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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: February 27, 1999
Commission File No: 1-11250
GTECH HOLDINGS CORPORATION
Delaware 05-0450121
(State or other jurisdiction (IRS Employer ID Number)
of incorporation or organization)
55 Technology Way, West Greenwich, Rhode Island 02817
(401) 392-1000
(Address and telephone number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Common Stock $.01 par value
Name of Each Exchange on which Registered: New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [x]
The aggregate market value of the registrant's Common Stock (its only voting
stock) held by non-affiliates of the registrant as of May 3, 1999 was
$987,743,750. (Reference is made to Page 39 herein for a statement of the
assumptions upon which this calculation is based.)
On May 3, 1999, there were outstanding 37,556,150 shares of the registrant's
Common Stock.
Documents Incorporated By Reference: Certain portions of the registrant's 1999
definitive proxy statement relating to its scheduled July 1999 Annual Meeting of
Shareholders (which proxy statement is expected to be filed with the Commission
not later than 120 days after the end of the registrant's last fiscal year) are
incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
GENERAL
GTECH Corporation ("GTECH") is the world's leading operator of computerized
online lottery systems and the wholly owned subsidiary of GTECH Holdings
Corporation ("Holdings"; collectively with its direct and indirect subsidiaries,
including GTECH, the "Company"). The Company currently operates, or supplies
equipment to, online lottery systems for 29 of the 38 online lottery authorities
in the United States and has supplied, currently operates or has entered into
contracts to operate in the future online lottery systems for 52 of the 84
international online lottery authorities. The Company, seeking to develop growth
opportunities outside of the online lottery industry, is actively involved in
the pursuit of other gaming and entertainment opportunities, such as
venue-based gaming and video lottery. The Company also is considering expanding
into other complimentary areas of business, especially those involving
transaction processing.
Since the establishment of the first online lottery in 1975, the online lottery
industry has experienced substantial growth, as governments have increasingly
relied on lotteries as a non-tax source of revenue. After a number of years of
growth, the Company has witnessed over the past two years a downward trend in
the sales generated by its United States lottery customers. During calendar
1998, ticket sales in the online lottery industry were approximately $20.1
billion in the United States, representing a decline of approximately 6% from
online lottery ticket sales in the United States during calendar 1997. During
fiscal 1999 (which ended February 27, 1999), lottery sales by the Company's
domestic customers declined approximately 2% from fiscal 1998 levels, resulting
in a decline in the Company's domestic service revenues of 5.6%. Notwithstanding
this, worldwide sales by the Company's lottery customers increased approximately
5% in fiscal 1999 over fiscal 1998. See "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations" below.
The Company's core business consists of providing online lottery services and
products to governmental lottery authorities and governmental licensees
worldwide. The Company offers its customers a full range of lottery services,
including the design, assembly, installation, operation, maintenance and
marketing of online lottery systems and instant ticket support systems and
services. The Company's lottery systems consist of numerous lottery terminals
located in retail outlets, central computer systems, systems software and game
software, and communications equipment which connects the terminals and the
central computer systems.
Historically, the majority of the Company's lottery customers in the United
States have entered into long-term service contracts pursuant to which the
Company provides, operates and maintains the customers' online lottery systems
in return for a percentage of the gross lottery revenues. Many of the Company's
international lottery customers have purchased their online lottery systems,
although some, especially lottery authorities in Eastern Europe and Latin
America, have entered into long-term service contracts with the Company. In
recent years there has been, in general, an industry movement away from product
sales in favor of long-term service contracts. In fiscal 1993, approximately 70%
of the Company's lottery revenues were
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derived from its portfolio of long-term online lottery service contracts with
substantially all of the remainder being derived from lottery product sales. In
fiscal 1999, approximately 95% of the Company's lottery revenues were derived
from online lottery service contracts. As anticipated, product sales declined
from $122.0 million in fiscal 1998 to $85.5 million in fiscal 1999.
Notwithstanding this, and the general industry trend away from product sales
described above, the Company currently anticipates that revenues attributable to
product sales to lotteries during fiscal 2000 are likely to return to
approximately fiscal 1998 levels.
