the fiscal 2002 second quarter included sales of terminals and software to our customer in the United Kingdom, and the sale of terminals to our customer in New South Wales, Australia. Product sales in the second quarter of fiscal 2001 were principally comprised of the sale of a new online lottery system to our customer in New South Wales, Australia, along with equipment sales to South Africa. Gross margins on service revenues improved from 30.2% in the second quarter of fiscal 2001 to 31.5% in the second quarter of fiscal 2002, primarily driven by higher multi-state jackpot activity, partially offset by start-up losses on new lottery system installations in Ukraine and Colombia. Gross margins on product sales fluctuate depending on the mix, volume and timing of product sales contracts. Gross margins on product sales in the second quarter of fiscal 2002 were 12.2% compared to negative (26.6%) in the same period last year. During the second quarter of the prior year, the Company experienced cost over-runs on system installations in New South Wales, Australia and Israel. Operating expenses in the second quarter of fiscal 2002 were $37.0 million, representing a $5.1 million, or 12.1%, decrease, when compared to the $42.1 million of operating expenses incurred in the second quarter of fiscal 2001, excluding the special and additional charges in the prior year quarter. This decrease was primarily attributable to cost reductions driven by the continued execution of the value assessment initiatives implemented in fiscal 2001 and the Company's increased emphasis on improving productivity and efficiency. As a percentage of revenues, exclusive of the prior year special and additional charges, operating expenses were 15.6% and 18.5% during the second quarters of fiscal 2002 and 2001, respectively. - 15 - 16 Other expense of $1.7 million in the second quarter of fiscal 2002 was primarily comprised of the write-off of the Company's $9.3 million cost method investment in the common stock of an Internet security developer, partially offset by a $3.9 million gain on the sale of a majority interest in the Company's subsidiary in the Czech Republic, which owns certain lottery assets, along with $2.1 million of the amortization of the gain on the Company's April 1998 sale of its 22.5% interest in Camelot Group plc ("Camelot"), which is being amortized over the remaining period of Camelot's first operating license, due to expire in September 2001, and $1.6 million of foreign exchange gains from hedging contracts. Other income in the second quarter of fiscal 2001 of $1.8 million was comprised principally of the amortization of the gain on the sale of the Company's interest in Camelot. The Company's effective income tax rate decreased from 39% in the second quarter of fiscal 2001 to 38% in the second quarter of fiscal 2002 principally due to lower state taxes and a reduction in non-deductible expenses. Year to Date Revenues for the first six months of fiscal 2002 were $471.5 million, representing a $1.9 million, or 0.4%, increase over revenues of $469.6 million in the first six months of fiscal 2001. Service revenues, including lottery and other services, in the first six months of fiscal 2002 were $420.2 million, representing a $6.6 million, or 1.6%, decrease from service revenues of $426.8 million in the first six months of fiscal 2001. This decrease reflected a decline in international lottery service revenues and the expiration of certain electronic benefit transfer contracts, partially offset by higher domestic lottery service revenues. The Company's international lottery service revenues in the first six months of fiscal 2002 were $168.1 million, a 4.4% decrease from the $175.8 million recorded in the first six months of fiscal 2001, primarily due to the combined effect of contractual rate changes and the impact of the reduction in the dollar value of foreign currencies. This decrease was partially offset by an increase in sales by several of the Company's international lottery customers and the launch of the national lottery in Colombia in the fourth quarter of the prior year. Had average foreign exchange rates in the first six months of the prior year prevailed in the first six months of this year, the Company estimates that international service revenues for the first six months of fiscal 2002 would have been $187.0 million, or approximately 6.3% higher, than reported in the first six months of last year. The Company's domestic lottery service revenues were $245.4 million in the first six months of fiscal 2002, an increase of 4.0% over the $235.9 million recorded in the same period of fiscal 2001. This increase was primarily due to higher multi-state jackpot activity. Product sales in the first six months of fiscal 2002 were $51.4 million, an increase of $8.6 million over the $42.8 million of product sales in the first six months of fiscal 2001. This increase was driven by sales of terminals and software to our customer in the United Kingdom. Gross margins on service revenues were 31.4% in the first six months of fiscal 2002 compared to 33.1% in the first six months of fiscal 2001, primarily driven by contractual rate changes in Texas, along with start-up losses on new lottery system installations in Colombia and Ukraine. Gross margins on product sales fluctuate depending on the mix, volume and timing of product sales contracts. Gross margins on product sales in the first six months of fiscal 2002 were 15.1% compared to - 16 - 17 negative (6.2%) in the same period last year. This increase was primarily due to the incurrence in the fiscal 2001 first half of cost over-runs on system installations in New South Wales, Australia and Israel. Operating expenses in the first six months of fiscal 2002 were $75.7 million, representing a $13.5 million, or 15.1%, decrease, when compared to the $89.2 million of operating expenses incurred in the first six months of fiscal 2001, excluding the special and additional charges in the prior year first half. This decrease was primarily attributable to cost reductions driven by the continued execution of the value assessment initiatives implemented in fiscal 2001 and the Company's increased emphasis on improving productivity and efficiency. As a percentage of revenues, exclusive of the prior year special and additional charges, operating expenses were 16.0% and 19.0 % during the first six months of fiscal 2002 and 2001, respectively. Other income of $0.5 million in the first six months of fiscal 2002 was comprised primarily of a $3.9 million gain on the sale of a majority interest in the Company's subsidiary in the Czech Republic, which owns certain lottery assets, the amortization of the gain on the sale of the Company's interest in Camelot, and $1.8 million of foreign exchange gains from hedging contracts. This was partially offset by the write-off of the Company's $9.3 million cost method investment in the common stock of an Internet security developer. Other income in the first six months of fiscal 2001 of $2.4 million was principally comprised of the amortization of the gain on the sale of the Company's interest in Camelot, partially offset by minority interest associated with the Company's 40% equity interest in a South African telecommunications company. The Company's effective income tax rate decreased from 39% in the first six months of fiscal 2001 to 38% in the first six months of fiscal 2002 principally due to lower state taxes and a reduction in non-deductible expenses. Changes in Financial Position, Liquidity and Capital Resources During the first six months of fiscal 2002, the Company generated $187.2 million of cash from