-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ApjR5klYo6D8kZDTlF+5pqvygcz7y+nIy6dP6pchyV5xjsuCe9/fxuX7yd/tdvr9 zcG5aXTTSsHh/Fvv4QXCNg== 0000950123-02-009493.txt : 20021008 0000950123-02-009493.hdr.sgml : 20021008 20021008151909 ACCESSION NUMBER: 0000950123-02-009493 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020824 FILED AS OF DATE: 20021008 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: 02784106 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 y64244e10vq.txt GTECH HOLDINGS CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 24, 2002 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, 2002, there were 57,076,348 shares of the registrant's Common Stock outstanding. 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 8-22 Item 2. Management's Discussion and Analysis of Financial Condition 23-33 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 33 Item 4. Controls and Procedures 33 PART II. OTHER INFORMATION Item 1. Legal Proceedings 34-35 Item 4. Submission of Matters to a Vote of Security Holders 35 Item 6. Exhibits and Reports on Form 8-K 36 SIGNATURES 37 CERTIFICATIONS 38-39 EXHIBITS
PART 1. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) August 24, February 23, 2002 2002 --------- --------- ASSETS (Dollars in thousands) CURRENT ASSETS: Cash and cash equivalents $ 114,906 $ 35,095 Trade accounts receivable 88,439 100,361 Sales-type lease receivables 4,681 4,894 Inventories 99,409 86,629 Deferred income taxes 28,321 28,321 Other current assets 16,022 22,730 --------- --------- TOTAL CURRENT ASSETS 351,778 278,030 SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 390,477 369,595 GOODWILL 115,498 116,828 OTHER ASSETS 88,529 89,376 --------- --------- TOTAL ASSETS $ 946,282 $ 853,829 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short term borrowings $ 2,466 $ 2,358 Accounts payable 44,329 43,430 Accrued expenses 73,750 75,666 Employee compensation 27,850 37,941 Advance payments from customers 107,843 72,645 Income taxes payable 65,701 53,928 Current portion of long-term debt 4,019 3,510 --------- --------- TOTAL CURRENT LIABILITIES 325,958 289,478 LONG-TERM DEBT, less current portion 333,657 329,715 OTHER LIABILITIES 38,088 27,986 DEFERRED INCOME TAXES 4,825 3,695 COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY: Preferred Stock, par value $.01 per share--20,000,000 shares authorized, none issued -- -- Common Stock, par value $.01 per share--150,000,000 shares authorized, 92,296,404 and 92,297,404 shares issued; 57,205,079 and 57,491,256 shares outstanding at August 24, 2002 and February 23, 2002, respectively (shares adjusted to reflect May 2002 two-for-one stock split) 923 461 Additional paid-in capital 241,536 234,247 Equity carryover basis adjustment (7,008) (7,008) Accumulated other comprehensive loss (108,066) (100,815) Retained earnings 609,138 542,878 --------- --------- 736,523 669,763 Less cost of 35,091,325 and 34,806,148 shares in treasury at August 24, 2002 and February 23, 2002, respectively (shares adjusted to reflect May 2002 two-for-one stock split) (492,769) (466,808) --------- --------- 243,754 202,955 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 946,282 $ 853,829 ========= =========
See Notes to Consolidated Financial Statements -3- CONSOLIDATED INCOME STATEMENTS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) Three Months Ended -------------------------- August 24, August 25, 2002 2001 --------- ---------- (Dollars in thousands, except per share amounts) Revenues: Services $ 211,600 $ 209,619 Sales of products 9,358 26,965 --------- --------- 220,958 236,584 Costs and expenses: Costs of services 126,942 143,592 Costs of sales 4,109 23,663 --------- --------- 131,051 167,255 --------- --------- Gross profit 89,907 69,329 Selling, general and administrative 22,901 27,081 Research and development 7,170 8,336 Goodwill amortization -- 1,590 --------- --------- Operating expenses 30,071 37,007 --------- --------- Operating income 59,836 32,322 Other income (expense): Interest income 977 1,224 Equity in earnings of unconsolidated affiliates 1,261 1,400 Other income (expense) 2,269 (1,685) Interest expense (2,718) (6,429) --------- --------- Income before income taxes 61,625 26,832 Income taxes 23,418 10,196 --------- --------- Net income $ 38,207 $ 16,636 ========= ========= Basic earnings per share $ 0.67 $ 0.28 ========= ========= Diluted earnings per share $ 0.66 $ 0.28 ========= =========
See Notes to Consolidated Financial Statements -4- CONSOLIDATED INCOME STATEMENTS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) Six Months Ended -------------------------- August 24, August 25, 2002 2001 --------- ---------- (Dollars in thousands, except per share amounts) Revenues: Services $ 435,335 $ 420,170 Sales of products 17,035 51,379 --------- --------- 452,370 471,549 Costs and expenses: Costs of services 273,877 288,084 Costs of sales 10,356 43,600 --------- --------- 284,233 331,684 --------- --------- Gross profit 168,137 139,865 Selling, general and administrative 45,810 56,651 Research and development 13,672 15,969 Goodwill amortization -- 3,063 --------- --------- Operating expenses 59,482 75,683 --------- --------- Operating income 108,655 64,182 Other income (expense): Interest income 1,819 3,254 Equity in earnings of unconsolidated affiliates 1,957 2,575 Other income 1,678 493 Interest expense (5,643) (12,851) --------- --------- Income before income taxes 108,466 57,653 Income taxes 41,218 21,908 --------- --------- Net income $ 67,248 $ 35,745 ========= ========= Basic earnings per share $ 1.17 $ 0.59 ========= ========= Diluted earnings per share $ 1.14 $ 0.58 ========= =========
See Notes to Consolidated Financial Statements -5- CONSOLIDATED STATEMENTS OF CASH FLOWS GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited) Six Months Ended -------------------------- August 24, August 25, 2002 2001 --------- ---------- (Dollars in thousands) OPERATING ACTIVITIES Net income $ 67,248 $ 35,745 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 66,619 81,277 Intangibles amortization 3,369 4,630 Goodwill amortization -- 3,063 Asset impairment charges -- 9,313 Equity in earnings of unconsolidated affiliates, net of dividends received 653 (442) Other 2,967 (7,836) Changes in operating assets and liabilities: Trade accounts receivable 8,490 21,255 Inventories (12,780) 3,978 Special charge (618) (4,850) Other assets and liabilities 63,705 39,729 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 199,653 185,862 INVESTING ACTIVITIES Purchases of systems, equipment and other assets relating to contracts (88,395) (118,096) Investments in and advances to unconsolidated subsidiaries -- 3,187 Other (2,950) (369) --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (91,345) (115,278) FINANCING ACTIVITIES Net proceeds from issuance of long-term debt -- 181,000 Principal payments on long-term debt (3,616) (136,255) Purchases of treasury stock (42,453) (186,293) Proceeds from stock options 14,331 32,258 Other 1,504 (1,346) --------- --------- NET CASH USED FOR FINANCING ACTIVITIES (30,234) (110,636) Effect of exchange rate changes on cash 1,737 (1,692) --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 79,811 (41,744) Cash and cash equivalents at beginning of period 35,095 46,948 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 114,906 $ 5,204 ========= =========
See Notes to Consolidated Financial Statements -6- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - (Unaudited) GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Equity Accumulated Additional Carryover Other Outstanding Common Paid-in Basis Comprehensive Retained Treasury Shares Stock Capital Adjustment Loss Earnings Stock Total ------ ----- ------- ---------- ---- -------- ----- ----- (Dollars in thousands) Balance at February 23, 2002 57,491,256 $ 461 $234,247 $ (7,008) $ (100,815) $ 542,878 $(466,808) $ 202,955 Comprehensive income: Net income -- -- -- -- -- 67,248 -- 67,248 Other comprehensive loss, net of tax: Foreign currency translation -- -- -- -- (5,907) -- -- (5,907) Net loss on derivative instruments -- -- -- -- (1,272) -- -- (1,272) Unrealized loss on investments -- -- -- -- (72) -- -- (72) --------- Comprehensive income 59,997 Treasury shares purchased (1,492,600) -- -- -- -- -- (42,453) (42,453) Shares issued under employee stock purchase and stock award plans 123,223 -- -- -- -- (64) 1,689 1,625 Shares issued upon exercise of stock options 1,083,200 -- (10) -- -- (462) 14,803 14,331 Tax benefits related to stock award plans -- -- 7,299 -- -- -- -- 7,299 May 2002 two-for-one stock split -- 462 -- -- -- (462) -- -- ---------- ------- -------- --------- ------------ --------- --------- --------- Balance at August 24, 2002 57,205,079 $ 923 $241,536 $ (7,008) $ (108,066) $ 609,138 $(492,769) $ 243,754 ========== ======= ======== ========= ============ ========= ========= =========
See Notes to Consolidated Financial Statements -7- 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 ("Holdings" or the "Company"), the parent of GTECH Corporation ("GTECH"), have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended August 24, 2002 are not necessarily indicative of the results that may be expected for the full fiscal year ending February 22, 2003. The balance sheet at February 23, 2002 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 2002 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 - COMMON STOCK SPLIT In the first quarter of fiscal 2003, the Company's Board of Directors approved a 2-for-1 common stock split effected in the form of a stock dividend distributed on May 23, 2002 to shareholders of record on May 16, 2002. All references to common shares and per share amounts have been restated to reflect the stock split for all periods presented.
NOTE C - INVENTORIES August 24, February 23, 2002 2002 ---- ---- (Dollars in thousands) Inventories consist of: Raw materials $ 8,507 $12,310 Work in progress 88,224 72,847 Finished goods 2,678 1,472 ------- ------- $99,409 $86,629 ======= =======
-8- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE D - LONG-TERM DEBT August 24, February 23, 2002 2002 ---------- ----------- (Dollars in thousands) Long-term debt consists of: 1.75% Convertible Debentures due 2021 $ 175,000 $ 175,000 7.75% Series A Senior Notes due 2004 40,000 40,000 7.87% Series B Senior Notes due 2007 95,000 95,000 Interest rate swaps 17,161 12,089 Other 10,515 11,136 ---------- ----------- 337,676 333,225 Less current portion 4,019 3,510 ---------- ----------- $ 333,657 $ 329,715 ========== ===========
The Company has an unsecured revolving credit facility of $300 million expiring in June 2006 (the "Credit Facility"). There were no outstanding borrowings under the Credit Facility at August 24, 2002 or February 23, 2002. On October 2, 2002, after the close of the Company's fiscal 2003 second quarter, the Company announced that it had launched an offer to purchase up to $50.0 million aggregate principal amount of its 7.75% Series A Guaranteed Senior Notes due 2004 and its 7.87% Series B Guaranteed Senior Notes due 2007 issued by GTECH Corporation in private placements in 1997. The offer expires on October 31, 2002, unless extended or earlier terminated. The Company intends to use cash on hand to fund the purchase. NOTE E - 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 F - 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. -9- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE G - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended ------------------- ---------------- August 24, August 25, August 24, August 25, 2002 2001 2002 2001 ---- ---- ---- ---- (Dollars and shares in thousands, except per share amounts) Numerator: Net income $38,207 $16,636 $67,248 $35,745 ======= ======= ======= ======= Denominator: Weighted average shares-Basic 57,225 59,076 57,387 60,298 Effect of dilutive securities: Employee stock options and unvested restricted shares 1,074 1,406 1,376 1,280 ------- ------- ------- ------- Weighted average shares-Diluted 58,299 60,482 58,763 61,578 ======= ======= ======= ======= Basic earnings per share $ .67 $ .28 $ 1.17 $ .59 ======= ======= ======= ======= Diluted earnings per share $ .66 $ .28 $ 1.14 $ .58 ======= ======= ======= =======
NOTE H -- COMPREHENSIVE INCOME The following table sets forth the components of comprehensive income:
Three Months Ended Six Months Ended ------------------ ---------------- August 24, August 25, August 24, August 25, 2002 2001 2002 2001 -------- -------- -------- -------- (Dollars in thousands) Net income $ 38,207 $ 16,636 $ 67,248 $ 35,745 Other comprehensive loss, net of tax Foreign currency translation (8,448) (3,567) (5,907) (13,331) Net loss on derivative instruments (597) (1,716) (1,272) (2,132) Unrealized loss on investments -- (36) (72) (36) -------- -------- -------- -------- Comprehensive income $ 29,162 $ 11,317 $ 59,997 $ 20,246 ======== ======== ======== ========
-10- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE I - SEGMENT INFORMATION The Company presently has one reportable business segment, the Lottery segment, which provides online, high speed, highly secure 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 subsidiary, which provides electronic benefit transfer services over the Company's dedicated network infrastructure. The composition of the "All Other" category for the three months and six months ended August 25, 2001 has been revised to include the Company's IGI/Europrint business unit in the Lottery segment because management considers it a component of the Lottery segment. The Company's business segment data is summarized below:
Three Months Ended Six Months Ended ------------------ ---------------- August 24, August 25, August 24, August 25, 2002 2001 2002 2001 -------- --------- -------- --------- (Dollars in thousands) Revenues from external sources: Lottery $220,194 $ 233,585 $450,925 $ 464,675 All other 764 2,999 1,445 6,874 -------- --------- -------- --------- Consolidated $220,958 $ 236,584 $452,370 $ 471,549 ======== ========= ======== ========= Net operating profit (loss) after income taxes: Lottery $ 39,378 $ 21,186 $ 71,024 $ 45,476 All other 75 (179) 29 (405) -------- --------- -------- --------- Consolidated $ 39,453 $ 21,007 $ 71,053 $ 45,071 ======== ========= ======== =========
A reconciliation of net operating profit after income taxes to net income as reported on the Consolidated Income Statements is as follows:
Three Months Ended Six Months Ended ------------------ ---------------- August 24, August 25, August 24, August 25, 2002 2001 2002 2001 -------- -------- -------- -------- (Dollars in thousands) Net operating profit after income taxes $ 39,453 $ 21,007 $ 71,053 $ 45,071 Reconciling items, net of tax: Interest expense (1,685) (3,986) (3,499) (7,968) Other 439 (385) (306) (1,358) -------- -------- -------- -------- Net income $ 38,207 $ 16,636 $ 67,248 $ 35,745 ======== ======== ======== ========
August 24, February 23, 2002 2002 ---- ---- (Dollars in thousands) Segment assets: Lottery $942,338 $848,162 All other 3,944 5,667 -------- -------- Consolidated $946,282 $853,829 ======== ========
-11- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE J - 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. See Note P to the Consolidated Financial Statements in the Company's fiscal 2002 Annual Report on Form 10-K for further information. 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 (438) (71) -- 509 -- Cash expenditures (5,880) (678) -- (1,437) (7,995) -------- -------- ------- ------- -------- Balance at February 23, 2002 1,608 804 -- 24 2,436 Cash expenditures (391) (251) -- 24 (618) -------- -------- ------- ------- -------- Balance at August 24, 2002 $ 1,217 $ 553 $ -- $ 48 $ 1,818 ======== ======== ======= ======= ========
NOTE K - GOODWILL AND OTHER INTANGIBLE ASSETS During the first quarter of this fiscal year, the Company adopted Statement of Financial Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which requires, among other things, that goodwill and certain other indefinite-lived intangible assets no longer be amortized, but instead tested for impairment at least annually. In connection with the adoption of the new standard, the Company determined that goodwill with a net book value of $1.3 million (within the Lottery segment) met the standards' intangible asset recognition criteria. Accordingly, this amount was reclassified into intangible assets and will continue to be amortized over its remaining useful life. -12- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE K - GOODWILL AND OTHER INTANGIBLE ASSETS (continued) The following table presents the impact of SFAS 142 on net income and earnings per share had the standard been in effect for the three months and six months ended August 25, 2001:
Three Six Months Ended Months Ended August 25, August 25, 2001 2001 ---- ---- (Dollars in thousands, except per share data) Net income as reported $ 16,636 $ 35,745 Add back amortization 1,428 2,855 ---------- ---------- Adjusted net income $ 18,064 $ 38,600 ========== ========== Basic earnings per share as reported $ .28 $ .59 Add back amortization .03 .05 ---------- ---------- Adjusted earnings per share - basic $ .31 $ .64 ========== ========== Diluted earnings per share as reported $ .28 $ .58 Add back amortization .02 .05 ---------- ---------- Adjusted earnings per share - diluted $ .30 $ .63 ========== ==========
Intangible assets, which are included in other assets in the Company's Consolidated Balance Sheets, are comprised of the following:
As of August 24, 2002 -------------------------------- Gross Net Carrying Accumulated Carrying Amount Amortization Amount ------- ------------ -------- (Dollars in thousands) Contract based $22,038 $22,038 $ -- Capitalized software 13,255 10,900 2,355 Other 1,853 654 1,199 ------- ------- ------ Total intangible assets $37,146 $33,592 $3,554 ======= ======= ====== As of February 23, 2002 --------------------------------- Gross Net Carrying Accumulated Carrying Amount Amortization Amount -------- ------------ -------- (Dollars in thousands) Contract based $22,038 $20,034 $2,004 Capitalized software 13,255 9,667 3,588 Other 1,489 1,489 -- ------- ------- ------ Total intangible assets $36,782 $31,190 $5,592 ======= ======= ======
-13- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE K - GOODWILL AND OTHER INTANGIBLE ASSETS (continued) A reconciliation of the net carrying amount of intangible assets as of February 23, 2002 to August 24, 2002 is as follows (in thousands):
Net Carrying Amount -------- Balance as of February 23, 2002 $ 5,592 Reclassification from goodwill, net 1,331 Amortization expense (3,369) ------- Balance as of August 24, 2002 $ 3,554 =======