operations. This cash, together with $181.0 million of borrowings under the Company's Credit Facility, was primarily used to fund the purchase of $118.1 million of systems, equipment and other assets relating to contracts and to repurchase $186.3 million of the Company's common stock. Trade accounts receivable decreased by $6.8 million, from $118.7 million at February 24, 2001 to $111.9 million at August 25, 2001, primarily due to collections of receivables related to product sales recorded in the fourth quarter of fiscal 2001, partially offset by progress billings on new system installations. Other assets decreased by $21.7 million, from $116.7 million at February 24, 2001 to $95.0 million at August 25, 2001, primarily due to the write-off of the Company's cost method investment in the common stock of an Internet security developer, along with scheduled payments received on long-term sales type leases and payments received on loans to Uthingo, the consortium that operates the South Africa National Lottery. Included in other assets at August 25, 2001 were investments in and advances to unconsolidated affiliates totaling $14.5 million. The Company periodically evaluates the net realizable value of these investments to determine if a permanent impairment exists and, in the opinion of management, no such impairment existed at August 25, 2001. However, should future events and circumstances indicate a permanent impairment has occurred with regard to one or more of these investments, a charge to expense would be recorded at that time to reflect the adjustment in the net realizable value of the underlying investment. - 17 - 18 Advance payments from customers increased by $34.5 million, from $55.4 million at February 24, 2001 to $89.9 million at August 25, 2001, primarily due to advances received from customers related to product sales expected to be delivered during the second half of fiscal 2002 and the first half of fiscal 2003. Other liabilities increased by $7.3 million, from $29.9 million at February 24, 2001 to $37.2 million at August 25, 2001, primarily due to cash collected in excess of revenue recognized and minority interest payable related to the sale of a majority interest in the Company's subsidiary in the Czech Republic. At August 25, 2001, the Company's current liabilites exceeded its current assets by $20.9 million, principally due to the $89.9 million of advance payments from customers. The Company's business is capital-intensive. Although it is not possible to estimate precisely, 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 $210 million to $220 million. The principal sources of liquidity for the Company are expected to be cash generated from operations and borrowings under the Company's Credit Facility. On June 22, 2001, the Company refinanced its Credit Facility with a syndicate of nine banks led by The Bank of America. The new credit facility provides for an unsecured revolving line of credit of $300 million and matures in June 2006. As of August 25, 2001 the Company had utilized approximately $48.0 million of its $300 million Credit Facility. The Company currently expects that its cash flow from operations and available borrowings under its Credit Facility will be sufficient for the foreseeable future 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. 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 the first six months of fiscal 2002. 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 August 25, 2001, after taking into consideration $150.0 million of interest rate swaps, the estimated fair value of the Company's $300.0 million of fixed rate debt approximated $307.6 million. At August 25, 2001, a hypothetical 10% increase in interest rates would increase the estimated fair value of the Company's fixed rate debt to $308.5 million and a hypothetical 10% decrease in interest rates would reduce the estimated fair value of the Company's fixed rate debt to $306.5 million. An independent investment banker determined the estimated fair value amounts. A hypothetical 10% adverse or favorable change in interest rates applied to variable rate debt would not have a material effect on current earnings. - 18 - 19 The Company uses various techniques to mitigate the risk associated with future changes in interest rates, including entering into interest rate swaps. During the second quarter of fiscal 2002, the Company entered into two interest rate swaps for an aggregate amount of $150.0 million, which effectively entitle the Company to exchange fixed rate payments for variable rate payments from the period June 6, 2001 to August 15, 2007. Foreign Currency Exchange Rates Foreign exchange exposures arise from current 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 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 August 25, 2001, a hypothetical 10% adverse change in foreign exchange rates would result in a translation loss of $13.2 million that would be recorded in the equity section of the Company's balance sheet. At August 25, 2001, a hypothetical 10% adverse change in foreign exchange rates would result in a net transaction loss of $3.5 million that would be recorded in current earnings after considering the effects of foreign exchange contracts currently in place. At August 25, 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 $3.5 million. The percentage of fiscal 2002 anticipatory cash flows that were hedged varied throughout the second quarter of fiscal 2002, but averaged 71%. As of August 25, 2001, the Company had contracts for the sale of foreign currency of approximately $140.4 million (primarily pounds sterling, Australian dollars, Euro, Brazilian reals and Moroccan Dirhams) and the purchase of foreign currency of approximately $29.8 million (primarily pounds sterling and Mexican pesos). Item 3. Quantitative and Qualitative Disclosures about Market Risk See "Market Risk Disclosures" above. - 19 - 20 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS For information respecting certain legal proceedings relating to the Company, refer to Part I, Item 1 - "Certain Factors That May Affect Future Performance - Maintenance of Business Relationships and Certain Legal Matters", Part I, Item 3 - "Legal Proceedings" and Note F to Consolidated Financial Statements, in the Company's fiscal 2001 Annual Report on Form 10-K, and Part II, Item 1 - "Legal Proceedings" included in the Company's Quarterly Report on Form 10-Q for the quarterly period ended May 26, 2001. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) and (c) The Company's Annual Meeting of Shareholders was held on July 9, 2001 and in connection therewith, proxies were solicited by management pursuant to Regulation 14 under the Securities Exchange Act of 1934. An aggregate of 29,833,301 shares of the Company's common stock ("Shares") were outstanding and entitled to vote at the meeting. At the meeting, the following matters (not including ordinary procedural matters) were submitted to a vote of the holders of Shares, with the results indicated below: 1. Election of three directors to serve until the 2004 Annual Meeting ------------------------------------------------------------------ The following incumbent directors were reelected. There was no solicitation in opposition to such nominees. The tabulation of votes was as follows:
Nominee For Withheld ---------------------- ----------------- --------------- Howard S. Cohen 26,273,351 Shares 229,035 Shares Robert M. Dewey, Jr. 26,297,375 Shares 201,011 Shares Philip R. Lochner, Jr. 26,298,127 Shares 204,259 Shares
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The exhibits to this report are as follows: 10.1 Business Services Agreement, dated May 24, 2001, by and between GTECH Corporation and Donald Stanford. 10.2 Severance Agreement and Release, dated as of May 24, 2001, by and between GTECH Corporation and Donald Stanford. (b) The Company filed a report on form 8-K with the Securities and Exchange Commission on July 3, 2001 concerning the Company's press release issued June 19, 2001 respecting fiscal 2002 first quarter results and financial guidance for fiscal 2002 - 20 - 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GTECH HOLDINGS CORPORATION Date: October 1, 2001 By /s/ Jaymin B. Patel ---------------------------------------- Jaymin B. Patel, Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: October 1, 2001 By /s/ Robert J. Plourde ---------------------------------------- Robert J. Plourde, Vice President and Corporate Controller (Principal Accounting Officer) - 21 - EX-10.1 3 y53545ex10-1.txt BUSINESS SERVICES AGREEMENT 1 EXHIBIT 10.1 BUSINESS SERVICES AGREEMENT This Business Services Agreement (the "Agreement") is entered into by and between GTECH Corporation, with a principal business address of 55 Technology Way, West Greenwich, Rhode Island 02817 ("GTECH") and Donald Stanford, an individual, with a residence address of 51 Dryden Avenue, Pawtucket, Rhode Island 02860 (Consultant"). WITNESSETH WHEREAS, GTECH and Consultant desire to enter into a Business Services Agreement upon the terms and conditions set forth below; NOW, THEREFORE, in consideration of the mutual promises set forth herein, the parties hereby agree as follows: 1. RETENTION OF CONSULTANT. 1.1 GTECH hereby retains Consultant and Consultant hereby accepts such retainer, to provide business services as specified in Section 2 hereof (collectively, the "Services"). The Services shall be provided on a full-time basis. Accordingly, Consultant agrees to be available to perform an average of 100 hours of Services per month during the term hereof. 1.2 The Services will be provided by Consultant as directed by the Chief Executive Officer ("CEO") or his designee (each an "Authorized Representative"). GTECH will advise Consultant, orally or in writing, through one of its Authorized Representatives, of any additions or other changes to the list of Authorized Representatives. In addition, at GTECH's request through one of its Authorized Representatives, Consultant will provide the Services described herein on behalf of GTECH Holdings Corporation and one or more GTECH direct or indirect subsidiaries and affiliates (GTECH Holdings Corporation and such GTECH subsidiaries and affiliates hereinafter referred to individually as an "Affiliate", and collectively as "Affiliates"). Consultant agrees that the Services will be performed personally by Donald Stanford. 2. SCOPE OF SERVICES. 2.1 The Services to be provided by Consultant hereunder at GTECH's request will include, but not be limited to, the following activities: (a) Service as a GTECH Fellow, with a primary focus on the technology systems new architecture, the technology strategy, customer communication and promoting GTECH's technology vision; (b) Consultation and advice on the development of the technology vision; 2 (c) Identification of future opportunities in technology with the potential to provide new growth opportunities for GTECH; (d) Promotion of GTECH's industry leadership position and the redefinition of GTECH's market dominance, at the request of GTECH's CEO and Corporate Leadership Council ("CLC"); (e) other tasks and services normally performed by business services consultants; and (f) providing all services and assistance necessary and appropriate to effectively perform the foregoing duties. The CEO and Consultant will mutually agree on the 2-3 primary areas of focus for each six (6) month period of this Agreement. To the extent Consultant requires the use of GTECH property to perform the Services hereunder, such as a laptop, cell phone and other items reasonably required, Consultant shall inform GTECH and GTECH, in its discretion, may provide Consultant with the use of such GTECH property without cost to Consultant. 3. COMPENSATION. 3.1 In compensation for Consultant's Services hereunder, GTECH will pay the Consultant, in twelve equal installments, $350,000.00 per year for the duration of the Agreement, beginning on a date thirty (30) days from the commencement of services under this Agreement. Consultant must invoice GTECH at the end of each period to receive compensation. 3.2 Consultant shall be liable for all taxes arising with respect to the compensation received by him hereunder, including but not limited to federal and state income taxes. Consultant shall comply with all applicable laws and regulations in connection with payments received by him hereunder, including without limitation, submitting to the applicable authorities all documents and invoices as may be required to be submitted under applicable laws and regulations, and payment of all taxes owed on a timely basis. 4. EXPENSES. GTECH agrees to reimburse Consultant for all reasonable and necessary expenses incurred by Consultant on GTECH's behalf and in furtherance of Consultant's Services hereunder, provided that all such expenses have been approved by an Authorized Representative prior to their being incurred. "Reasonable and necessary expenses" may include but are not limited to travel costs for trips which have been approved in advance by an Authorized Representative. Expenses shall be reimbursed at Consultant's cost. GTECH shall reimburse Consultant in accordance with GTECH policy as would be applicable to a senior executive of GTECH. Reimbursement of Consultant's expenses - 2 - 3 shall be made upon submission to GTECH of receipts or vouchers verifying disbursements in sufficient detail to identify the nature and amount of each expense incurred. 5. NO PRESS RELEASES. Consultant will not issue any written or oral statement or other communication to any press or other media organization concerning GTECH or the Affiliates; the Services provided by Consultant on behalf of GTECH; the gaming, lottery or other industries in which GTECH and the Affiliates participate; or any other matter related to GTECH or its businesses, unless such communication is approved in advance by an Authorized Representative in writing. 6. TERM. Subject to earlier termination pursuant to Section 7 below, the term of this Agreement will commence on the Termination Date of the Severance Agreement and Release being executed contemporaneously with this Agreement (the "Severance Agreement"), and will expire at 11:59 pm Eastern United States time on a day three (3) years thereafter. The term of this Agreement may be extended prior to its expiration by mutual written agreement of the parties for one or more successive one (1) year periods. 7. TERMINATION. GTECH may terminate this Agreement immediately at any time in the event of the occurrence of any of the following: (i) conviction of Consultant of a felony or of any crime involving gambling, fraud, deceit, theft or dishonesty; (ii) Consultant's negligent performance of, inability or failure to perform his obligations hereunder; (iii) Consultant's insolvency, filing of a voluntary bankruptcy or failure to obtain the dismissal of an involuntary bankruptcy petition within thirty (30) days of its filing; (iv) Consultant's material breach of this Agreement; (v) the death, disability or other inability of Consultant to perform Services hereunder. A termination under this Section 7 will be effective upon the provision of written notice thereof; provided, however, that any termination under subsection (ii) or (v) (excluding the death of Consultant, which operates as an immediate termination without any continuing payment obligations under this Section 7) only within three (3) years of the commencement of this Agreement shall not relieve GTECH of the obligation to continue payments in accordance with Section 3.1 hereof for the balance of the initial term (three (3) years in total) remaining at the time of such termination. 