Amortization expense for the six months ended August 24, 2002 and the fiscal year ended February 23, 2002 is as follows:
Six Months Ended Fiscal Year Ended August 24, February 23, 2002 2002 ---- ---- (Dollars in thousands) Contract based $2,004 $4,007 Capitalized software 1,231 4,223 Other 134 193 ------ ------ Total amortization $3,369 $8,423 ====== ======
Amortization expense for the next five fiscal years is expected to be as follows (in thousands):
Fiscal Amortization Year Expense ------ ------------ 2003 $ 4,733 2004 1,383 2005 262 2006 262 2007 262
-14- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE L - NEW ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other things, SFAS 145 rescinds Statement of Financial Accounting Standards No. 4 ("SFAS 4"), "Reporting Gains and Losses from Extinguishment of Debt" and eliminates the requirement that gains and losses from the extinguishment of debt be classified as an extraordinary item, net of related income tax effects, unless the criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are met. The standard is required to be adopted by the Company beginning on February 23, 2003 (the first day of fiscal 2004). The Company has early adopted SFAS 145 on August 25, 2002 (the first day of its fiscal 2003 third quarter) and will reclassify, in the fourth quarter of fiscal 2003, the $12.5 million ($7.8 million after-tax) extraordinary charge it recorded in the fourth quarter of the prior fiscal year into other expense in its Consolidated Income Statements. In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for Costs Associated With Exit or Disposal Activities". SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Therefore, SFAS 146 eliminates the definition and requirements for recognition of exit costs in EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements. NOTE M - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION On December 18, 2001, Holdings (the "Parent Company") issued $175 million principal amount of 1.75% Convertible Debentures due 2021 (the "Convertible Debentures"). The Convertible Debentures are unsecured and unsubordinated obligations of the Parent Company that are jointly and severally, fully and unconditionally guaranteed by GTECH and two of its wholly-owned subsidiaries: GTECH Rhode Island Corporation and GTECH Latin America Corporation (collectively with GTECH, the "Guarantor Subsidiaries"). Condensed consolidating financial information is presented below. Selling, general and administrative costs and research and development costs are allocated to each subsidiary based on the ratio of the subsidiaries combined service revenue and sales of products to consolidated revenues. The Parent Company conducts business through its consolidated subsidiaries and unconsolidated affiliates and has, as its only asset, an investment in GTECH. Equity in earnings of consolidated affiliates recorded by the Parent Company includes the Parent Company's 100% share of the after-tax earnings of GTECH. Taxes payable and deferred income taxes are obligations of the subsidiaries. Income tax expense related to both current and deferred income taxes are allocated to each subsidiary based on the Company's consolidated effective income tax rates. -15- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE M - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (continued) Condensed Consolidating Balance Sheets August 24, 2002
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------ ------- ------------ (Dollars in thousands) Assets Current Assets: Cash and cash equivalents $ -- $ 98,912 $ 15,994 $ -- $114,906 Trade accounts receivable -- 63,475 24,964 -- 88,439 Due from subsidiaries and affiliates -- 56,501 -- (56,501) -- Sales-type lease receivables -- 2,865 1,816 -- 4,681 Inventories -- 70,358 54,449 (25,398) 99,409 Deferred income taxes -- 25,264 3,057 -- 28,321 Other current assets -- 6,088 9,934 -- 16,022 -------- -------- --------- --------- -------- Total Current Assets -- 323,463 110,214 (81,899) 351,778 Systems, Equipment and Other Assets Relating to Contracts -- 320,733 98,778 (29,034) 390,477 Investment in Subsidiaries and Affiliates 243,754 63,224 -- (306,978) -- Goodwill -- 70,605 44,893 -- 115,498 Other Assets -- 72,446 16,083 -- 88,529 -------- -------- --------- --------- -------- Total Assets $243,754 $850,471 $ 269,968 $(417,911) $946,282 ======== ======== ========= ========= ======== Liabilities and Shareholders' Equity Current Liabilities: Short term borrowings $ -- $ -- $ 2,466 $ -- $ 2,466 Accounts payable -- 35,575 8,754 -- 44,329 Due to subsidiaries and affiliates -- -- 56,501 (56,501) -- Accrued expenses -- 52,938 20,812 -- 73,750 Employee compensation -- 22,589 5,261 -- 27,850 Advance payments from customers -- 47,925 59,918 -- 107,843 Income taxes payable -- 33,328 32,373 -- 65,701 Current portion of long-term debt -- 1,337 2,682 -- 4,019 -------- -------- --------- --------- -------- Total Current Liabilities -- 193,692 188,767 (56,501) 325,958 Long-Term Debt, less current portion -- 325,824 7,833 -- 333,657 Other Liabilities -- 24,023 14,065 -- 38,088 Deferred Income Taxes -- 8,746 (3,921) -- 4,825 Shareholders' Equity 243,754 298,186 63,224 (361,410) 243,754 -------- -------- --------- --------- -------- Total Liabilities and Shareholders' Equity $243,754 $850,471 $ 269,968 $(417,911) $946,282 ======== ======== ========= ========= ========
-16- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE M - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (continued) Condensed Consolidating Income Statements Three Months Ended August 24, 2002
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------ ------- ------------ (Dollars in thousands) Revenues: Services $ -- $ 159,070 $ 52,530 $ -- $ 211,600 Sales of products -- 5,465 3,893 -- 9,358 Intercompany sales and fees -- 29,461 12,423 (41,884) -- -------- --------- -------- --------- --------- -- 193,996 68,846 (41,884) 220,958 Costs and expenses: Costs of services -- 90,031 40,180 (3,269) 126,942 Costs of sales -- 2,007 2,417 (315) 4,109 Intercompany cost of sales and fees -- 14,443 5,195 (19,638) -- -------- --------- -------- --------- --------- -- 106,481 47,792 (23,222) 131,051 -------- --------- -------- --------- --------- Gross profit -- 87,515 21,054 (18,662) 89,907 Selling, general & administrative -- 17,058 5,843 -- 22,901 Research and development -- 5,351 1,819 -- 7,170 -------- --------- -------- --------- --------- Operating expenses -- 22,409 7,662 -- 30,071 -------- --------- -------- --------- --------- Operating income -- 65,106 13,392 (18,662) 59,836 Other income (expense): Interest income -- 395 582 -- 977 Equity in earnings of unconsolidated affiliates -- 220 1,041 -- 1,261 Equity in earnings of consolidated affiliates 38,207 11,144 -- (49,351) -- Other income (expense) -- (1,166) 3,435 -- 2,269 Interest expense -- (2,242) (476) -- (2,718) -------- --------- -------- --------- --------- Income before income taxes 38,207 73,457 17,974 (68,013) 61,625 Income taxes -- 27,914 6,831 (11,327) 23,418 -------- --------- -------- --------- --------- Net income $ 38,207 $ 45,543 $ 11,143 $ (56,686) $ 38,207 ======== ========= ======== ========= =========
-17- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE M - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (continued) Condensed Consolidating Income Statements Six Months Ended August 24, 2002
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------ ------- ------------ (Dollars in thousands) Revenues: Services $ -- $ 331,153 $ 104,182 $ -- $ 435,335 Sales of products -- 10,135 6,900 -- 17,035 Intercompany sales and fees -- 48,784 24,910 (73,694) -- -------- --------- --------- --------- --------- -- 390,072 135,992 (73,694) 452,370 Costs and expenses: Costs of services -- 194,254 85,039 (5,416) 273,877 Costs of sales -- 5,856 4,815 (315) 10,356 Intercompany cost of sales and fees -- 28,784 7,287 (36,071) -- -------- --------- --------- --------- --------- -- 228,894 97,141 (41,802) 284,233 -------- --------- --------- --------- --------- Gross profit -- 161,178 38,851 (31,892) 168,137 Selling, general & administrative -- 34,557 11,253 -- 45,810 Research and development -- 10,317 3,355 -- 13,672 -------- --------- --------- --------- --------- Operating expenses -- 44,874 14,608 -- 59,482 -------- --------- --------- --------- --------- Operating income -- 116,304 24,243 (31,892) 108,655 Other income (expense): Interest income -- 749 1,070 -- 1,819 Equity in earnings of unconsolidated affiliates -- 296 1,661 -- 1,957 Equity in earnings of consolidated affiliates 67,248 18,230 -- (85,478) -- Other income (expense) -- (1,671) 3,349 -- 1,678 Interest expense -- (4,724) (919) -- (5,643) -------- --------- --------- --------- --------- Income before income taxes 67,248 129,184 29,404 (117,370) 108,466 Income taxes -- 49,090 11,174 (19,046) 41,218 -------- --------- --------- --------- --------- Net income $ 67,248 $ 80,094 $ 18,230 $ (98,324) $ 67,248 ======== ========= ========= ========= =========
-18- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE M - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (continued) Condensed Consolidating Income Statements Three Months Ended August 25, 2001
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated -------- ------------ ------------ ----------- ------------ (Dollars in thousands) Revenues: Services $ -- $ 160,154 $ 49,465 $ -- $ 209,619 Sales of products -- 23,253 3,738 (26) 26,965 Intercompany sales and fees -- 16,941 23,000 (39,941) -- -------- --------- -------- --------- --------- -- 200,348 76,203 (39,967) 236,584 Costs and expenses: Costs of services -- 102,093 44,179 (2,680) 143,592 Costs of sales -- 21,008 2,739 (84) 23,663 Intercompany cost of sales and fees -- 20,254 10,345 (30,599) -- -------- --------- -------- --------- --------- -- 143,355 57,263 (33,363) 167,255 -------- --------- -------- --------- --------- Gross profit -- 56,993 18,940 (6,604) 69,329 Selling, general & administrative -- 21,059 6,022 -- 27,081 Research and development -- 6,441 1,895 -- 8,336 Goodwill amortization -- 633 957 -- 1,590 -------- --------- -------- --------- --------- Operating expenses -- 28,133 8,874 -- 37,007 -------- --------- -------- --------- --------- Operating income -- 28,860 10,066 (6,604) 32,322 Other income (expense): Interest income -- 281 943 -- 1,224 Equity in earnings of unconsolidated affiliates -- 136 1,264 -- 1,400 Equity in earnings of consolidated affiliates 16,636 9,342 -- (25,978) -- Other income (expense) -- (5,096) 3,411 -- (1,685) Interest expense -- (5,813) (616) -- (6,429) -------- --------- -------- --------- --------- Income before income taxes 16,636 27,710 15,068 (32,582) 26,832 Income taxes -- 10,530 5,726 (6,060) 10,196 -------- --------- -------- --------- --------- Net income $ 16,636 $ 17,180 $ 9,342 $ (26,522) $ 16,636 ======== ========= ======== ========= =========
-19- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE M - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (continued) Condensed Consolidating Income Statements Six Months Ended August 25, 2001
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------ ------- ------------ (Dollars in thousands) Revenues: Services $ -- $ 316,148 $ 104,022 $ -- $ 420,170 Sales of products -- 37,594 13,811 (26) 51,379 Intercompany sales and fees -- 62,487 35,470 (97,957) -- -------- --------- --------- --------- --------- -- 416,229 153,303 (97,983) 471,549 Costs and expenses: Costs of services -- 202,376 90,540 (4,832) 288,084 Costs of sales -- 35,366 8,545 (311) 43,600 Intercompany cost of sales and fees -- 46,123 18,215 (64,338) -- -------- --------- --------- --------- --------- -- 283,865 117,300 (69,481) 331,684 -------- --------- --------- --------- --------- Gross profit -- 132,364 36,003 (28,502) 139,865 Selling, general & administrative -- 42,499 14,152 -- 56,651 Research and development -- 11,974 3,995 -- 15,969 Goodwill amortization -- 1,265 1,798 -- 3,063 -------- --------- --------- --------- --------- Operating expenses -- 55,738 19,945 -- 75,683 -------- --------- --------- --------- --------- Operating income -- 76,626 16,058 (28,502) 64,182 Other income (expense): Interest income -- 1,428 1,826 -- 3,254 Equity in earnings of unconsolidated affiliates -- 539 2,036 -- 2,575 Equity in earnings of consolidated affiliates 35,745 15,378 -- (51,123) -- Other income (expense) -- (5,627) 6,120 -- 493 Interest expense -- (11,615) (1,236) -- (12,851) -------- --------- --------- --------- --------- Income before income taxes 35,745 76,729 24,804 (79,625) 57,653 Income taxes -- 29,157 9,426 (16,675) 21,908 -------- --------- --------- --------- --------- Net income $ 35,745 $ 47,572 $ 15,378 $ (62,950) $ 35,745 ======== ========= ========= ========= =========
-20- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE M - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (continued) Condensed Consolidating Statements of Cash Flows Six Months Ended August 24, 2002
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------ ------- ------------ (Dollars in thousands) Net cash provided by operating activities $ -- $ 189,637 $ 9,849 $ 167 $ 199,653 Investing Activities Purchases of systems, equipment and other assets relating to contracts -- (82,259) (5,969) (167) (88,395) Other -- (2,950) -- -- (2,950) -------- --------- -------- ----- --------- Net cash used for investing activities -- (85,209) (5,969) (167) (91,345) Financing Activities Principal payments on long-term debt -- (2,186) (1,430) -- (3,616) Purchases of treasury stock (42,453) -- -- -- (42,453) Proceeds from stock options 14,331 -- -- -- 14,331 Intercompany capital transactions 27,647 (27,647) -- -- -- Other 475 (120) 1,149 -- 1,504 -------- --------- -------- ----- --------- Net cash used for financing activities -- (29,953) (281) -- (30,234) Effect of exchange rate changes on cash -- (1,428) 3,165 -- 1,737 -------- --------- -------- ----- --------- Increase in cash and cash equivalents -- 73,047 6,764 -- 79,811 Cash and cash equivalents at beginning of period -- 25,865 9,230 -- 35,095 -------- --------- -------- ----- --------- Cash and cash equivalents at end of period $ -- $ 98,912 $ 15,994 $ -- $ 114,906 ======== ========= ======== ===== =========
-21- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE M - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (continued) Condensed Consolidating Statements of Cash Flows Six Months Ended August 25, 2001
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------ ------- ------------ (Dollars in thousands) Net cash provided by operating activities $ -- $ 169,827 $ 27,187 $(11,152) $ 185,862 Investing Activities Purchases of systems, equipment and other assets relating to contracts -- (94,783) (34,465) 11,152 (118,096) Investments in and advances to unconsolidated subsidiaries -- -- 3,187 -- 3,187 Other -- (1,830) 1,461 -- (369) --------- --------- -------- -------- --------- Net cash used for investing activities -- (96,613) (29,817) 11,152 (115,278) Financing Activities Net proceeds from issuance of long-term debt -- 181,000 -- -- 181,000 Principal payments on long-term debt -- (135,340) (915) -- (136,255) Purchases of treasury stock (186,293) -- -- -- (186,293) Proceeds from stock options 32,258 -- -- -- 32,258 Intercompany capital transactions 153,203 (153,203) -- -- -- Other 832 (1,451) (727) -- (1,346) --------- --------- -------- -------- --------- Net cash used for financing activities -- (108,994) (1,642) -- (110,636) Effect of exchange rate changes on cash -- (508) (1,184) -- (1,692) --------- --------- -------- -------- --------- Decrease in cash and cash equivalents -- (36,288) (5,456) -- (41,744) Cash and cash equivalents at beginning of period -- 37,068 9,880 -- 46,948 --------- --------- -------- -------- --------- Cash and cash equivalents at end of period $ -- $ 780 $ 4,424 $ -- $ 5,204 ========= ========= ======== ======== =========