8. CONFIDENTIALITY. Consultant acknowledges a duty of confidentiality owed to GTECH and the Affiliates. Except as may be specifically authorized in advance by an Authorized Representative in writing, Consultant will not, at any time during or after the term of this Agreement, retain in writing, use, divulge, furnish or make accessible to anyone, or use for his own benefit - 3 - 4 or for the benefit of others, any information in any form obtained or received by him under or in connection with this Agreement, relating to GTECH, the Affiliates or to its or their actual or proposed technology, products, services, customers, markets, plans and strategies or business ("Confidential Information"), generally, except information which through no fault of Consultant becomes generally known in the lottery or gaming industries, information received by Consultant in good faith from a third party having a prior right to make such disclosure and information already known to Consultant at the time of its disclosure by GTECH ("Confidential Information"). Consultant acknowledges and agrees that all Confidential Information is and will remain the exclusive and valuable property of GTECH and that Consultant will not gain any interest in Confidential Information by reason of this Agreement. Upon termination of this Agreement or on earlier request by GTECH, Consultant will immediately return to GTECH any and all records containing Confidential Information. The terms of this Section 8 indefinitely survive the expiration or earlier termination of this Agreement. 9. NONCOMPETITION. For so long as Consultant is retained hereunder, and for a period of six (6) years thereafter, and in addition to the non-competition obligations contained in the Severance Agreement, and Consultant will not, directly or indirectly or alone or in conjunction with others: (i) become engaged in, associated in any capacity with, provide services to (including but not limited to services which are in any way similar to the Services required to be provided hereunder), or acquire a financial interest in, any entity other than GTECH which is engaged in the lottery or gaming businesses, provided that Consultant's ownership as a passive investor of less than one percent (1%) of the issued and outstanding stock or equity, or $100,000 principal amount of any debt securities, of any corporation, partnership or entity engaged in the lottery and gaming business shall be permitted; or (ii) engage in or participate in any effort to disturb any business relationship between GTECH and its employees, suppliers, distributors, dealers, customers and other business associates. This Section 9 shall not supersede any noncompetition provision contained in any other prior agreements between Consultant and GTECH or Affiliates. 10. REPRESENTATIONS AND WARRANTIES. 10.1 Consultant hereby represents and warrants that acceptance of his appointment hereunder does not breach, and the performance of his duties hereunder will not breach, any duty owed by Consultant to any other person, firm, corporation, partnership, association or other business entity. Consultant agrees that he will indemnify GTECH and hold it harmless from any claims, demands, costs, judgments, liabilities or losses incurred as the result of his breach of this warranty. The terms of this Section indefinitely survive the expiration or earlier termination of this Agreement. 10.2 Consultant represents and warrants that neither any part of the compensation or any other amount Consultant may receive hereunder, nor any other funds or things of value, have been or will be offered, paid or promised, nor will Consultant authorize any such offer, - 4 - 5 payment or promise, directly or indirectly, to any person who is an official, member, employee or agent of any government, including executive, legislative, administrative or judicial branch thereof ("Government") for the purpose of inducing such person to (i) use his influence with the Government or (ii) fail to perform his official functions, in either case to assist GTECH or Consultant in obtaining or retaining business for or with, or directing business to, any person or influencing legislation or regulations in any jurisdiction. 10.3 Consultant covenants and warrants that he will not make any political contributions on GTECH's or an Affiliate's behalf. 11. STATUS OF PARTIES. Consultant and GTECH acknowledge that nothing in this Agreement will create the relationship of employer and employee, partners, principal and agent, or joint ventures between GTECH and Consultant. Consultant will be an independent contractor of GTECH, and will not have the authority to bind GTECH, nor will Consultant represent to any person that he has such authority. 12. POLICIES AND PROCEDURES. Consultant agrees to fully comply at all times with the GTECH Holdings Corporation Conflict of Interest and Ethical Conduct Policies and Procedures, a copy of which is attached hereto as Exhibit A and made a part hereof, and any subsequent modifications thereto of which Consultant is notified. Upon execution of this Agreement, Consultant agrees to deliver to GTECH a completed Consultant Representation, Warranty and Annual Certification in the form of Exhibit B attached hereto. 13. NO SUBCONTRACT OR ASSIGNMENT. 13.1 Consultant agrees that he will not subcontract or assign this Agreement, in whole or in part, to any other person or entity without the prior specific written approval of an Authorized Representative. 13.2 Consultant agrees to devote the entirety of his business time and attention, skill, undivided loyalty, and best efforts to the faithful performance of his duties hereunder. Notwithstanding the above and to the extent that the activities do not conflict with his duties to GTECH, Consultant shall not be precluded from performing unpaid work on behalf of charitable organizations or management of Consultant's personal assets. 14. MISCELLANEOUS. 14.1 The validity, interpretation and enforcement of this Agreement will be governed by the laws of the State of Rhode Island. Consultant irrevocably consents to and expressly agrees that any disputes arising from this Agreement will be adjudicated in the courts of - 5 - 6 the State of Rhode Island and the federal courts therein, and the parties each agree to the exclusive jurisdiction of such courts. 14.2 This writing represents the entire agreement and understanding of the parties with respect to the subject matter hereof, and supersedes any prior written or oral agreements and understandings of the parties in respect thereto, but not including any prior written agreements between Consultant and GTECH or Affiliates relating to Consultant's employment. 14.3 In the event that any one or more provisions of this Agreement are held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect the enforceability of any other provisions of this Agreement. If any one or more of the provisions contained herein are held to be excessively broad as to duration, scope, activity or subject, such provision(s) will be construed, by limiting or reducing the same, so as to be enforceable to the extent compatible with the applicable law. 14.4 This Agreement will not be modified except in writing signed by both parties hereto. 14.5 No waiver of any provisions of this Agreement will be effective unless agreed to in writing by the party against whom such waiver is sought to be enforced. Waiver of any default or breach hereunder will not constitute a waiver of any other default or breach whether similar or otherwise. 14.6 This Agreement will be binding upon and inure to the benefit of GTECH, its legal representatives and assigns, and upon Consultant, his legal representatives and permitted assigns. 14.7 This Agreement will be assignable by GTECH, in whole or in part, to any Affiliate thereof or to any successor to any portion of GTECH's business relating to this Agreement. 14.8 Any notice required to be sent by one party to the other in accordance with this Agreement must be in writing and delivered by hand or sent by certified mail, return receipt requested, to the address set forth above, or to such other address as may be specified by like notice from time to time. 14.9 This Agreement may be executed in one or more counterparts, each of which will be deemed an original and all of which, collectively, will constitute one and the same Agreement. - 6 - 7 IN WITNESS WHEREOF, the parties hereto have, by their duly authorized representatives, executed this Agreement. GTECH CORPORATION DONALD STANFORD By: /s/ Howard S. Cohen By: /s/ Donald L. Stanford ------------------------------ ----------------------------- Howard S. Cohen Chief Executive Officer Date: May 24 2001 ---------------------------- (mo.) (day) (yr.) Date: May 21 2001 ---------------------------- (mo.) (day) (yr.) - 7 - 8 Exhibit A GTECH HOLDINGS CORPORATION AND SUBSIDIARIES POLICIES AND PROCEDURES CONFLICT OF INTEREST AND ETHICAL CONDUCT I. PURPOSE The purpose of this document is to set forth GTECH's Policies and Procedures respecting conflicts of interest and ethical conduct. II. IN GENERAL. (a) APPLICATION. These Policies and Procedures apply to all Employees and, when acting for an on behalf of GTECH, all Consultants. (b) DEFINITIONS. For purposes of these Policies and Procedures, the following terms shall have the respective meanings set forth below: (i) "CONSULTANT" shall include all non-Employees of GTECH providing consulting or advisory services to GTECH. (ii) "EMPLOYEE" shall include all individuals who are employees of GTECH. (iii) "GTECH" shall mean GTECH Holdings Corporation and any and all of its direct or indirect subsidiaries. III. CONFLICT OF INTEREST (a) GENERAL POLICY. It is GTECH's policy that all decisions made by Employees and Consultants in the course of their employment or consulting agreements be made solely on the basis of the best interests of GTECH. Employees and Consultants must use their best efforts to ascertain that decisions which they are called upon to make are in the best interests of GTECH and must avoid any association or relationship which would influence (or give the appearance of influencing) a decision to be made on other than the basis of GTECH's best interests. (b) SPECIFIC POLICIES. Specific policies are as follows: (i) COMPETITIVE BEHAVIOR. No Employee or Consultant may engage in any behavior which competes with GTECH in any manner whatsoever. No Employee or Consultant may have any direct or indirect interest in (or serve as an employee, director, officer, consultant or agent to) any 9 corporation or other entity which competes or seeks to compete with GTECH in any business or product line. Nor shall any Employee or Consultant directly or indirectly assist any person or entity to compete with GTECH. (An exception is that Employees or Consultants may have an investment interest in the publicly traded securities of a GTECH competitor provided that such investment (when aggregated with all holdings of such Employee's household or immediate family) is less than 1% of the issued and outstanding securities of such competitor.) Consultants shall disclose to GTECH all employment, management participation or directorships with any organization other than GTECH. If such employment, management participation or directorship is performed at the direction of or on behalf of Consultant by Consultant's employees, Consultant shall be responsible for promptly making said disclosure on behalf of said employees. (ii) INTERESTED TRANSACTIONS. No Employee or Consultant may work on, or direct the work of others on, any transaction involving GTECH in which he has any personal or other financial interest other than that of an Employee or Consultant and/or shareholder of GTECH, provided however, that: (A) upon full disclosure of the nature and extent of such interest, GTECH may approve exceptions to this rule in circumstances where the best interests of GTECH will not be adversely affected, and (B) Employees and Consultants may have an investment interest in the publicly traded securities of an entity with which GTECH is transacting business provided that such investment (when aggregated with all holdings of such Employee's household or immediate family) is less than 1% of the issued and outstanding securities of such entity. Accordingly, subject to the above, Employees and Consultants may not receive a finder's fee, commission or other compensation from any third party for any transaction involving GTECH. (iii) BUSINESS OPPORTUNITIES. No Employee or Consultant may take personal advantage of a business opportunity that is developed while in the course of such individual's employment or that is otherwise rightfully an opportunity that is GTECH's. (iv) CONFIDENTIALITY. Consultants and Employees must maintain all non-public information concerning GTECH (and any customer, supplier or other entity with whom GTECH does business or with whom GTECH is considering entering into a transaction) in confidence and must not use such information for their own benefit or to the detriment of GTECH's best interests or disclose it to others, directly or indirectly, except as required in the performance of their regular duties for GTECH. - 2 - 10 (v) GAMES. No Employee or Consultant shall during the period of employment or consulting engagement, participate in any lottery game marketed or provided by GTECH and all such persons are prohibited from claiming or receiving any benefit as a result of such prohibited participation. Employees and Consultants are to advise their household and immediate family members that they may be similarly restricted by state laws, regulations and our contracts in the various jurisdictions. Each Employee and Consultant shall do all things necessary to comply with all applicable laws and contracts between GTECH and others pertaining to any said Lottery. IV. ETHICAL CONDUCT (a) GENERAL POLICY. It is GTECH's policy always to conduct its activities in full compliance with all applicable laws. The use of GTECH funds or assets for any unlawful or unethical purposes is strictly prohibited. (b) SPECIFIC POLICIES. Specific policies are as follows: (i) IMPROPER PAYMENTS. No Employee or Consultant shall make or accept (or shall consent to the making or the acceptance of) any improper payment of money or property whatsoever in connection with his employment or consultancy. (See the GTECH Government Relations Policies and Procedures for application of this policy in the context of Government Officials.) (ii) GIFTS AND FAVORS. No Employee or Consultant shall give or accept any significant gift or favor to or from any person or organization which is doing business with GTECH and under no circumstances may it exceed $100 in fair market value unless approved in writing by the Vice President of Compliance. Whether a gift or favor is significant depends on whether or not it represents more than token value to the intended recipient and