-22- 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, the following: (i) governmental regulations and other actions affecting the online lottery industry could have a negative effect on the Company's business, (ii) the Company's lottery operations are dependent upon its continued ability to retain and extend its existing contracts (including with respect to several of the Company's significant online lottery service contracts which are the subject of competitive procurement procedures over the next 6 months) and win new contracts, (iii) slow growth or declines in sales of online lottery goods and services could adversely affect the Company's future revenues and profitability, (iv) the Company has significant foreign exchange exposure, (v) the Company is subject to the economic, political and social instability risks of doing business in foreign jurisdictions, (vi) the Company has a concentrated customer base, and the loss of any of its larger customers could harm its results, (vii) the Company's quarterly operating results may fluctuate significantly, (viii) the Company operates in a highly competitive environment, (ix) the Company is subject to substantial penalties for failure to perform under its contracts, (x) the Company may not be able to respond to technological changes or satisfy future technological demands of its customers, (xi) expansion of the gaming industry faces opposition which may limit the legalization, or expansion, of online gaming to the detriment of the Company's business, financial condition, results and prospects, (xii) the Company's business prospects and future success depend upon its ability to attract and retain qualified employees, (xiii) the Company may be subject to adverse determinations in pending legal proceedings, and (xiv) other risks and uncertainties set forth below and elsewhere in this report, in the Company's fiscal 2002 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 2003 ends on February 22, 2003. 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 generally provide compensation to the Company 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 Company's gross margins on product sales fluctuate depending on the mix, volume and timing of product sales contracts. 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 2003 will be in a range of $90 million to $110 million. -23- The Company has taken steps to broaden its offerings of high-volume transaction processing services outside of its core business of providing online lottery services. For example, the Company's networks in Brazil and Chile currently process bill payments and other commercial service transactions. 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 "Legal Proceedings" in Part II, Item 1 herein; and Part I, Item 1 - "Certain Factors That May Affect Future Performance - - Government regulations and other actions affecting the online lottery industry could have a negative effect on the Company's business", Part I, Item 3 - "Legal Proceedings" and Note F to the Consolidated Financial Statements in the Company's fiscal 2002 Annual Report on Form 10-K, for further information concerning these matters and other contingencies. The Company is a global business and derives a substantial portion of its revenues from operations outside of the United States. In particular, in fiscal 2002, the Company derived approximately 51% of its revenues from its international operations and 11.5% of its revenues from its Brazilian operations alone (including 10.7% of its revenues from the National Lottery of Brazil, one of the Company's largest customers). In addition, a substantial portion of the Company's assets are held outside of the United States. Upcoming Significant Contract Rebids A majority of the Company's revenues and cash flow is derived from its portfolio of long-term online lottery services 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), the National Lottery of Brazil and Georgia, two of the Company's five largest contracts, as measured by annual revenues, will be the subject of competitive procurements to select contractors to supply lottery goods and services upon the termination of the Company's current contracts. Upon the expiration of the Company's current contract, Caixa Economica Federal ("CEF"), the operator of Brazil's National Lottery, will attempt to handle internally some non-lottery operations currently performed by the Company under its contract and, with regard to the remaining lottery operations, is seeking to proceed with a competitive procurement process calculated to result in multiple vendors to administer Brazil's National Lottery, which is presently administered solely by the Company. On July 24, 2002, CEF published four Requests for Proposals in connection with this procurement process, the validity of which the Company is challenging in court. See Part II, Item 1 - "Legal Proceedings". CEF has indicated further that GTECH will be requested to provide lottery services in varying capacities for some period beyond the current term of the contract due to the scope and complexity of the transition CEF is attempting. -24- In addition, the California lottery contract, which was the Company's fourth largest contract in fiscal 2002 (based on annual revenues), expires in October 2003. Following a competitive procurement process, on October 4, 2002, the Company entered into a facilities management agreement to provide online lottery technology, equipment and services to the California Lottery for a period of six years beginning on October 14, 2003, with four additional one year options to extend at the discretion of the California Lottery. After the exercise of any extension options, the agreement will remain in effect until either party gives notice of termination at least two years in advance. Critical Accounting Policies In December 2001, the Securities and Exchange Commission issued new advice regarding disclosure of critical accounting policies. In response to this advice, the Company has identified the accounting policies listed below that it believes are most critical to the Company's financial condition and results of operations, and that require management's most difficult, subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note A to the Consolidated Financial Statements in the Company's fiscal 2002 Annual Report on Form 10-K, which includes other significant accounting policies. REVENUE RECOGNITION The Company recognizes service revenues as the services are performed. Liquidated damages (which equaled 0.32% of the Company's total revenues in the first six months of fiscal 2003 and 0.14%, 0.47% and 0.56% of the Company's total revenues in fiscal 2002, 2001 and 2000, respectively) are recorded as a reduction in revenue in the period in which it is determined that they are probable and estimable. Revenues from product sales or sales-type leases are recognized when installation is complete and the customer accepts the product (when acceptance is a stipulated contractual term). In those instances where the Company is not responsible for installation, revenue is recognized when the product is shipped. Amounts received from customers in advance of revenue recognition are deferred as liabilities. Generally, product sales under long-term contracts are recorded over the contractual period under the percentage of completion method of accounting. Under the percentage of completion method of accounting, sales and estimated gross profit are recognized as work is completed and accepted by the customer by utilizing the most recent estimates of cost to complete. Sales and gross profit are adjusted prospectively for revisions in estimated total contract costs during the period in which the information necessary to make the adjustment becomes available. If the current contract estimate indicates a loss, provision is made for the estimated loss when it becomes known and quantifiable. The completed contract method of accounting is used for long-term contracts in those circumstances under which estimated costs to complete the delivery cannot be reasonably estimated or when the contract stipulates the entire balance due under the contract is refundable if the product is not accepted by the customer. Under the completed contract method of accounting, product sales are recorded when the Company has substantially completed its obligations under the contract. At August 24, 2002, the Company had advance payments from customers of approximately $107.8 million, including amounts received from two customers in Europe whose lottery systems are online and selling lottery tickets. The Company currently expects to record product sales related to these two customers in fiscal 2003 upon receipt of final customer acceptance letters. -25- RECEIVABLES AND INVENTORY RESERVES The Company evaluates the collectibility of trade accounts and sales-type lease receivables on a customer-by-customer basis and believes its reserves are adequate; however, if economic circumstances change significantly resulting in a major customer's inability to meet its financial obligation to the Company, original estimates of the recoverability of amounts due the Company could be reduced by significant amounts requiring additional reserves. Inventories include amounts related to the Company's long-term service contracts and product sales contracts, including product sales under long-term contracts, and are stated at the lower of cost (first-in, first-out method) or market. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts. The Company believes its reserves are adequate; however, should future sales forecasts change, the Company's original estimates of obsolescence could increase by a significant amount requiring additional reserves. IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE AND LONG-LIVED ASSETS The Company periodically evaluates the recoverability of goodwill and other intangible and long-lived assets whenever events or changes in circumstances, such as declines in revenues, earnings or cash flows or material adverse changes in the economic stability of a particular country indicate that the carrying amount of an asset may not be recoverable. If facts and circumstances were to indicate that the Company's long-lived assets might be impaired, the estimated future undiscounted cash flows associated with the long-lived assets would be compared to their carrying amounts to determine if a write-down to fair value is necessary. Effect of New Accounting Pronouncements During the first quarter of this fiscal year, the Company adopted Statement of Financial Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which requires, among other things, that goodwill and certain other indefinite-lived intangible assets no longer be amortized, but instead tested for impairment at least annually. In connection with the adoption of the new standard, the Company determined that goodwill with a net book value of $1.3 million (within the Lottery segment) met the standards' intangible asset recognition criteria. Accordingly, this amount was reclassified into intangible assets and will continue to be amortized over its remaining useful life. Prior year net income and diluted earnings per share for the six-months ended August 25, 2001, excluding amortization of goodwill, was $38.6 million, or $0.63 per diluted share. In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other things, SFAS 145 rescinds Statement of Financial Accounting Standards No. 4 ("SFAS 4"), "Reporting Gains and Losses from Extinguishment of Debt" and eliminates the requirement that gains and losses from the extinguishment of debt be classified as an extraordinary item, net of related income tax effects, unless the criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are met. The standard is required to be adopted by the Company beginning on February 23, 2003 (the first day of fiscal 2004). The Company has early adopted SFAS 145 on August 25, 2002 (the first day of its fiscal 2003 third quarter) and will reclassify, in the fourth quarter of fiscal 2003, the $12.5 million ($7.8 million after-tax) extraordinary charge it recorded in the fourth quarter of the prior fiscal year into other expense in its Consolidated Income Statements. -26- In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for Costs Associated With Exit or Disposal Activities". SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Therefore, SFAS 146 eliminates the definition and requirements for recognition of exit costs in EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements. Results of Operations Second Quarter Revenues for the second quarter of fiscal 2003 were $221.0 million, down $15.6 million, or 6.6%, from revenues of $236.6 million in the second quarter of fiscal 2002. Service revenues, including lottery and other services, in the fiscal 2003 second quarter were $211.6 million, up $2.0 million, or 0.9%, over service revenues of $209.6 million in the second quarter of fiscal 2002. This increase was primarily driven by a $9.1 million increase in international lottery service revenues, partially offset by a $5.1 million decrease in domestic lottery services revenues and the expiration of certain electronic benefit transfer contracts. The Company's international lottery service revenues in the second quarter of fiscal 2003 were $90.0 million, up $9.1 million, or 11.3%, over the $80.8 million recorded in the second quarter of fiscal 2002, primarily driven by several new international contracts, including Jamaica and Taiwan, partially offset by the weakening of the Brazilian real against the U.S. dollar. Had last year's average exchange rates prevailed throughout the most recent quarter, the Company estimates that service revenues would have increased by approximately 3% compared to the second quarter of last year. International lottery service revenues include approximately $12 million from commercial transaction processing services, primarily in Brazil. The Company's domestic lottery service revenues were $121.0 million in the second quarter of fiscal 2003, down $5.1 million, or 4.0%, from the $126.1 million recorded in the same quarter of fiscal 2002. This decrease was primarily due to lower jackpot activity and contractual rate changes. Product sales in the second quarter of fiscal 2003 were $9.4 million, down $17.6 million from the $27.0 million of product sales in the second quarter of fiscal 2002. Product sales in the second quarter of the prior year 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. Gross margins on service revenues improved from 31.5% in the second quarter of fiscal 2002 to 40.0% in the second quarter of fiscal 2003, primarily driven by new contracts that generated incrementally higher gross margins, lower depreciation (principally related to contract extensions and fully depreciated assets associated with existing contracts), and improved operational and service delivery efficiencies. 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 2003 were 56.1% compared to 12.2% in the same period last year. Product sales in the second quarter of fiscal 2003 were primarily composed of component sales that typically carry higher gross margins than terminals or turnkey system sales. In addition, prior year product margins were adversely impacted by inventory reserves recorded in connection with a product sale contract with a customer in Italy. -27- Operating expenses in the second quarter of fiscal 2003 were $30.1 million, down $6.9 million, or 18.7%, when compared with the $37.0 million of operating expenses incurred in the second quarter of fiscal 2002. This decrease was primarily driven by the Company's continued execution of cost savings initiatives and emphasis on improving efficiencies, along with the benefit of the adoption of the new accounting rule on goodwill, which eliminated approximately $1.4 million of goodwill amortization in the second quarter of the current year. These declines in operating expenses were partially offset by the cost of contractual obligations associated with the departure in August 2002 of the Company's former President and Chief Executive Officer. As a percentage of revenues, operating expenses were 13.6% and 15.6% (15.0% adjusted for the change in goodwill accounting) during the second quarters of fiscal 2003 and 2002, respectively. Other income of $2.3 million in the second quarter of fiscal 2003 was primarily comprised of foreign exchange gains associated with the Company's foreign exchange management program designed to protect future cash flows. 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 was being amortized over the remaining period of Camelot's first operating license, which expired in September 2001, and $1.6 million of foreign exchange gains from hedging contracts. Interest expense in the second quarter of fiscal 2003 was $2.7 million, down $3.7 million, or 57.7%, from interest expense of $6.4 million incurred during the second quarter of the prior year. This decrease was primarily due to lower debt balances along with lower interest rates resulting from the Company's debt restructuring in the fourth quarter of fiscal 2002. Weighted average diluted shares in the second quarter of fiscal 2003 declined 2.2 million shares to 58.3 million shares, adjusted for the two-for-one stock split, as a result of the Company's share repurchase programs. The impact on diluted earnings per share of the lower level of weighted average shares in the second quarter of fiscal 2003 as compared to the second quarter of fiscal 2002 was approximately $0.03 per diluted share. Year to Date Revenues for the first six months of fiscal 2003 were $452.4 million, down $19.1 million, or 4.1%, from revenues of $471.5 million in the first six months of fiscal 2002. Service revenues, including lottery and other services, in the first six months of fiscal 2003 were $435.3 million, up $15.2 million, or 3.6%, over service revenues of $420.2 million in the first six months of fiscal 2002. This increase was primarily driven by a $19.0 million increase in international lottery service revenues and a $1.5 million increase in domestic lottery services revenues, partially offset by the expiration of certain electronic benefit transfer contracts. The Company's international lottery service revenues in the first six months of fiscal 2003 were $187.1 million, up $19.0 million, or 11.3%, over the $168.1 million recorded in the first six months of fiscal 2002, primarily driven by several new international contracts, including Jamaica and Taiwan, partially offset by the weakening of the Brazilian real against the U.S. dollar. Had last year's average exchange rates prevailed throughout the first six months of fiscal 2003, the Company estimates that service revenues would have increased by approximately 5.1% compared to the same period last year. -28- The Company's domestic lottery service revenues were $246.9 million in the first six months of fiscal 2003, up $1.5 million, or 0.6%, over the $245.4 million recorded in the same period of fiscal 2002. This increase was primarily due to higher lottery sales generated by a number of the Company's existing domestic customers, including Texas and New York, partially offset by lower jackpot activity in the Powerball states along with contractual rate changes. Product sales in the first six months of fiscal 2003 were $17.0 million, down $34.4 million from the $51.4 million of product sales in the first six months of fiscal 2002. Product sales in the first six months of the prior year included the sale of terminals and software to our customer in the United Kingdom. Gross margins on service revenues improved from 31.4% in the first six months of fiscal 2002 to 37.1% in the first six months of fiscal 2003, primarily driven by new contracts that generated incrementally higher gross margins, lower depreciation (principally related to contract extensions and fully depreciated assets associated with existing contracts), and improved operational and service delivery efficiencies. 