whether or not it might reasonably be expected to place the intended recipient under some obligation to the donor. Any doubts about the significance of a gift or favor should be resolved by not giving or accepting same. (Gifts to and entertainment of Government Officials may only be made if and to the extent permitted by the GTECH Government Relations Policies and Procedures.) (iii) UNAUTHORIZED USE OF ASSETS. No Employee or Consultant shall make any unauthorized use of GTECH's funds, assets, facilities, or personnel. (iv) IMPROPER ACCOUNTING PRACTICES. - 3 - 11 (a) No Employee or Consultant shall establish or maintain any undisclosed or unrecorded fund or asset for any purpose whatsoever. No false, incomplete or misleading records shall be made, and no undisclosed or unrecorded corporate funds shall be established for any purpose, nor should GTECH funds be placed in any personal or non-corporate account. (b) No Employee or Consultant shall make or cause to be made any improper or fraudulent entry in the books or records of GTECH. (c) No Employee or Consultant shall make or cause to be made any payment on behalf of GTECH with the intention or understanding that any part of such payment is to be used for any purpose other than that disclosed by the documents supporting the payment. (v) BIDDING COLLUSION. No Employee or Consultant shall assist or cause GTECH to collude with any third party (whether as to bidding, price or otherwise) with respect to any advertised, competitive, or other procurement or other business opportunity, nor shall any Employee or Consultant assist or cause any third party to so collude against GTECH. V. APPLICATION OF THE POLICIES. The Specific Policies set forth in Section III (b) and Section IV (b) are not intended to be exhaustive and in any given situation an individual may be required to exercise his or her best judgment as to whether he or she is acting in compliance with the General Policies set forth as Section III (a) and Section IV (a) above. Questions regarding interpretation of the General Policies or their application to particular situations should be directed to the Legal Department. VI. COMPLIANCE AND DISCIPLINE. At least annually, each employee and Consultant (and, if a Consultant is a corporation, partnership or other entity, each individual employed by the Consultant that is principally responsible for performing or overseeing the Consultant's work) shall be required to execute and return to GTECH in accordance with its terms an Annual Certification in the form of Exhibit A hereto (or in such other form as may be adopted by GTECH in the future) by which individual shall certify his or her continued compliance with these Policies and Procedures (or shall set forth how he or she is not in compliance). Employees and Consultants are obliged to report all violations of these Polices and Procedures of which they become aware to the Vice President, Compliance. In order to encourage Employees and Consultants to satisfy their obligations in this regard, it is imperative - 4 - 12 that they be assured that they may raise concerns and report misconduct without fear of retribution. Accordingly, no supervisor or other Employee is permitted, directly or indirectly, to retaliate, threaten to retaliate or encourage others to retaliate, against any Employee or Consultant for reporting a violation of these Policies and Procedures to the Vice President, Compliance. Upon receiving a report alleging a violation of these Policies and Procedures, the Vice President, Compliance shall conduct such investigations as may be necessary or appropriate to ascertain the facts surrounding the alleged violation and shall advise the Legal Department accordingly. VII. ADDITIONAL INFORMATION. Please contact the Vice President, Compliance or the Legal Department for additional information and/or clarification respecting any of the Policies and Procedures set forth above or their application to any specific circumstance. - 5 - 13 Exhibit B GTECH GOVERNMENT RELATIONS CONSULTANT REPRESENTATION, WARRANTY AND ANNUAL CERTIFICATION A. Representation and Warranty. I represent and warrant that the following statements are accurate: 1. I am not and am not related (immediate family) to a Government Official (as defined in the Policies and Procedures) nor is any member or officer of my firm. 2. I am not subject to the influence of any Government Official or any official or employee of a political party. Neither I nor any member or officer of my firm is an elected official of a political party. 3. I hold no directorship, officership or other position (including registered lobbyist) with any corporation or other organization (publicly or privately owned, not-for-profit, governmental, and regulatory), except those as to which I have notified GTECH in writing. 4. Neither I nor any member or officer of my firm has breached any obligation of confidentiality in the discharge of responsibilities to GTECH. Neither I, nor any member of my immediate family has any financial interest, direct or indirect, in any entity with which GTECH does business. 5. I or my firm have retained the entire amount of all fees paid to me by GTECH. Neither I nor any member or officer of my firm has made no payment or contribution of any kind in violation of the Policies and Procedures. 6. Neither I nor any member or officer of my firm has entered into any agreement or understanding with any Government Official or entity with which GTECH transacts business to receive any future benefit, financial or otherwise, or political appointment. 7. To the best of my knowledge: (a) I have advised GTECH of all activities which I have undertaken or of which I am aware which would impose upon GTECH any requirement to report or to file with any jurisdiction, and (b) it is not a violation of any applicable law for me or my firm to accept any fee paid under the Consulting Agreement. 8. I have been provided with and fully understand the Policies and Procedures applicable to me as a Government Relations Consultant. 9. I and my firm are in full compliance with all reporting and other legal requirements relating to services provided to GTECH and I have provided copies to GTECH of all reports, registrations and other filings required of me or my firm in such connection. 14 B. Certification. I HEREBY CERTIFY THAT, EXCEPT AS SET FORTH ON AN ATTACHED STATEMENT AS INDICATED BELOW, IF ANY: (a) I am and have been, at all times since the effective date of the Business Services Agreement between myself and GTECH Corporation (the "Consulting Agreement"), familiar with and in full compliance with the "GTECH Holdings Corporation and Subsidiaries Policies and Procedures - Government Relations" and the "GTECH Conflict of Interest and Ethical Conduct Policy" (collectively, as amended, the "Policies and Procedures"), (b) the representations and warranties set forth in Section A of this Exhibit B are true, complete and correct as of the date hereof and have been true, complete and correct at all times since the effective date of the Consulting Agreement, and (c) I am not on the date hereof, nor have I ever been, in breach under the Consulting Agreement. I agree to immediately notify the Vice President of Compliance at GTECH's Corporate Headquarters, currently at 55 Technology Way, West Greenwich, Rhode Island 02817, of any change in circumstances that would make the foregoing certifications untrue, inaccurate, or incomplete. [ ] I have attached a statement. [ ] I have not attached a statement. Consultant: /s/ Donald L. Stanford ------------------------------------ Donald Stanford - 2 - EX-10.2 4 y53545ex10-2.txt SEVERENCE AGREEMENT 1 EXHIBIT 10.2 SEVERANCE AGREEMENT AND RELEASE This SEVERANCE AGREEMENT AND RELEASE ("Agreement") is made as of the 24th day of May, 2001, by and among GTECH Holdings Corporation, GTECH Corporation (together with their respective direct and indirect subsidiaries and affiliates and any of their respective officers, directors or employees) (collectively "GTECH" or the "Company") and Donald Stanford ("Mr. Stanford"). WITNESSETH: WHEREAS, Mr. Stanford has been employed by GTECH since October, 1979, presently as Chief Technology Officer; and WHEREAS, GTECH has sought for its own convenience that Mr. Stanford and GTECH sever their relationship; and WHEREAS, the parties wish to set forth their agreement respecting the terms and conditions thereof. NOW, THEREFORE, the parties hereby agree as follows: 1. Termination of Employment. It is hereby agreed that Mr. Stanford's employment shall terminate effective as of February 15, 2002 or six (6) months after the date of hire of a Chief Development officer, whichever is sooner (the "Termination Date"). 2. Continuation of Base Salary. a. In furtherance of GTECH's obligations to Mr. Stanford under its severance policy, and in consideration of his long-standing contribution to GTECH, GTECH shall provide Mr. Stanford, within ten (10) days of the Termination Date, with a one-time payment of $700,000, subject to all applicable withholdings and deductions. b. This payment and the other benefits provided for in this Agreement constitute the entire obligation of GTECH, represent full and complete satisfaction by GTECH of all obligations under the severance policy, and constitute full and complete settlement of any claim under law or equity that that Mr. Stanford might otherwise assert against GTECH for compensation, benefits or remuneration of any form. 3. Benefits. From and after the Termination Date, Mr. Stanford shall not be eligible for any GTECH benefits or perquisites, and shall no longer be eligible to participate in any GTECH benefit program or plan, except as expressly set forth below: 2 a. So long as GTECH participates in an "insured" plan (currently United Health Plans of New England), GTECH shall, for a period of six (6) years following the Termination Date, or until Mr. Stanford's earlier death, continue to provide medical benefits to Mr. Stanford under such "insured" plan. Thereafter, Mr. Stanford shall be entitled to whatever medical coverage, if any, is required to be provided by applicable law. GTECH shall provide Mr. Stanford, within ten (10) days of the Termination Date, with a one-time payment in the amount of $2,500.00 in lieu of providing dental and vision coverage. b. GTECH shall pay to Mr. Stanford his accrued but unused vacation pay during the pay period following the Termination Date. c. Mr. Stanford shall be eligible for consideration for a CMIP bonus for FYE `01, in accordance with the terms of the current incentive plan. Mr. Stanford also shall be eligible for a pro rata CMIP bonus for FYE '02, in accordance with the terms of the then-current incentive plan. Nothing herein shall create an expectation of an entitlement to a bonus on the part of Mr. Stanford. d. Mr. Stanford shall have pro rata usage of his Executive Perquisites Plan account for calendar year 2002. 4. Continuing Obligations. Mr. Stanford further covenants with GTECH as follows: a. For a period of three years (3) years after the Termination Date, Mr. Stanford, upon reasonable notice, shall furnish such information and proper assistance to GTECH as may reasonably be required in connection with any third party claims, investigations, litigation or similar proceedings which may involve GTECH with respect to the period of Mr. Stanford's employment with GTECH. b. Mr. Stanford shall not knowingly use for his own benefit or disclose or reveal to any unauthorized person any trade secret or other confidential information relating to GTECH, including any customer lists, customer needs, price and performance information, processes, specifications, hardware, software, firmware, programs, devices, supply sources and characteristics, business opportunities, marketing, promotional, pricing and financing techniques, or other information relating to the business of GTECH, provided that such restriction on additional information shall not apply to information which is (i) proven to be generally available in the industry, (ii) disclosed in published literature, (iii) obtained by Mr. Stanford after the Termination Date from a third party without binder of secrecy, or (iv) required to be disclosed by Mr. Stanford by court order or other process of law, provided however, that Mr. Stanford shall to the extent the circumstances allow, provide GTECH with prior written notice of such requirement and with the opportunity to assist in opposing such court order or other process of law. Mr. Stanford agrees that, except as otherwise agreed by GTECH, he will return to GTECH, promptly upon request, any physical embodiment of such confidential information. c. 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 Mr. Stanford may have conceived, created, organized, -2- 3 prepared or produced during the period of his employment with GTECH and which relate to the business of GTECH, and all rights, title and interest in and to any patents, patent applications, copyright registrations and copyright applications resulting therefrom, are owned by GTECH, and Mr. Stanford agrees to execute instruments or documents, provide evidence and testimony, and to otherwise assist GTECH in establishing, enforcing and maintaining such rights, title and interest of GTECH. d. GTECH shall reimburse Mr. Stanford for all reasonable and necessary expenses incurred by him pursuant to this Section 4, which are consistent with GTECH policy, upon submission by Mr. Stanford to GTECH of receipts and vouchers verifying such expenses in sufficient detail to identify the nature and amount thereof. 5. Release. Mr. Stanford acknowledges that the payments provided for in paragraphs 2 and 3 of this Agreement are greater than any to which he may have otherwise been entitled under any existing Company separation, benefit or compensation policy. In consideration of the foregoing, Mr. Stanford hereby releases and forever discharges GTECH, its present and former directors, officers, employees, agents, subsidiaries, shareholders, successors and assigns from any and all liabilities, causes of action, debts, claims and demands (including without limitation claims and demands for monetary payment) both in law and in equity, known or unknown, fixed or contingent, which he may have or claim to have based upon or in any way related to employment (as an officer, director or employee), rights or entitlements related thereto or termination of such employment by GTECH and hereby covenants not to file a lawsuit or charge to assert such claims. This includes but is not limited to claims of breach of contract and wrongful termination and claims arising under the federal Age Discrimination in Employment Act, and any other federal, state or local laws prohibiting employment discrimination or claims growing out of any legal restrictions on GTECH's right to terminate its employees. 