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 2003 were 39.2% compared to 15.1% in the same period last year. Prior year product margins were adversely impacted by inventory reserves recorded in connection with a product sale contract with a customer in Italy. Operating expenses in the first six months of fiscal 2003 were $59.5 million, down $16.2 million, or 21.4%, when compared with the $75.7 million of operating expenses incurred in the first six months of fiscal 2002. This decrease was primarily driven by the Company's continued execution of cost saving initiatives and emphasis on improving efficiencies, along with the benefit of the adoption of the new accounting rule on goodwill, which eliminated approximately $2.9 million of goodwill amortization in the first six months of the current year. These declines in operating expenses were partially offset by the cost of contractual obligations associated with the departure in August 2002 of the Company's former President and Chief Executive Officer. As a percentage of revenues, operating expenses were 13.1% and 16.0% (15.4% adjusted for the change in goodwill accounting) during the first six months of fiscal 2003 and 2002, respectively. Other income of $1.7 million in the second quarter of fiscal 2003 was primarily comprised of foreign exchange gains associated with the Company's foreign exchange management program designed to protect future cash flows. Other income of $0.5 million in the first six months of fiscal 2002 was primarily comprised 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. Interest expense in the first six months of fiscal 2003 was $5.6 million, down $7.3 million, or 56.1%, from interest expense of $12.9 million incurred during the first six months of the prior year. This decrease was primarily due to lower debt balances along with lower interest rates resulting from the Company's debt restructuring in the fourth quarter of fiscal 2002. Weighted average diluted shares in the first six months of fiscal 2003 declined 2.8 million shares to 58.8 million shares, adjusted for the two-for-one stock split, as a result of the Company's share repurchase programs. The impact on diluted earnings per share of the lower level of weighted average shares in the first six months of fiscal 2003 as compared to the same period of fiscal 2002 was approximately $0.05 per diluted share. -29- Recent Developments On October 2, 2002, after the close of the Company's fiscal 2003 second quarter, the Company announced that it had launched an offer to purchase up to $50.0 million aggregate principal amount of its 7.75% Series A Guaranteed Senior Notes due 2004 and its 7.87% Series B Guaranteed Senior Notes due 2007 issued by GTECH Corporation in private placements in 1997. The offer expires on October 31, 2002, unless extended or earlier terminated. The Company intends to use cash on hand to fund the purchase. Changes in Financial Position, Liquidity and Capital Resources During the first six months of fiscal 2003, the Company generated $199.7 million of cash from operations, which was primarily used to fund the purchase of $88.4 million of systems, equipment and other assets relating to contracts and to repurchase $42.5 million of the Company's common stock. At August 24, 2002, the Company had $114.9 million of cash and cash equivalents on hand, of which approximately 78% was invested with two financial institutions. Trade accounts receivable decreased by $12.0 million, from $100.4 million at February 23, 2002 to $88.4 million at August 24, 2002, primarily due to collections related to product sales recorded in fiscal 2002, along with the collection of certain domestic service receivables. Inventories increased by $12.8 million, from $86.6 million at February 23, 2002 to $99.4 million at August 24, 2002, primarily due to spending related to product sales expected to be delivered during fiscal 2004. Other current assets decreased by $6.7 million, from $22.7 million at February 23, 2002 to $16.0 million at August 24, 2002. The February 23, 2002 balance included $5.9 million of prepaid inventory that was shipped to the Company during the first half of this fiscal year. Employee compensation decreased by $10.0 million, from $37.9 million at February 23, 2002 to $27.9 million at August 24, 2002, primarily due to the payment of fiscal 2002 management incentive compensation and employee profit sharing. Advance payments from customers increased by $35.2 million, from $72.6 million at February 23, 2002 to $107.8 million at August 24, 2002, primarily due to advances received from customers related to product sales expected to be delivered during the second half of fiscal 2003 and during fiscal 2004. Income taxes payable increased by $11.8 million, from $53.9 million at February 23, 2002 to $65.7 million at August 24, 2002, primarily due to the timing of income tax payments, partially offset by tax benefits from the exercise of stock options and restricted stock. Other liabilities increased by $10.1 million, from $28.0 million at February 23, 2002 to $38.1 million at August 24, 2002, primarily due to the deferral of revenue related to the Company's joint venture in Taiwan. See "Guarantees" below and Note K to the Consolidated Financial Statements in the Company's fiscal 2002 Annual Report on Form 10-K for further information. The Company's business is capital-intensive. Although it is not possible to estimate precisely, the Company currently anticipates that net cash used for investing activities in fiscal 2003 will be in a range of $170 million to $180 million. The principal sources of liquidity for the Company are expected to be existing cash balances, along with cash generated from operations and borrowings under the Company's credit facility. The Company's credit facility provides for an unsecured revolving line of credit of $300 million and matures in June 2006. As of August 24, 2002, there were no borrowings under the 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 share repurchase programs. -30- Off-Balance Sheet Arrangements The Company has a 50% limited partnership interest in West Greenwich Technology Associates, L.P. (the "Partnership"), which owns the Company's World Headquarters facilities and leases them to the Company. The general partner of the Partnership is an unrelated third party. The Company accounts for the Partnership using the equity method. The following is a summary of certain unaudited financial information of the Partnership, along with the results of operations at August 24, 2002, used as the basis for applying the equity method of accounting (in thousands):
(Unaudited) ----------- AUGUST 24, 2002 EARNINGS DATA: Net loss $ (427) BALANCE SHEET DATA: Assets $17,375 Liabilities 27,099
The Company made lease payments of $0.1 million to the Partnership in the first six months of fiscal 2003, which is included in selling, general and administrative expense in the Company's Consolidated Income Statements. See Note K to the Consolidated Financial Statements in the Company's fiscal 2002 Annual Report on Form 10-K for further information. Guarantees The Company has guaranteed, at August 24, 2002, approximately $5.8 million, or 44%, of $13.3 million of loans made by an unrelated commercial lender to Lottery Technology Services Corporation ("LTSC"). The loans have a maturity date of January 2007 and the Company's guarantee expires in July 2007. The Company has a 44% interest in Lottery Technology Services Investment Corporation ("LTSIC"), which is accounted for using the equity method. LTSIC's wholly owned subsidiary, LTSC, provides equipment and services, supplied by the Company, to the Bank of Taipei, which holds the license to operate the Taiwan Public Welfare Lottery. The Company is recognizing 56% of product sales and service revenue from LTSC. The remaining 44% of product sales and service revenue has been deferred and is included in other liabilities in the Company's Consolidated Balance Sheets at August 24, 2002 and February 23, 2002. Sales of products and services to LTSC were $3.8 million during the first six months of fiscal 2003. See Notes F and K to the Consolidated Financial Statements in the Company's fiscal 2002 Annual Report on Form 10-K for further information. At August 24, 2002, the Company has guaranteed $2.6 million of lease obligations of Times Squared Incorporated. The guarantee expires in December 2013. See Note F to the Consolidated Financial Statements in the Company's fiscal 2002 Annual Report on Form 10-K for further information. 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 2003. -31- 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 24, 2002, after taking into consideration $135 million of interest rate swaps, the estimated fair value of the Company's $135 million of fixed rate Senior Notes approximated $134.1 million. A hypothetical 10% adverse or favorable change in interest rates applied to the fixed rate Senior Notes would not have a material effect on current earnings. An independent investment banker determined the estimated fair value amounts. At August 24, 2002, the estimated fair value of the Company's $175 million principal amount of 1.75% Convertible Debentures approximated $180.6 million. At August 24, 2002, a hypothetical 10% increase in interest rates would reduce the estimated fair value of the Convertible Debentures to $178.5 million and a hypothetical 10% decrease in interest rates would increase the estimated fair value of the Convertible Debentures to $182.6 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. The Company uses various techniques to mitigate the risk associated with future changes in interest rates, including entering into interest rate swaps. At August 24, 2002, the Company had interest rate swap agreements in place on $135 million of its fixed rate Series A and Series B Senior Notes, which effectively entitles the Company to exchange fixed rate payments for variable rate payments during the period June 2001 to May 2007. Equity price risk At August 24, 2002, the estimated fair value of the Company's $175 million principal amount of 1.75% Convertible Debentures was $180.6 million. At August 24, 2002, a hypothetical 10% increase in the market price of the Company's common stock would increase the estimated fair value of the Convertible Debentures to $186.9 million and a hypothetical 10% decrease in the market price of the Company's common stock would reduce the estimated fair value of the Convertible Debentures to $175.4 million. An independent investment banker determined the estimated fair value amounts. Foreign Currency Exchange Rates Foreign exchange exposures arise from current and anticipated transactions denominated in currencies other than the Company's functional currency (United States dollars) 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 United States dollars, by sharing risk with its customers, by utilizing foreign currency borrowings, by leading and lagging receipts and payments and by entering into foreign currency exchange and option contracts. In addition, a significant portion of the costs attributable to the Company's foreign currency revenues are payable in the local currencies. Whenever possible, the Company negotiates clauses into its contracts that allow for price adjustments should a material change in foreign exchange rates occur. The Company, from time to time, enters into foreign currency exchange and option contracts to reduce the exposure associated with current transactions and anticipated transactions denominated in foreign currencies. However, the Company does not engage in currency speculation. At August 24, 2002, a -32- hypothetical 10% adverse change in foreign exchange rates would result in a translation loss of $8.6 million that would be recorded in the equity section of the Company's balance sheet. At August 24, 2002, a hypothetical 10% adverse change in foreign exchange rates would result in a net transaction loss of $3.0 million that would be recorded in current earnings after considering the effects of foreign exchange contracts currently in place. At August 24, 2002, a hypothetical 10% adverse change in foreign exchange rates would result in a net reduction of cash flows from anticipatory transactions during the remainder of fiscal 2003 of $2.6 million, after considering the effects of foreign exchange contracts currently in place. The percentage of fiscal 2003 anticipatory cash flows that were hedged varied throughout the first six months of fiscal 2003, but averaged 50%. As of August 24, 2002, the Company had contracts for the sale of foreign currency of approximately $104.9 million (primarily pounds sterling, Brazilian real and euro) and the purchase of foreign currency of approximately $38.2 million (primarily pounds sterling, Brazilian real and Mexican pesos). Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Market Risk Disclosures" above. Item 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. The Company's chief executive officer and its chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a date within 90 days of the filing date of the quarterly report (the "Evaluation Date") have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken. -33- PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS As previously reported, the Company, William Y. O'Connor, the Company's former Chairman and Chief Executive Officer, Steven P. Nowick, its former Chief Operating Officer and W. Bruce Turner, the Company's former Chairman and current President and Chief Executive Officer, were named as defendants in a shareholder class action suit captioned Sandra Kafenbaum and Steven Schulman, individually and on behalf of all others similarly situated, v. GTECH Holdings Corporation, et al, which suit was filed in the U.S. District Court of Rhode Island in August 2000. In April 2001, the Company and the other defendants moved to dismiss the complaint in this lawsuit, as amended, on the grounds that its allegations are unsupported by fact and fail, in any event, to state a cause of action under the federal securities laws. Oral argument for the Company's motion to dismiss was held in October 2001. In September 2002, the Court ruled on the Company's motion, granting the motion to dismiss as to certain statements by the Company, but denying the motion to dismiss as to certain other of the Company's statements cited in the complaint. The Court also granted the Company's motion to dismiss plaintiff's claim against Mr. Turner, holding that there are no actionable statements attributable to him. The Company believes that it has good defenses to the claims made in this lawsuit. On the basis of information presently available, the Company believes the outcome of this matter will not materially adversely affect the Company's consolidated financial position or results of operations. As previously reported, Caixa Economica Federal ("CEF"), the operator of Brazil's National Lottery, will attempt to handle internally the data processing services currently performed by the Company under its contract with CEF. The Company's contract with CEF, which expires in January 2003, was the Company's second largest contract in fiscal 2002, as measured by annual revenues, accounting for 10.7% of the Company's consolidated revenues in that fiscal year. See Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - General." In June 2002, CEF held a public hearing to describe in greater detail its plans for the operation of the National Lottery after the expiration of the Company's current contract. At this hearing, CEF revealed that it plans to directly acquire all terminals and certain related goods and services, to lease or to otherwise directly acquire all necessary telecommunications equipment and services, and to itself perform all necessary data processing services. In June 2002, the Company filed before the 17th Federal Lower Court of Brasilia, a lawsuit captioned "Atentado", in which the Company alleges that CEF's proposed new structure violates said Court's judgment obtained by the Company in March 2001, pursuant to which, in the context of a prior tender proposed by CEF, the Company had obtained the right to submit an integrated bid for all goods and services to be required under the successor to the Company's current contract. In July 2002, the Company secured an injunction, from the 17th Federal Lower Court, ordering CEF to halt its tender process, which injunction was later confirmed in a decision on the merits of the claim. Subsequent to this, CEF, after obtaining an order from the Federal Higher Court of Brasilia partly suspending the 17th Federal Lower Court favorable award secured by the Company, published four Requests For Proposals and otherwise proceeded with the procurement, but stated, in connection therewith, that contracts with winning vendors will only be executed if and when a competent court rules in its favor with respect to the remaining elements of the favorable award secured by the Company. CEF scheduled the auctions associated with the four Requests for Proposals to begin on September 20, 2002, but the 17th Federal Lower Court of Brasilia again enjoined CEF from proceeding in that manner on September 19, 2002. CEF thus postponed proceeding with the Requests for Proposals pending a decision from the Federal Higher Court of Brasilia. On September 30, 2002, the Federal Higher Court of Brasilia denied CEF's request to suspend the lower court decision and precluded CEF from proceeding with the requests for proposals. CEF has sought additional review of that decision and continues in its efforts to obtain legal support to proceed with the requests for proposals. In addition, the federal government of Brazil has joined the legal action to support CEF's position in the federal Higher Court of Brasilia. The Company continues to press in Brazilian courts its contention, which the Company believes to have merit, that CEF's procurement process violates the March 2001 judicial decision noted above, as well as applicable Brazilian law. At the present time, however, the Company is unable to predict the outcome of its legal challenges to the CEF's procurement process. As a result of the legal and political circumstances in Brazil, including among other factors the upcoming national presidential elections, as well as the scope and complexity of the transition CEF is attempting, the Company believes it is likely to receive a contract extension beyond the current term which expires in January 2003, and the Company and CEF have started discussions in that regard. -34- At this time, however, the Company is not able to predict the outcome of those discussions or the terms of any possible contract extension. On October 2, 2002, the Regional Appeals Court of Dusseldorf, Public Procurement Division, ruled that the decision of Westdeutsche Lotterie GmbH & Co. OHG ("WestLotto") to award its new online lottery system contract to the Company was lawful and consistent with applicable legal authorities. This ruling overturned the determination of the Public Procurement Tribunal of Munster, announced on 24 June 2002 and served on 26 June 2002, which granted the bid protest of Scientific Games Corporation under the aforementioned online lottery procurement. Scientific Games' attorney later withdrew the initial request for award review. This is the most favorable outcome of the proceeding for the Company, for the Tribunal's threshold decision no longer exists, legally, empowering WestLotto to award the contract to the Company. This is expected to occur by October 15,2002. For information respecting these and certain other legal proceedings, refer to Part I, Item 1 - "Certain Factors That May Affect Future Performance - Government Regulations and Other Actions Affecting the Online Lottery Industry Could Have a Negative Effect On the Company's Business", Part I, Item 3 - "Legal Proceedings" and Note F to Consolidated Financial Statements, in the Company's fiscal 2002 Annual Report on Form 10-K, and Part II, Item 1 - "Legal Proceedings" in the Company's Quarterly Report for the quarterly period ended May 25, 2002. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) and (c) The Company's Annual Meeting of Shareholders was held on August 5, 2002 and in connection therewith, proxies were solicited by management pursuant to Regulation 14A under the Securities Exchange Act of 1934. An aggregate of 57,269,453 shares of the Company's common stock ("Shares") were issued and eligible 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 one director to serve until the 2003 Annual Meeting The following incumbent director was reelected. The tabulation of votes was as follows:
Nominee For Withheld - ---------------------------- ----------------- -------------- Lt. Gen. (Ret.) Emmett Paige 52,763,978 Shares 700,338 Shares
2. Election of two directors to serve until the 2005 Annual Meeting The following incumbent directors were reelected. The tabulation of votes was as follows:
Nominee For Withheld - ----------------------- ----------------- ---------------- The Rt. Hon. Sir Jeremy 52,190,191 Shares 1,274,125 Shares Hanley, KCMG Anthony Ruys 52,768,904 Shares 695,412 Shares
3. Approval of the Company's 2002 Omnibus Stock Option and Long-Term Incentive Plan The tabulation of votes was as follows:
For Against Abstentions - ----------------- ---------------- ------------- 36,372,249 Shares 8,455,667 Shares 70,529 Shares
-35- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The exhibits to this report are as follows: 10.1 Agreement, dated as of August 6, 2002, by GTECH Holdings Corporation, GTECH Corporation and W. Bruce Turner 12.1 Computation of Ratio of Earnings to Fixed Charges 99.1 Certification Pursuant to 18 United States Code Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of W. Bruce Turner, President and Chief Executive Officer of the Company 99.2 Certification Pursuant to 18 United States Code Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Jaymin B. Patel, Senior Vice President and Chief Financial Officer of the Company (b) Reports on Form 8-K - The Company filed the following report with the Securities and Exchange Commission on Form 8-K during the quarter to which this report relates: (i) The Company filed a report on Form 8-K on August 7, 2002 incorporating by reference a press release issued by the Company on August 7, 2002 announcing that the Company's Board of Directors accepted the resignation of Howard S. Cohen as President, Chief Executive Officer, and Director and appointed W. Bruce Turner, GTECH Chairman, to replace him as President and Chief Executive Officer. In addition, the Company reiterated its earnings guidance for the second quarter and full fiscal year as previously provided. -36- 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 8, 2002 By /s/ Jaymin B. Patel ------------------------------------------ Jaymin B. Patel, Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: October 8, 2002 By /s/ Robert J. Plourde ------------------------------------------ Robert J. Plourde, Vice President and Corporate Controller (Principal Accounting Officer)
-37- CHIEF EXECUTIVE OFFICER CERTIFICATION I, W. Bruce Turner, President and Chief Executive Officer of GTECH Holdings Corporation (the "Company"), certify that: (1) I have reviewed this quarterly report on Form 10-Q of the Company; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; (4) The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and (6) The Company's other certifying officer and I have indicated in this quarterly report whether or not there were any significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. GTECH HOLDINGS CORPORATION Date: October 8, 2002 By /s/ W. Bruce Turner ------------------------------------ W. Bruce Turner President and Chief Executive Officer -38- CHIEF FINANCIAL OFFICER CERTIFICATION I, Jaymin B. Patel, Senior Vice President and Chief Financial Officer of GTECH Holdings Corporation (the "Company") certify that: (5) I have reviewed this quarterly report on Form 10-Q of the Company; (6) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (7) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; (8) The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and (6) The Company's other certifying officer and I have indicated in this quarterly report whether or not there were any significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. GTECH HOLDINGS CORPORATION Date: October 8, 2002 By /s/ Jaymin B. Patel ------------------------------------- Jaymin B. Patel, Senior Vice President and Chief Financial Officer -39- EX-10.1 3 y64244exv10w1.txt AGREEMENT, DATED AS OF AUGUST 6, 2002 EXHIBIT 10.1 AGREEMENT THIS AGREEMENT, dated as of August 6, 2002, by and between GTECH HOLDINGS CORPORATION AND GTECH CORPORATION, each a Delaware corporation (collectively, the "Company"), and W. BRUCE TURNER ("Executive"). WHEREAS, the Company desires to retain the services of Executive on the terms and conditions provided in this Agreement; and WHEREAS, Executive, understanding and accepting the terms and conditions of employment set forth herein, desires to render such services on such terms and conditions. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto hereby covenant and agree as follows: 1. DEFINITIONS. Capitalized terms used in this Agreement and not otherwise defined herein shall have the following meanings: "ACT" means the Securities Exchange Act of 1934, as amended to date. "AFFILIATE" shall mean any joint venture or other entity in which the Company or any of its subsidiaries has an equity interest of at least 20%. "AVERAGE CASH COMPENSATION" means an amount equal to: (i) the average Base Salary and Performance Bonus paid or payable to Executive annually for the most recent complete fiscal years of employment up to a maximum of three fiscal years; (ii) if Executive has completed one (but not more than one) fiscal year of employment, an amount equal to the Base Salary and Performance Bonus paid or payable to Executive for such complete fiscal year of employment; or (iii) if Executive has not completed at least one fiscal year of employment, the amount provided for in the second sentence of Section 9(b) hereof. For purposes of calculating Average Cash Compensation, Base Salary shall include any elective salary reductions made by Executive and contributed by the Company on Executive's behalf to the Company's retirement plans. "BOARD" means the Board of Directors of GTECH Holdings Corporation. "CAUSE" means any of the following: (i) any negligent and/or willful failure by Executive to substantially perform his duties; (ii) Executive's engaging in serious misconduct which is injurious to the Company or breaching any of the Company's ethics and compliance policies (unless, in its sole discretion, the Board determines that the breach is immaterial, inadvertent and subject to cure under Section 8(b) hereof without harm to the Company) as from time to time implemented by the Company; (iii) any material breach by Executive of the terms of Sections 4(c), 10; 11 or 14(a) hereof, (iv) Executive's having been convicted of, or pleading nolo contendere to, a crime that constitutes a felony or is a gaming or gambling-related offense; or (v) Executive's use of illegal drugs or abuse of other controlled substances or his habitual intoxication. "CHANGE IN CONTROL" means the happening of any of the following: (i) any "person," including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Act, but excluding the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; (ii) the stockholders of the Company shall approve a definitive agreement (1) for the merger or other business combination of the Company with or into another corporation if (A) a majority of the directors of the surviving corporation were not directors of the Company immediately prior to the effective date of such merger or (B) the stockholders of the Company immediately prior to the effective date of such merger own less than 50% of the combined voting power in the then outstanding securities in such surviving corporation or (2) for the sale or other disposition of all or substantially all of the assets of the Company; or (iii) the purchase of 30% or more of the Common Stock pursuant to any tender or exchange offer made by any "person," including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Act), other than the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates. "CHANGE OF CONTROL DATE" means the date on which a Change in Control occurs, provided however that if a Change in Control occurs and if Executive's employment with the Company is terminated by the Company prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then the "Change of Control Date" shall mean the date immediately prior to the date of such termination. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the Compensation Committee of the Board. 2 "COMMON STOCK" means the Common Stock, par value $.01 per share, of the Company. "DISABILITY" means the inability (as determined by the Board in its sole discretion after affording Executive a reasonable opportunity to present his case) of Executive to render his agreed-upon, full-time services to the Company due to physical and/or mental infirmity. "EFFECTIVE DATE" means August 6, 2002. "GOOD REASON" means any of the following events (subject to the notice and cure provisions of Section 8(c) hereof): (i) the assignment to Executive of duties, responsibilities and/or reporting relationship that are materially inconsistent with those associated with Executive's position as stated in Sections 4(a) and 4(b) hereof, excluding any interim relieving of Executive's duties pursuant to Section 8(b); (ii) the Company's failure to pay Executive any amounts otherwise vested and due hereunder or under any plan or policy of the Company; (iii) a reduction in the title of Executive or in the authorities, duties or responsibilities of Executive except that the loss of the title of President shall not be "Good Reason" as set forth herein; (iv) any material breach of this Agreement by the Company; (v) failure to extend this Agreement (for a minimum of one year on the same or better terms respecting annual cash compensation and benefits, excluding one-time awards of restricted stock or stock options, other one-time benefits such as relocation benefits, and any other benefits which have been changed with respect to Senior Executives generally) at least 90 days prior to the end of the Term or the end of any extended term, as the case may be; or (vi) failure by the Company to renominate Executive as a director at the expiration of his current term as director. "PERFORMANCE BONUS" means the actual amount of a performance bonus awarded by the Committee to Executive with respect to the relevant fiscal year in accordance with Section 5(b) hereof, including the portion of the Performance Bonus paid in stock equivalent (but excluding the portion of the stock award representing a discount beyond the cash equivalent made in conjunction with the payment of the Performance Bonus). "PRORATED PERFORMANCE BONUS" means the portion of the Performance Bonus, if any, which is payable with respect to fiscal 2003 (as provided in Section 5(b)(i)), or which becomes due after a termination of this Agreement under Sections 5(c) or 9(b) hereof. The Prorated Performance Bonus will be calculated as follows: the Committee shall (a) determine the Performance Bonus to which Executive would have been entitled, had Executive been employed for the entire fiscal year, in accordance with Section 5(b)(i) or (ii) hereof, (b) divide that amount 3 by 52 to produce a Weekly Amount; and (c) multiply the Weekly Amount by the number of weeks during the relevant fiscal year that Executive was employed by the Company. "SENIOR EXECUTIVES" means such executives of the Company as constitute, from time-to-time, the "executive officers" of the Company within the meaning of Regulation Section 240.3b-7 issued under the Act. 2. EMPLOYMENT OF EXECUTIVE. The Company hereby agrees to employ Executive, and Executive agrees to be employed by the Company, to render services to the Company and its subsidiaries, affiliates and divisions for the period, at the rate of compensation and upon the other terms and conditions set forth in this Agreement. 3. TERM. The term of Executive's engagement hereunder shall commence on Effective Date, and shall continue for a term of three years (the "Term"). The Term is subject to earlier termination as hereinafter provided in Section 8 hereof, and the compensation, benefits, etc., if any, payable upon termination shall be as set forth in Section 9 hereof. In the event that the term of Executive's engagement by the Company shall continue beyond the Term, the Company and Executive agree that any successor agreement memorializing the terms of such engagement shall include, among its provisions (which shall be negotiated in good faith), a non-competition provision protecting all of the Company's material business lines. 4. POSITION AND DUTIES. (a) Position. During the Term, Executive shall be retained and shall serve as Chief Executive Officer and President of the Company. During the Term, Executive also agrees to serve, if elected, as a director and/or officer of any subsidiary or Affiliate of the Company. (b) Duties. During the Term, Executive shall have the authority and power to perform such duties consistent with his positions as Chief Executive Officer and President as designated by the Board, and shall report only to the Board or any committees thereof at the request of the Board. Executive shall not be required without his consent to undertake responsibilities not commensurate with his position. Executive shall comply fully and promptly with the various policies, procedures and rules governing employees promulgated and/or as amended from time to time by the Company and any applicable subsidiary or Affiliate of the Company (including, without limitation, the Company's Ethical Conduct and Conflicts of Interest Policy and Government Affairs Policies and Procedures) and with any applicable disclosure and other requirements of any governmental authority and of any other entity with which the Company, its subsidiaries and Affiliates are doing or propose to do business. Except for illness, vacations, and holidays in accordance with then-current Company policy, and (subject to the approval of the Board) reasonable leaves of absence, Executive shall devote his full business time, attention, skill, undivided loyalty and best efforts to the faithful performance of his duties hereunder; provided, however, that Executive may, as long as such activities do not interfere with the performance of Executive's responsibilities: (i) serve (and retain any compensation with respect to such service) as a director of Ameristar Casinos, Inc., and, with the 4 prior approval of the Board, serve on other corporate, civic and charitable boards and committees, (ii) deliver lectures and fulfill speaking engagements, and (iii) manage personal investments. (c) Principal Place of Employment. Executive's principal place of employment shall be at the Company's principal offices (currently located in West Greenwich, Rhode Island) or at such other location as the Company hereafter reasonably may require. Executive agrees to reside in Rhode Island. (d) Nomination as Director. Assuming the Term has not been terminated, the Board agrees to nominate Executive for reelection as director at the Company's 2003 Annual Meeting, at which time Executive's current term as a director is scheduled to expire, and Executive agrees, subject to Section 8(d) hereof, to continue to serve as a director if elected. 