6. Advice of Counsel. Mr. Stanford understands that various state and federal laws prohibit employment discrimination based on age, sex, race, color, national origin, religion, disability or veteran status. These laws are enforced through the Equal Employment Opportunity Commission (EEOC), Department of Labor and state human rights agencies. Mr. Stanford acknowledges that he has been advised by GTECH to discuss this Agreement with his attorney and has been encouraged to take this Agreement home for at least forty-five days so that he can thoroughly review and understand the effect of this Agreement before acting on it. Mr. Stanford acknowledges that he has been informed that the benefits provided in this Severance Agreement and Release are part of an employment termination program that has been offered to certain employees of GTECH. Mr. Stanford also acknowledges that he has been informed in writing about the job titles and ages of all individuals eligible or selected for the program, as well as the ages of all individuals in the same job classification or organizational unit who were not selected for the program. 7. Non-Competition and Other Restrictions. Mr. Stanford further covenants with GTECH as follows and expressly agrees that all payments and benefits due to him under this Agreement are subject to his compliance with the following provisions. -3- 4 a. For six (6) years after the Termination Date, Mr. Stanford 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 the Lottery and Gaming Business (as defined below). As used herein, the "Lottery and Gaming Business" shall mean the provision of products or services of every nature (other than on behalf of GTECH) relating to the operation of all manner of lotteries, games of chance and parimutuel wagering however and wherever conducted. Mr. Stanford shall not be deemed to have violated this Section 7(a) merely by virtue of employment by a non-competitive division or subsidiary of a business entity or consolidated group that includes one or more divisions or subsidiaries that does in fact compete with a business carried on by GTECH, nor shall he be precluded from involvement in any internet business as long as the business is not the Lottery and Gaming Business. Mr. Stanford'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 engaged in the Lottery and Gaming Business shall not by itself be deemed to constitute engagement by Mr. Stanford. b. Further, for a period of six (6) years after the Termination Date, Mr. Stanford shall not (i) disturb or interfere with any business relationship between GTECH and any of its employees, dealers, customers, suppliers or other business associates, or (ii) solicit or cause to be solicited any officer, employee, customer or shareholder of GTECH to terminate such person's relationship with GTECH. c. Mr. Stanford recognizes that the possible restrictions on Mr. Stanford's activities which may occur as a result of his performance of his obligations under this Section 7 and Section 4 are required for the reasonable protection of GTECH and its investments, and Mr. Stanford expressly acknowledges that such restrictions are fair and reasonable for that purpose. Mr. Stanford further expressly acknowledges that damages alone will be an inadequate remedy for any breach or violation of any of the provisions of this Section 7 and Section 4, and that GTECH, in addition to all other remedies hereunder and at law or 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. If any of the provisions of this Section 7 are held to be in any respect an unreasonable restriction upon Mr. Stanford 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. 8. Change of Address. Mr. Stanford agrees to promptly notify GTECH of any change in address, and/or non-GTECH employment or business activity occurring within twelve (12) months of the Termination Date. Such notice shall include the name and address of each such employer or business associated as well as the nature of each such non-GTECH employment or business activity. 9. Return of Property. Mr. Stanford shall return to GTECH any GTECH property in his possession, custody or control on the Termination Date. -4- 5 10. Comments. Mr. Stanford shall at no time make or cause to be made any derogatory or disparaging comments regarding GTECH, its business, or its present or past directors, officers or employees. 11. Tax Withholding. GTECH may withhold from any compensation or 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. 12. No Admission. The execution of this Agreement does not represent and shall not be construed as an admission of a violation of any statute or law or breach of any duty or obligation by either GTECH or Mr. Stanford. 13. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid and unenforceable provisions were omitted. 14. Non-assignability. a. Neither this Agreement nor any rights or interest hereunder shall be assignable by Mr. Stanford, his beneficiaries, or legal representatives without prior written consent. b. This Agreement shall be binding upon, and accrue to the benefit of, Mr. Stanford and GTECH and their respective heirs, executors, administrator, successors and permitted assigns, including, in the case of GTECH, any person or entity acquiring all or substantially all of GTECH's assets. 15. Governing Law. This Agreement is made pursuant to and shall be governed by the laws of the State of Rhode Island, without regard to its rules regarding conflict of laws. In any dispute concerning this Agreement, the non-prevailing party shall pay the prevailing party's reasonable attorney's fees and costs, together with interest on any unpaid amount due at the rate of twelve percent per annum (but not in excess of the highest rate allowed by law). 16. Entire Agreement. This Agreement, along with the Business Services Agreement being executed contemporaneously with this Agreement, contain the entire understanding between Mr. Stanford and GTECH regarding the subject matter hereof and, except as expressly set forth herein, supersedes any prior agreements, written or oral. 17. Stock Options and Restricted Stock. Mr. Stanford's entitlement to any options shall be exercised in accordance with the applicable Stock Option Plans. GTECH will recommend to the Compensation Committee the acceleration of unvested options and the extension of unvested options. Mr. Stanford's entitlement to Restricted Stock, if any, shall be exercised in accordance with the 2000 Plan, which provides for the immediate vesting of all shares upon termination of employment. 18. Confidentiality. This Agreement is confidential and neither the Agreement nor any of its terms or contents shall be made public by Mr. Stanford or otherwise disclosed by him to any -5- 6 person other than his immediate family, attorney, tax advisor or accountant, except as required by law or if necessary to enforce this Agreement. 19. Modification. This Agreement may not be changed orally but only by an instrument in writing signed by the parties hereto. The parties acknowledge that they have not relied upon any representation or statement, written or oral, not set forth in this Agreement. 20. Revocation; Effective Date. Mr. Stanford may revoke his agreement to the terms hereof at any time during the seven-day period immediately following the date of his signature below ("Revocation Period") by delivering written notice of his revocation to GTECH. This Agreement shall become effective upon the expiration of the Revocation Period. IN WITNESS WHEREOF, the parties have executed this Agreement on the date set forth below. GTECH Holdings Corporation Attest: By: /s/ David Calabro /s/ Karen Connelly ---------------------------- ------------------------------- Date: 6/12/01 -------------------------- GTECH Corporation Attest: By: /s/ Arlean Fellela /s/ Helena M. Silva ---------------------------- ------------------------------- Date: June 12, 2001 -------------------------- Witness: /s/ Donald L. Stanford /s/ Rebecca Corbett ------------------------------- ------------------------------- Donald Stanford Date: May 24, 2001 -------------------------- -6-