5. COMPENSATION AND REIMBURSEMENT OF EXPENSES. (a) Base Salary. For all services rendered by Executive in all capacities with the Company, its subsidiaries and Affiliates during the Term, the Company shall pay or cause to be paid to Executive as compensation a salary at an annual rate of $650,000 (the "Base Salary"), payable in equal installments not less frequently than monthly through the Company's standard payroll practices. (b) Performance Bonus. (i) With respect to the Company's fiscal 2003 (ending February 22, 2003), Executive shall be eligible to earn a Prorated Performance Bonus at the discretion of the Committee. The amount of the Prorated Performance Bonus, if any, for fiscal year 2003 shall be determined by the Committee in accordance with the performance metrics included in the GTECH Management Incentive Plan and Management Business Objectives. Executive's performance will be measured against the Company's established set of targets for fiscal year 2003, and depending upon performance against those targets, Executive will be eligible to receive a bonus for fiscal 2003 (before prorating) in an amount up to 200% of Base Salary. The target bonus for fiscal 2003 (before prorating) will be 100% of Base Salary. Promptly after the end of fiscal year 2003, the Committee will consider whether the Executive's performance justifies an additional performance bonus with respect to fiscal 2003. The Committee shall determine the amount of such additional performance bonus, if any, in its complete discretion. (ii) With respect to each fiscal year of the Company during the Term commencing with fiscal year 2004 (ending February 21, 2004), Executive shall be eligible to earn a Performance Bonus at the discretion of the Committee. The amount of the Performance Bonus, if any, for a given fiscal year shall be determined by the Committee in accordance with the performance metrics and business objectives included in the GTECH Management Incentive Plan as approved annually by the Board in its sole discretion for all Senior Executives. Under the Plan, Executive's performance will be measured against an established set of targets for each fiscal year, and depending upon performance against those targets, Executive will be eligible to 5 receive a bonus in the range of 0% to 200% of Base Salary. The annual target Performance Bonus will be 100% of Base Salary. (iii) Any Performance Bonus awarded to Executive by the Committee shall be paid not later than 30 days following payment of bonus amounts to Senior Executives. Bonus payments for GTECH are normally made in April/May of each year for the preceding fiscal year ending in February, and Executive shall receive his Performance Bonus not later than June 15 for such preceding fiscal year. Executive's Performance Bonus, if any, for any given fiscal year shall be paid by the Company in a mix of cash and discounted restricted stock, at the discretion of the Committee, which shall determine annually (a) the maximum amount of bonus allowed in discounted restricted stock, not to exceed 30% of the Performance Bonus (with the understanding that it will not exceed 20% for the fiscal year 2003), (b) the magnitude of the discount, and (c) the vesting terms under the Omnibus Stock Plan for GTECH, it being understood that the portion of the Performance Bonus paid in stock in lieu of the cash payment shall vest immediately, subject to transfer restrictions as established by the Committee that apply generally to performance bonus stock awards for other Senior Executives, and the portion of any stock award representing a discount beyond the Performance Bonus equivalent shall cliff vest as established by the Committee (with the understanding that the vesting period will not exceed two years for fiscal year 2003). (iv) Nothing contained in this Agreement constitutes a guarantee that the Committee will award Executive a Performance Bonus for any given fiscal year. (c) Change of Control. (i) In the event Executive's employment is terminated by the Company for any reason other than Cause, or in the event Executive resigns for Good Reason, within eighteen months after the Change of Control Date, the Company will pay Executive, as liquidated damages, a lump sum cash payment in lieu of the severance payments provided under Section 9(b) hereof, payable within ten (10) days of Executive's termination, equal to two and ninety-nine hundredths (2.99) times the sum of (A) Executive's current annual Base Salary in effect at the date of termination (including in base salary for this purpose any elective salary reductions made by the Executive and contributed by the Company on Executive's behalf to the Company's retirement plan, any non-qualified plan, or a plan meeting the requirements of Section 125 of the Code), plus (B) the total Performance Bonus paid or payable to the Executive from the Company for the most recent full fiscal year of the Company, plus (C) the maximum amount allowable under the Executive Perquisite Program during the most recent calendar year of the Company. In addition, Company shall pay Executive within 10 days after such termination (i) his Base Salary accrued through the date of such termination at the rate in effect immediately prior to such date; (ii) any accrued but unpaid Performance Bonus under Section 5(b) hereof for the prior fiscal year; (iii) any Prorated Performance Bonus up to the date of such termination calculated by reference to Executive's target Performance Bonus, as determined by the Committee for the current fiscal year; and (iv) any other amounts to which Executive is entitled under the terms of Sections 5 and 6 hereof up to the date of such termination. (If the date of such termination is within 12 months of the Effective Date, the Performance Bonus will be the target Prorated Performance Bonus for fiscal year 2003 as set forth in Section 5(b)(i) 6 hereof.) The payment of any Performance Bonus or Prorated Performance Bonus after such termination shall be made in cash, notwithstanding the provisions of Section 5(b)(ii) hereof. (ii) In the event of a termination described in Section 5(c)(i) above, Executive, together with Executive's dependents and beneficiaries, will become fully vested in and continue following Executive's termination to participate fully in, at no additional cost to Executive, all life insurance plans, accident and health plans and other welfare plans, maintained or sponsored by the Company immediately prior to the termination, at the same level and subject to terms at least as favorable to Executive as in effect immediately prior to termination (or the full value thereof in cash) from the Company, until the third anniversary of termination. Executive will also become fully vested in the retirement plans, and all non-qualified plans, and within thirty (30) days of Executive's termination of employment, Company shall pay to Executive the sum of (i) all benefits accrued under the Non-Qualified Plans and (ii) an amount equal to 2.99 times the average benefit accrued and/or Company contributions made to the retirement plans and the non-qualified plans over the last three fiscal years. (iii) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise-Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. (iv) All determinations required to be made under this Section 5(c), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other nationally recognized certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5(c), shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Subject to the remainder of this Section 5(c), any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 280G and Section 4999 of the Code at the time of the initial determination by the Accounting 7 Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive (so as to fully extinguish Executive's tax liability for the Payments including all interest and penalties). (v) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (C) cooperate with the Company in good faith in order effectively to contest such claim, and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall 8 indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (vi) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (vii) Notwithstanding anything to the contrary contained herein, if Executive is dismissed by the Company for Cause, Executive will not be entitled to the payments or benefits provided under Section 5(c) hereof. (d) Reimbursement of Expenses. Consistent with the Company's established policies, the Company shall pay or reimburse Executive for all reasonable and necessary travel and other expenses of Executive incurred by Executive in performing his duties hereunder upon receipt of appropriate written substantiation of such expenses. (e) One-Time Payment. The Company shall make a one-time payment to Executive in the amount of $100,000 and such additional payments as are necessary to offset all taxes which are payable by Executive with respect to payments described in this Section 5(e). 6. BENEFITS. (a) Benefits. Except as otherwise expressly provided herein, Executive shall be entitled to receive, during the Term, benefits substantially similar to the level of benefits provided generally to Senior Executives under any benefit plan, program or arrangement of the Company in effect, subject to Executive's meeting the eligibility requirements of such plans, programs or arrangements, and in the case of benefit plans, programs or arrangements providing for discretionary grants or awards, to the discretion of the Board or applicable committee. (b) Stock Options. Executive shall receive the following stock options in accordance with the following terms and conditions: 9 (i) On September 6, 2002, the Company shall grant to Executive options to purchase 265,000 shares of Common Stock under the Company's 2002 Omnibus Stock Option and Long-Term Incentive Plan (the "2002 Plan"), subject to Executive's execution of the Company's standard option agreement, as described below. Such options shall vest as follows: 66,250 shall vest on September 6, 2003; 66, 250 shall vest on September 6, 2004; 66,250 shall vest on September 6, 2005; and 66,250 shall vest on September 6, 2006. (ii) Executive shall be eligible for consideration by the Committee for annual grants of stock options under the 2002 Plan or any successor plan, in the sole discretion of the Committee. Nothing contained in this Agreement constitutes a guarantee that the Committee will award Executive additional stock options beyond those specifically described in Section 6(b)(i) of this Agreement. (iii) All grants of options under this Agreement are subject to and conditioned upon the Company obtaining all necessary shareholder approvals, if any, which Company shall use all reasonable efforts to obtain. Each time Executive receives a grant of stock options pursuant to this Section 6(b), he shall be asked to enter into the Company's standard Non-Qualified Stock Option Agreement (the "Option Agreement") which shall set forth the terms and conditions governing the grant and exercise of the Options including such terms as are set forth in this Section 6(b) and which Option Agreement with respect to the option grants under the 2002 Plan shall be substantially similar to the Option Agreement attached hereto as Appendix B. The Company shall use its best efforts to file, and cause to be effective under the Securities Act of 1933, as amended, a registration statement on Form S-8 (or a comparable form) with respect to the shares (or other rights) granted or issued as provided for or referenced in this Agreement or, if applicable, issuable upon exercise of rights so provided or referenced, but the Company shall not be obligated to register any such shares or rights for resale. The Company will also use its best efforts to ensure that each grant referenced above shall meet the requirements for exemption under Rule 16b-3 under the Act. (c) Restricted Stock. On September 6, 2002, the Company shall grant to Executive 41,000 shares of Restricted Stock (the "Restricted Shares") under the Company's 2002 Plan (or such alternative plan as the Company may specify) (the "Restricted Stock Plan"), subject to Executive's execution of the Company's Restricted Stock Agreement. The Restricted Shares shall vest as follows: 10,250 shall vest on September 6, 2003; 10,250 shall vest September 6, 2004; 10,250 shall vest September 6, 2005; and 10,250 shall vest on September 6, 2006. The Restricted Shares, after vesting, may be transferred only in accordance with the terms and conditions of the Restricted Stock Plan. (d) Certain Specific Benefits and Arrangements. Without limiting the generality of subsection (a) above (except as may otherwise be specified in Appendix A hereto), Executive shall be entitled to the specific benefits and arrangements set forth in Appendix A hereto, provided however that, with respect to calendar year 2002 (or any portion thereof), Executive shall not be entitled to receive any benefit specified in Appendix A hereto if, but only to the extent that, Executive received with respect to calendar year 2002 (or such respective portion thereof) under that certain employment agreement dated August 9, 2000 between the Company and Executive, as amended, a benefit substantially identical to such Appendix A benefit. 10 (e) Indemnification. The Company shall defend and hold Executive, to the extent the Executive is a defendant, target or witness, harmless to the fullest extent permitted by applicable law in connection with any claim, action, suit, investigation or proceeding arising out of or relating to performance by Executive of services for, or action of Executive as a director, officer or employee of the Company or any parent, subsidiary or Affiliate of the Company, or of any other person or enterprise at the Company's request. To the extent permitted by law, expenses incurred by Executive in defending a claim, action, suit or investigation or criminal proceeding shall be paid by the Company in advance of the final disposition thereof upon the receipt by the Company of an undertaking by or on behalf of Executive to repay said amount unless it shall ultimately be determined that Executive is entitled to be indemnified hereunder. This Section 6(e) shall not apply to a non-derivative action commenced by the Company against Executive. 7. BENEFITS PAYABLE DURING TERM UPON DISABILITY. (a) Disability Benefits. In the event of Disability of Executive during the Term of his employment hereunder, the Company shall continue to pay Executive the compensation and extend to him the benefits provided in Sections 5 and 6 hereof during the period of Disability, subject to Section 9(c) hereof and to the extent permitted by applicable law, provided that in the event of Executive's Disability for an aggregate period of time exceeding 150 calendar days in any 12 consecutive month period during the Term, the Company, at its election, may terminate the Term of Executive's employment, and Executive shall receive the compensation as set forth in Section 9(b) hereof. (b) Services During Disability. During the Term, notwithstanding any Disability, Executive shall, to the extent that he is physically and mentally able to do so, furnish information and assistance to the Company, and, in addition, upon the reasonable request in writing on behalf of the Board, or a senior executive officer designated by the Board, from time to time, he shall make himself available to the Company, its subsidiaries and Affiliates to undertake reasonable assignments consistent with his position and his physical and mental health. In the event of such Disability, Executive shall resign from the Board. 8. TERMINATION OF EMPLOYMENT. (a) Expiration and Earlier Termination. Executive's Term of employment shall terminate upon expiration of the Term and shall be subject to earlier termination: (i) upon the death of Executive; (ii) at the election of the Company in the event of Executive's Disability (as provided in Section 7(a) hereof); (iii) upon discharge of Executive by the Company for Cause; and (iv) upon discharge of Executive without Cause or resignation of Executive. 11 (b) Certain Obligations of the Company. The Company shall give the Executive not less than 60 days prior written notice of any intended termination of Executive's employment by the Company for Cause (other than for the reasons set forth in clauses (ii) and (iv) of the definition of Cause in Section 1 hereof). In the event of such a proposed termination for Cause, such notice shall specify the grounds for such termination, and the Company shall only be entitled to terminate the Executive for such Cause if the Executive shall have failed to cure the grounds for such termination within said 60-day notice period and Executive shall have been afforded an opportunity to address the Board, with legal counsel, to argue against such termination. However, after giving such notice and before Executive is afforded the opportunity to address the Board, the Company may relieve Executive of his duties on an interim basis. The Company may immediately terminate Executive's employment by written notice in the event of the occurrence of any of the events set forth in clauses (ii) and (iv) of the definition of Cause in Section 1 hereof. In addition, the Company may immediately terminate Executive's employment without Cause by written notice to the Executive. (c) Certain Obligations of Executive. Executive shall give the Company not less than 60 days prior written notice of any intended termination by Executive of Executive's employment. In the event of a proposed resignation for Good Reason, such notice shall specify the grounds for such resignation, and Executive shall only be entitled to terminate his employment for Good Reason if the Company shall have failed to correct the specified grounds within said 60-day notice period and, upon cure thereof by the Company, such event shall no longer constitute Good Reason. Executive shall not be entitled to terminate for Good Reason unless he has given notice to the Company of his intention so to terminate within 60 days following the occurrence of the event alleged to constitute such Good Reason. Notwithstanding the foregoing, in the event that Executive has given the Company notice of his intention to resign, the Board may elect to have such resignation become effective immediately or at such other date, not later than the effective date specified in the notice, as the Board may determine. (d) Resignation. Upon termination of the Term for any reason, Executive (unless otherwise requested by a majority of the independent directors of the Board) concurrently shall resign any directorships and officer or employee positions which he holds with the Company, its subsidiaries and Affiliates. 9. COMPENSATION, BENEFITS, ETC. UPON, AND EFFECTS OF, TERMINATION. (a) Death, Discharge for Cause and Resignation for Other than Good Reason. If the Term of Executive's employment is terminated by reason of his death, discharge for Cause or resignation for other than Good Reason, the Company shall pay or cause to be paid to Executive or his estate, as the case may be, at the time such payment is due (i) his Base Salary accrued through the effective date of such termination at the rate in effect immediately prior to such termination; (ii) any accrued but unpaid Performance Bonus under Section 5(b) hereof for the prior fiscal year (to be paid at the same time Senior Executives receive performance bonuses for that fiscal year as set forth in Section 5(b)(ii) hereof); and (iii) any other amounts to which Executive is entitled under the terms of Sections 5 and 6 hereof up to the effective date of such termination. In the event of such termination of employment for Cause or resignation for other than Good Reason under this Section 9(a), all unvested stock options and unvested shares of 12 restricted stock, as they are scheduled to vest in accordance with the applicable restricted stock and stock option agreements, shall be forfeited by Executive. (b) Disability, Discharge Without Cause and Resignation for Good Reason. If the Term of Executive's employment is terminated by the Company by reason of his Disability as provided in Section 7(a) hereof, by the Company without Cause or by reason of Executive's resignation for Good Reason, the Company shall pay to Executive or his estate, as the case may be, the following: (i) his Base Salary accrued through the effective date of such termination at the rate in effect immediately prior to such termination; (ii) an amount equal to one year of Average Cash Compensation; (iii) any accrued but unpaid Performance Bonus under Section 5(b) hereof for the prior fiscal year; (iv) a Prorated Performance Bonus, if any, payable with respect to the fiscal year of termination; and (v) any other amounts to which Executive is entitled under the terms of Sections 5 and 6 hereof up to the effective date of such termination. If Executive's employment is terminated for any reason under this Section 9(b) prior to the end of the Company's fiscal 2004, the Average Cash Compensation shall be an amount equal to the Base Salary plus the target Prorated Performance Bonus for fiscal year 2003 as set forth in Section 5(b)(i) hereof. The payments required under this Section 9(b) shall be made by the Company after such termination as follows: the Base Salary component of Average Cash Compensation shall be paid in equal bi-weekly installments over one year, the Performance Bonus component of Average Cash Compensation shall be paid within 14 days, and the Prorated Performance Bonus, if any, payable with respect to the fiscal year of termination shall be paid at the same time Senior Executives are paid performance bonuses for the respective fiscal year. Any such Prorated Performance Bonus shall be paid in cash, notwithstanding the provisions of Section 5(b)(ii) hereof. (c) In the event this Agreement is terminated in accordance with Section 9(b) hereof, the Company shall continue, for a period of one year following such termination, the benefits described in Sections 4, 6 and 8 of Appendix A, and shall continue the medical benefits described in Section 5 of Appendix A for the Term, as if the Agreement had not been terminated, plus continue such medical coverage for an additional period of one year. In addition, in the event this Agreement is terminated in accordance with Section 9(b) hereof, Executive shall become fully vested in the retirement plans, all non-qualified plans and in all benefits accrued under all other employee benefit plan (e.g., matches under the 401(k) plan). Executive also shall be entitled, to the extent not inconsistent with this Agreement, to receive such additional benefits, if any, as he may be entitled to under the express terms of the applicable benefit plans (other than bonus and severance plans) of the Company, its subsidiaries and Affiliates, and to whatever medical coverage, if any, as is required to be provided by applicable law. (d) Reductions, Forfeitures, etc. Notwithstanding the foregoing: (i) any payments or benefits required to be paid or provided to Executive pursuant to Section 7(a) in the event of Executive's Disability shall be reduced to the extent that comparable payments or benefits are received by Executive during such period under the Company's disability plan, as in effect from time to time, (ii) without limiting any other rights the Company may have, any payments or benefits required to be paid or provided to Executive under this Agreement shall be forfeited to the Company by Executive if Executive shall breach any of his obligations under Sections 10(b) or 11 hereof, except as may otherwise be required by applicable law, and (iii) except as otherwise provided above, the payments and benefits required by this Section 9 shall 13 be made or provided at such times as they would have been paid or provided if Executive's employment had not been terminated. (e) Full Settlement. In the event of the termination of Executive's employment, the payments and other benefits provided for by this Agreement (and as otherwise provided under the express terms of any compensation or benefit plans of the Company, its subsidiaries or Affiliates, to the extent not inconsistent with this Agreement, or as may otherwise be required by applicable law) shall constitute the entire obligation of the Company, its subsidiaries and Affiliates to Executive for compensation and benefits and shall also constitute full and complete settlement of any claim under law or in equity that the Executive might otherwise assert against the Company, its subsidiaries or Affiliates, for compensation and benefits. Executive has no duty to mitigate respecting other employment after the termination of this Agreement and shall be entitled to receive the amounts described in this Section 9 irrespective of whether Executive obtains other employment immediately following such termination. 10. CERTAIN OBLIGATIONS OF EXECUTIVE. Executive further covenants with the Company as follows and expressly agrees that the provisions of Sections 10 and 11 are material obligations to the Company and the breach of those provisions will constitute material breaches of this Agreement. As used in Sections 10 and 11, the term the "Company" shall include GTECH Holdings Corporation and its subsidiaries and Affiliates. (a) Assistance in Litigation. During the Term, and for a period of three years thereafter subject to reasonable accommodation of Executive's then business schedule, Executive, upon reasonable notice, shall furnish such information and proper assistance to the Company as may reasonably be required in connection with any litigation in which the Company is, or may become, a party or in connection with any investigation or review by any governmental agency of which the Company is or may become a subject. The Company shall compensate Executive at a reasonable hourly rate, plus reimburse all expenses incurred consistent with Company policy, for any such assistance provided by Executive after the Term. (b) Confidential Information. Executive shall not knowingly use for his own benefit or disclose or reveal to any person, during or after the Term, any trade secret or other confidential information relating to the Company, including any customer lists, customer needs, price and performance information, processes, specifications, hardware, software, firmware, programs, devices, supply sources and characteristics, business opportunities, marketing, promotional, pricing and financing techniques, and other information relating to the Company; provided that such restriction on confidential information shall not apply to information which is (i) proven to be generally available in the industry, (ii) disclosed in published literature or (iii) obtained by Executive after the Term from a third party without binder of secrecy. Executive agrees that, except as otherwise agreed by the Company, he will return to the Company, promptly upon the request of the Board or any executive officer designated by the Board, any physical embodiment of such confidential information. In the event Executive is requested by any legal process to disclose Confidential Information, Executive shall immediately inform the Company and shall permit the Company an opportunity to oppose such process, it being 14 understood that Executive's compliance with legal process, after the Company's reasonable opportunity to oppose such process, does not constitute a violation of this Section 10(b). (c) Proprietary Creations. All rights, title and interest in and to any ideas, inventions, technology, processes, know-how, works, hardware, software, firmware, programs, devices, trade secrets, trade names, trademarks or service marks, which Executive may conceive, create, organize, prepare or product during the period of his employment with the Company and which relate to the business of the Company, and all rights, title and interest in and to any patents, patent applications, copyright registrations and copyright applications resulting therefrom, shall be owned by the Company, and Executive agrees to execute instruments or documents, to provide evidence and testimony, and to otherwise assist the Company in establishing, enforcing and maintaining such rights, title and interest of the Company during and after the Term. (d) Authorization. Executive does hereby irrevocably constitute, authorize, empower and appoint the Company, or any of its officers, such Executive's true and lawful attorney (with full power of substitution and delegation) in Executive's name, and in Executive's place and stead, or in the Company's name, to take and do such action, and to make, sign, execute, acknowledge and deliver any and all instruments or documents which the Company, from time to time, may deem desirable or necessary to vest in the Company, its successors and assigns, any of the rights, title or interest granted pursuant to Section 10(c) above for the use and benefit of the Company, its successors and assigns. 11. NON-COMPETITION. (a) During the Term and for two years following termination of Executive's employment (irrespective of the reason for such termination), Executive shall not engage or propose to engage, directly or indirectly (which includes owning, managing, operating, controlling, being employed by, acting as a consultant to, giving financial assistance to, participating in or being connected in any material way with any business or person so engaged) in any Lottery Business anywhere in the world, including without limitation in any business which competes or proposes to compete with any Lottery Business in which the Company was engaged or proposed to be engaged anywhere in the world; provided, that Executive's ownership as a passive investor of less than one percent of the issued and outstanding stock or equity, or $100,000 principal amount of any debt securities, of any corporation, partnership or other entity so engaged shall not by itself be deemed to constitute such engagement by Executive. As used herein, the term " Lottery Business" shall mean the provision of products or services of every nature relating to the operation of all manner of lotteries however and wherever conducted, but does not include traditional gaming activities not of the type and nature customarily operated by governments. (b) Further, for a period of two years following termination of Executive's employment (irrespective of the reason for such termination), Executive shall not (i) disturb or interfere with any business relationship between the Company and any of its customers, suppliers or other business associates, or (ii) solicit or cause to be solicited any officer, employee or customer of the Company to terminate such person's relationship with the Company or to take other action which is materially injurious to the Company. 15 12. TAX WITHHOLDING. The Company may withhold from any benefits payable under this agreement all Federal, State, City, or other taxes as shall be required pursuant to any law or governmental regulations or ruling. 13. EFFECT OF PRIOR AGREEMENTS. This Agreement, including the Appendices hereto, contains the entire understanding between the parties hereto with respect, to the matters covered herein and supersedes any prior agreement, condition, practice, custom, usage and obligation with respect to such matters insofar as any such prior agreement, condition, practice, custom, usage or obligation might have given rise to any enforceable right, except for those agreements respecting the grant of stock options and restricted stock identified on Appendix C hereto, which shall continue in full force and effect in accordance with their terms. Without limiting the generality of the foregoing, the employment agreement dated August 9, 2000 between the Company and Executive, as amended, is superceded in its entirety by this Agreement. 14. GENERAL PROVISIONS. (a) Certain Representations and Warranties of Executive. Executive represents to the Company that (i) the execution and performance of this Agreement by Executive and his employment hereunder does not and will not constitute a breach of or violate any contract, agreement, obligation or understanding, oral or written, or order of any court or governmental authority to which he is a party or by which he is bound; (ii) the employment and other personal background information provided by Executive to Company is true and correct in all material respects; (iii) to the best of Executive's knowledge, there is no factor relating to him or his family not previously disclosed in writing to the Company which could reasonably be expected, if he were a senior executive officer or director of the Company, to disqualify the Company, its subsidiaries or Affiliates from, or materially jeopardize their chances of, obtaining lottery contracts or other contracts in the businesses in which they are engaged or propose to engage; and (iv) Executive has been represented by counsel selected by Executive in the negotiation and preparation of this Agreement. (b) Non-assignability and Inurement. Neither this Agreement nor any rights or interest hereunder shall be assignable by Executive, his beneficiaries, or legal representatives without the Company's prior written consent (it being understood that all payments to which Executive is entitled hereunder shall inure to the benefit of his estate or legal heirs). (c) Binding Agreement. This Agreement shall be binding upon, and accrue to the benefit of, Executive and the Company and their respective heirs, executors, administrators, successors and permitted assigns, including, in the case of the Company, any person or entity acquiring all or substantially all of the Company's assets. (d) Amendment of Agreement. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 16 (e) Remedies. Executive acknowledges and agrees that the possible restrictions on his activities which may occur as a result of his performance of his obligations under Sections 10 and 11 hereof are required for the reasonable protection of the Company, its subsidiaries and Affiliates, and Executive expressly acknowledges and agrees that such restrictions are fair and reasonable for that purpose. Executive further expressly acknowledges and agrees that damages alone will be an inadequate remedy for any breach or violation by him of this Agreement and that the Company, its subsidiaries and Affiliates, in addition to all other remedies at law or in equity, shall be entitled as a matter of right to injunctive relief, including specific performance, with respect to any such breach or violation, in any court of competent jurisdiction including, without limitation, any state or federal court in Rhode Island. If any of the provisions of such Sections are held to be in any respect an unreasonable or unlawful restriction upon Executive, then they shall be deemed to extend only over the maximum period of time, geographic area, and/or range of activities as to which they may be enforceable. (f) Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. (g) Severability. If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not so held invalid, and each such other provision shall to the full extent consistent with law continue in full force and effect. (h) Notices. For the purposes of this Agreement, notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when hand delivered or mailed by United States certified or registered express mail, return receipt requested, postage prepaid, if to Executive, addressed to the address set forth on the signature page of this Agreement with a copy to his counsel, Jack Gorny, Esq., Fox Rothschild O'Brien & Frankel, CitiCenter Building, Suite 500, 1300 Atlantic Avenue, Atlantic City, New Jersey 08401-7278; if to the Company, addressed to GTECH Holdings Corporation, 55 Technology Way, West Greenwich, Rhode Island 02817 and directed to the attention of the Board with a copy to the General Counsel of the Company; if to a member of the Board, addressed to each member at his respective address on file with the General Counsel of the Company with a copy to the Company, or to such other address as either party may have furnished to the others in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (i) Counterparts. This Agreement may be executed by facsimile and in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (j) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any 17 occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. (k) Headings. The headings of Sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. (l) Governing Law; Forum. This Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. In the event of any dispute hereunder, the prevailing party shall be entitled to recover all costs, including reasonable attorneys' fees, incurred in adjudicating such dispute. (m) Joint and Several Liability. Notwithstanding any other provision of this Agreement, each of GTECH Holdings Corporation and GTECH Corporation, and their successors and assigns, shall be jointly and severally liable for all obligations or any of them to Executive hereunder. In the event that a substantial portion of the assets of either Company are transferred to any other direct or indirect subsidiary or other Affiliate of the Company, whether in one transaction or a series of transactions, such Company, as applicable, shall cause (prior to or concurrently with each transfer) the transferee to become a signatory to this Agreement and to become jointly and severally liable for all obligations or any of them to Executive hereunder. (n) Conflicts. To the extent there is any conflict between the terms of this Agreement and the Option Agreement or the Restricted Stock Agreement respecting acceleration or vesting of stock options or restricted stock, the provisions of this Agreement shall supersede any other conflicting provisions in those agreements. (o) References to Plans. Any reference in this Agreement to a specific employee benefit plan, program or arrangement maintained by the Company shall be deemed to be a reference to such plan, program or arrangement, as it may be amended from time to time, and to any successor thereto. Nothing contained herein shall be interpreted as requiring the Company to keep any plan, program or arrangement in effect. (Signatures on Next Page) 18 IN WITNESS WHEREOF, GTECH Holdings Corporation and GTECH Corporation have caused this Agreement to be executed by their duly authorized officers, and Executive has signed this Agreement, all as of the day and year first above written. GTECH HOLDINGS CORPORATION Attest: /s/ Molly Trahan By: /s/ Marc Crisafulli ----------------------- -------------------------------- Name: Molly Trahan Name: Marc Crisafulli Title: Exec. Asst. Title: SVP & General Counsel GTECH CORPORATION Attest: /s/ Molly Trahan By: /s/ Marc Crisafulli ----------------------- -------------------------------- Name: Molly Trahan Name: Marc Crisafulli Title: Exec. Asst. Title: SVP & General Counsel Witness: W. BRUCE TURNER /s/ Molly Trahan /s/ W. Bruce Turner - ----------------------- -------------------------------- Address: 3508 Bayfair Place Tampa, Florida 33629 19 APPENDIX A SUMMARY OF CERTAIN BENEFITS AND ARRANGEMENTS 1. Relocation Expenses. The Company shall reimburse Executive for all relocation costs incurred by him in moving to Rhode Island, in accordance with the corporate relocation guidelines. In the event Executive's employment is terminated by the Company for any reason, the Executive acknowledges that the Company shall have no obligation to reimburse the Executive for any relocation costs following such termination. 2. Vacation. Executive shall be entitled to a paid vacation of four weeks per year commencing to accrue on the date of Executive's employment hereunder. 3. Automobile Allowance. The Company shall provide Executive with an automobile allowance in the monthly amount of $1,250 in accordance with the Company's automobile policy and in a manner consistent with other Senior Executives. 4. Life Insurance. Executive shall receive life insurance coverage in accordance with the Company's policy in a manner comparable to Senior Executives. 5. Medical. During the Term, the cost of Executive's annual physical examination shall be borne by the Company. In addition, the Company shall provide Executive with medical insurance in a manner comparable to Senior Executives as may be modified from time to time and on the following additional terms: (a) Such medical insurance shall be provided during the Term. (b) Such medical insurance shall continue to be provided after the expiration of the Term to the extent expressly provided in Sections 5(c) and 9(c) plus for the following additional periods (such periods to be applied on a cumulative basis): (i) for an additional period of one year if Executive remains an employee of the Company on the third anniversary of the expiration of the Term; (ii) for an additional period of two years if Executive remains an employee of the Company on the sixth anniversary of the expiration of the Term; and (iii) for an additional period of three years if Executive remains an employee of the Company on the ninth anniversary of the expiration of the Term. (c) Executive may participate at his own cost in the Company's retirement health plan provided he satisfies the eligibility requirements of such plan and that such plan continues to be made available by the Company. (d) Notwithstanding the foregoing, Company shall not be obliged to continue medical insurance for Executive after expiration of the Term (except to the extent expressly provided in Section 9(c)) if and to the extent Executive qualifies for medical insurance benefits with spousal coverage from a successor employer. 6. Perquisite Plan. Executive shall be entitled to participate in the Company's Executive Perquisites Plan in a manner similar to Senior Executives, provided that the amount available to Executive under the Plan for calendar year 2002 ($27,500 before tax gross-up) shall be pro rated based upon the portion of the year he was retained by the Company. 7. Deferred Compensation; 401(k); SERP. Executive shall be entitled to participate in the Company's 401(k) retirement plan, deferred compensation plan and Supplemental Retirement Plan for Senior Executives Plan ("SERP") in a manner similar to Senior Executives. 8. Executive Tax Preparation. Executive shall be entitled to tax preparation and financial planning services, at the Company's expense, up to a maximum annual expense of $5,000.00. 9. Attorneys Fees. The Company shall reimburse Executive for all reasonable attorneys fees and reasonable related expenses incurred in the negotiation and finalization of this Agreement. APPENDIX B FORM OF OPTION AGREEMENT GTECH HOLDINGS CORPORATION NON-QUALIFIED STOCK OPTION AGREEMENT NON-QUALIFIED STOCK OPTION AGREEMENT made as of the ___ day of ___________, 2002 (the "Grant Date"), between GTECH HOLDINGS CORPORATION, a Delaware corporation (the "Company"), and _____________, an Employee of the Company (the "Employee" or "optionee"). WHEREAS, the Company desires to afford the Employee an opportunity to purchase shares of Common Stock, $.01 par value, of the Company ("Stock"), as hereinafter provided, in accordance with the provisions of the Company's 2002 OMNIBUS STOCK OPTION AND LONG-TERM INCENTIVE PLAN (the "Plan"), which is incorporated herein by reference and made a part hereof. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Plan. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto, intending to be legally bound hereunder, agree as follows: 1. GRANT OF OPTIONS. The Company hereby grants to the Employee the right and option (the "Options") to purchase all or any part of an aggregate of __________shares of Stock. The Options are in all respects limited and conditioned as hereinafter provided, and are subject to the terms and conditions of the Plan now in effect and as they may be amended from time to time in accordance with the Plan and any rules, regulations and procedures pursuant thereto which may be adopted by the Compensation Committee or such other committee of the Board of Directors as may be designated (the "Committee") from time to time. (Said terms, conditions, rules, regulations and procedures are and automatically shall be incorporated herein by reference and made a part hereof and shall control in the event of any conflict with any other terms of this Option Agreement.) It is intended that the Options granted hereunder be Non-Qualified Stock Options ("NQSOs") and NOT Incentive Stock Options ("ISOs") as such term is defined in section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. PURCHASE PRICE. The purchase price per share of the shares of Stock covered by the Options (the "Option Price") shall be $_____. It is the determination of the Committee that on the Grant Date the Option Price was not less than the higher of: (i) one hundred percent (100%) of the Fair Market Value of said Stock, or (ii) the par value thereof. 3. TERM. Unless earlier terminated pursuant to any provision of the Plan or of this Option Agreement, the Options shall expire _______________ (the "Expiration Date"), which date is not more than ten years from the Grant Date. The Options shall not be exercisable after the Expiration Date. 4. EXERCISE OF OPTIONS. The Options shall become exercisable in such installments and on such dates, as is set forth below, subject to possible acceleration as provided in this Option Agreement or the Plan, and provided that no Option shall be exercisable during the six (6) month period commencing on the Date of Grant: NUMBER OF SHARES DATE EXERCISABLE [___] [_______________] [___] [_______________] [___] [_______________] [___] [_______________] Options that become exercisable in accordance with the foregoing shall remain exercisable, subject to the provisions of the Plan and this Option Agreement, until the expiration of the term of the Options as set forth in Section 3 hereof or until other termination of the Options. 5. METHOD OF EXERCISING OPTIONS. Subject to the terms and conditions of this Option Agreement and the Plan, the Options may be exercised upon at least two (2) days written notice to the Company, Attention: General Counsel, at the Company's principal office, which currently is located at 55 Technology Way, West Greenwich, Rhode Island 02817, or to such agent as the Company may designate, at such agent's address. Such notice shall state the election to exercise the Options and the number of shares with respect to which they are being exercised; shall be signed by the person or persons so exercising the Option; shall, if the Company so requests, be accompanied by the investment certificate referred to in Section 6 hereof; and shall be accompanied by payment of the full Option price of such shares. The Option price shall be paid to the Company: (a) In cash, or in its equivalent; (b) In unrestricted Stock previously acquired by the Employee and held by the Employee for at least six (6) months; (c) In any combination of (a) and (b) above; or (d) By delivering a properly executed notice of exercise of the Options to the Company and a broker, with irrevocable instructions to the broker promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price of the Options, and by delivering such proceeds in cash or its equivalent. (NOTE THAT THE PAYMENT PROCEDURE SPECIFIED IN CLAUSE (d) IS CONSIDERED A SALE BY AN EMPLOYEE WHO IS SUBJECT TO SECTION 16(b) OF THE SECURITIES EXCHANGE ACT OF 1934 ("SECTION 16(b)") WHICH MAY BE MATCHED WITH ANY NON-EXEMPT PURCHASE WITHIN THE SIX-MONTH PERIOD BEFORE OR AFTER THE BROKER FINANCED TRANSACTION.) In the event such Option Price is paid, in whole or in part, with shares of Stock, the portion of the Option Price so paid shall be equal to the Fair Market Value of such Stock being used as payment on the date the notice of exercise is received by the Company or its agent. Upon receipt of such notice and payment, the Company, as promptly as practicable, shall deliver or cause to be delivered a certificate or certificates representing the shares of Stock with respect to which the Options are so exercised. The certificate or certificates for such shares shall be registered in the name of the person or persons so exercising the Options (or, if the Options shall be exercised by the Employee and if the Employee shall so request in the notice exercising the Options, shall be registered in the name of the Employee and the Employee's spouse, jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person or persons exercising the Options. All shares that shall be purchased upon the exercise of the Options as provided herein shall be fully paid and non-assessable by the Company. 6. SHARES TO BE PURCHASED FOR INVESTMENT. Unless the Company has theretofore notified the Employee that a registration statement covering the shares to be acquired upon the exercise of the Options has become effective under the Securities Act of 1933 and the Company has not thereafter notified the Employee that such registration is no longer effective, it shall be a condition to any exercise of the Options that the shares acquired upon such exercise be acquired for investment and not with a view to distribution, and the person effecting such exercise shall submit to the Company a certificate of such investment intent, together with such other evidence supporting the same as the Company may request. The Company shall be entitled to restrict the transferability of the shares issued upon any such exercise to the extent necessary to avoid a risk of violation of the Securities Act of 1933 (or of any rules or regulations promulgated thereunder) or of any state laws or regulations. Such restrictions may, at the option of the Company, be noted or set forth in full on the share certificates. 7. NON-TRANSFERABILITY OF OPTION. Except as otherwise permitted by the Committee, the Options are not assignable or transferable, in whole or in part, by the Employee otherwise than by will or by the laws of descent and distribution, and during the lifetime of the Employee the Options shall be exercisable only by the Employee or, in the event of his disability, by his guardian or legal representative. A transferred Option shall continue to be subject to the same terms and conditions as were applicable to such Option immediately prior to transfer. 8. TERMINATION OF EMPLOYMENT. Subject to Section 10 of the Plan, "Change-In-Control Provisions", Section 12 of the Plan, "Adjustment Upon Change of Shares", and Section 14 of the Plan, "Amendment and Termination of Plan", and unless otherwise determined by the Committee at or after the Grant Date, if the Employee's employment by the Company terminates prior to the Expiration Date of the Options set forth in Section 3 hereof, the Options, to the extent unexercised, shall terminate as follows: (a) RETIREMENT. If the Employee retires from the Company (such retirement to be determined at the sole discretion of the Committee), all unvested Options previously granted to the Employee shall vest and the Employee shall have two (2) years from the effective date of retirement within which to exercise all vested Options. (b) CESSATION OF SERVICE FOR ANY REASON EXCEPT RETIREMENT OR CAUSE. If the Employee's employment by the Company terminates for any reason other than retirement as set forth in paragraph (a) above or Cause as set forth in paragraph (c) herein, the Options may be exercised, but only if vested on the date of such termination of service, at any time prior to the earlier of: (i) the Expiration Date specified in Section 3 hereof; or (ii) the expiration of six (6) months following the date of such termination of employment. (c) CESSATION OF SERVICE FOR CAUSE. If the Employee's employment by the Company is terminated for Cause (as defined in Section 6(f) of the Plan), all unexercised vested and unvested Options held by the Employee shall lapse and be forfeited on the date of termination of service. (d) Notwithstanding paragraphs (a) and (b) above, the period of exercisability of the Options following termination of service is subject to possible earlier termination under the provisions of the Plan. 9. WITHHOLDING OF TAXES. In calculating the Employee's tax obligations, the Company shall value the Stock being purchased as follows: With respect to Sections 5(a) through (c), the value of the Stock being purchased shall be its Fair Market Value on the day the Company or its agent receives the Employee's notice of exercise. With respect to Section 5(d), the value of the Stock being purchased shall be the price at which the Employee's broker enters into a contract to sell the Stock being purchased, as certified in writing by such broker. The obligation of the Company to deliver shares of Stock upon the exercise of the Options shall be subject to the Company's receipt of the Employee's share of those amounts which the Company is obligated to withhold under applicable federal, state and local tax withholding requirements. If the exercise of any of the Options is subject to the withholding requirements of applicable tax laws, the Committee may permit the Employee, subject to the provisions of the Plan and such additional withholding rules (the "Withholding Rules") as may be adopted by the Committee, to satisfy the withholding tax, in whole or in part, by electing to have the Company withhold (or by returning to the Company) shares of Stock, which shares shall be valued, for this purpose, at their Fair Market Value on the date of exercise of the Options (or, if later, the date on which the optionee recognizes ordinary income with respect to such exercise) (the "Determination Date"). An election to use shares of Stock to satisfy tax withholding requirements must be made in compliance with and subject to the Withholding Rules. 10. DESIGNATION OF BENEFICIARY. The Employee shall designate, on a form set forth in Exhibit A to this Agreement, one or more beneficiaries to receive Options in the event of the Employee's death prior to the full exercise of such Options; provided, that if so such beneficiary is designated or if the beneficiary so designated does not survive the Employee, the estate of such Employee shall be deemed to be the beneficiary. The Employee may, upon written notice to the Committee, change the beneficiary designated in this Option Agreement. 11. GOVERNING LAW. This Option Agreement shall be construed in accordance with, and its interpretation shall be governed by, the laws of the State of Delaware, without giving effect to conflicts of laws principles. IN WITNESS WHEREOF, the Company has caused this NON-QUALIFIED STOCK OPTION AGREEMENT to be duly executed by its duly authorized officer, and the Employee has executed this Agreement, all on the day and year first above written. GTECH Holdings Corporation Attest By:______________________________ By:__________________________ Marc A. Crisafulli Senior Vice President and General Counsel _____________________________ ___________________________ Witness APPENDIX C OPTION AGREEMENTS AND RESTRICTED STOCK AGREEMENTS BETWEEN EXECUTIVE AND GTECH HOLDINGS CORPORATION AS OF DATE OF THIS AGREEMENT 1. Agreement dated August 9, 2000, and Amendment thereto dated June 1, 2001; 2. GTECH Holdings Corporation Executive Restricted Stock Agreement dated August 9, 2000; 3. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated August 9, 2000; 4. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated November 15, 2000; 5. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated February 15, 2001; 6. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated March 12, 2001; 7. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated May 15, 2001; 8. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated August 15, 2001; 9. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated November 15, 2001; 10. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated February 15, 2002; and 11. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated May 15, 2002. In addition to the foregoing, after the date of this Agreement the Company and Executive entered into the following agreements in accordance with the terms of the employment agreement dated August 9, 2000: 1. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated August 9, 2002; and 2. GTECH Holdings Corporation Non-Qualified Stock Option Agreement dated August 30, 2002. EX-12.1 4 y64244exv12w1.txt COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.1 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited) Six Months Ended ------------------------ August 24, August 25, 2002 2001 -------- -------- (Dollars in thousands, except ratios) Earnings: Income before income taxes $108,466 $ 57,653 Add: Interest on indebtedness 5,643 12,851 Equity income, net of distributions 653 (442) Minority losses 1,141 396 Portion of rents representative of the interest factor 3,222 3,222 Amortization of capitalized interest 624 976 -------- -------- Adjusted earnings $119,749 $ 74,656 ======== ======== Fixed charges: Interest on indebtedness 5,643 12,851 Portion of rents representative of the interest factor 3,222 3,222 Capitalized interest -- 917 -------- -------- Total fixed charges $ 8,865 $ 16,990 ======== ======== Ratio of earnings to fixed charges 13.51 4.39 ======== ========
EX-99.1 5 y64244exv99w1.txt CERTIFICATION Exhibit 99.1 GTECH HOLDINGS CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of GTECH Holdings Corporation (the "Company") on Form 10-Q for the period ending August 24, 2002 as filed with the Securities and Exchange Commission on the Date hereof (the "Report"), I, W. Bruce Turner, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C section 1350, as adopted pursuant to sections 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. GTECH HOLDINGS CORPORATION Date: October 8, 2002 By /s/ W. Bruce Turner ------------------------------------- W. Bruce Turner President and Chief Executive Officer EX-99.2 6 y64244exv99w2.txt CERTIFICATION Exhibit 99.2 GTECH HOLDINGS CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of GTECH Holdings Corporation (the "Company") on Form 10-Q for the period ending August 24, 2002 as filed with the Securities and Exchange Commission on the Date hereof (the "Report"), I, Jaymin B. Patel, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C section 1350, as adopted pursuant to sections 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. GTECH HOLDINGS CORPORATION Date: October 8, 2002 By /s/ Jaymin B. Patel ------------------------------------------ Jaymin B. Patel, Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----