In recent years, lottery authorities have recognized that by offering new games
or products, they often are able to generate significant additional revenues. An
important part of the Company's strategy is to develop new products and services
for its customers in order to increase their lottery revenues. The Company's
principal online products and services introduced in recent years consist of
keno, instant ticket support systems and services and televised lottery programs
such as BingoVision(TM). Keno, an online lottery game which features drawings as
often as every five minutes, was first introduced by the Company and the
Lotteries Commission of South Australia in 1990 and subsequently has been
introduced successfully by the Company and lottery authorities in 20 additional
jurisdictions on four continents. The Company currently provides instant ticket
support services, products and systems in 26 domestic jurisdictions and 13
jurisdictions outside of the United States. In recent years, the Company has
offered customers television lottery games. BingoVision(TM), the Company's best
known television game, is a televised bingo-based lottery game which is played
in 10 jurisdictions. During fiscal 1999, the Company augmented its game design
expertise by acquiring 80% of the equity of Europrint Holdings Ltd. and its
wholly-owned subsidiary, Interactive Games International, which pioneered the
development of interactive, televised lottery games, including BingoVision(TM).
See "Certain Significant Developments Since the Start of Fiscal 1999" and
"Products and Services Introduced in Recent Years" below.
During fiscal 1999, the Company announced that it had established a business
unit, UWin!(TM), to provide internet-based interactive games to its
international customers in the government-sponsored lottery market. In May 1999,
after the close of fiscal 1999, the Company entered into a contract with the An
Post National Lottery Company, the Irish lottery authority, to provide, maintain
and operate its UWin!(TM) internet solution in the Republic of Ireland through
March 2000. See "Certain Significant Developments Since the Start of Fiscal
1999" and "Products and Services Introduced in Recent Years" below.
In recent years, the Company also has broadened its product lines outside of its
core business of providing online lottery services and products. In September
1995, the Company incorporated its Dreamport, Inc. ("Dreamport") subsidiary, to
pursue gaming opportunities other than online lottery, including video lottery
and venue-based gaming. Dreamport now provides a comprehensive array of
creative management and technology solutions and development and strategic
services to the gaming and entertainment markets, as well as video lottery
systems and other gaming technology. Dreamport, through a joint venture with
Full House Resorts, Inc., provides financing, gaming development and management
services to the Midway Slots and Simulcast emporium at Harrington Raceway in
Delaware and the Huron Potawatomi Tribe in Battle Creek, Michigan, which
recently entered into a tribal
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compact with the State of Michigan. Dreamport currently independently provides
machine gaming video lottery products and services to 10 jurisdictions
worldwide. During fiscal 1999, Dreamport, in equal partnership with Harrah's
Entertainment, Inc. and Keeneland Association, purchased the assets of Turfway
Park, a thoroughbred race course in Florence, Kentucky. See "Certain Significant
Developments Since the Start of Fiscal 1999" below.
Since August 1993, the Company, principally through its wholly-owned subsidiary,
Transactive Corporation ("Transactive"), has been in the business of providing
electronic benefits delivery ("EBT") systems and services on behalf of
government authorities. During fiscal 1998, the Company announced that it had
entered into an agreement to sell to Citicorp Services, Inc., a subsidiary of
Citicorp ("Citicorp Services"), certain of its EBT contracts, subject to
receiving necessary customer consents and regulatory approvals, and that it had
decided not to pursue future opportunities that may arise in the electronic
benefits delivery industry. During fiscal 1999, the Company reported that the
U.S. Department of Justice had commenced a legal action to enjoin the
consummation of the transaction on anti-trust grounds and, subsequently, that
Citicorp Services had terminated the agreement to purchase certain of
Transactive's EBT contracts. The Department of Justice's legal proceeding was
dismissed as a result of this termination, and the Company announced that it
would continue to perform all EBT contracts through their terms. See "Certain
Significant Developments Since the Start of Fiscal 1999," below.
GTECH was founded in 1980. Holdings acquired GTECH in a leveraged buy-out, in
which members of then-senior management of GTECH participated, that was
completed in February 1990.
The Company's principal executive offices are located at 55 Technology Way, West
Greenwich, Rhode Island 02817, and its telephone number is (401) 392-1000.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The future performance of the Company's business is subject to the factors set
forth below, as well as the other considerations described elsewhere herein.
Certain statements contained in this Report are forward looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934. Such statements include, without limitation,
statements relating to (i) the future prospects for and stability of the lottery
industry and other businesses in which the Company is 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, (iv) the Company's program to address potential issues relating to the
change of date to January 1, 2000 ("Year 2000"), and (v) the results and effects
of legal proceedings and investigations. Such forward looking statements reflect
management's assessment based on information currently available, but are not
guarantees and are subject to risks and uncertainties which could cause actual
results to differ materially from those contemplated in the forward looking
statements. These risks and uncertainties include but are not limited to those
set forth herein and in the Company's press releases and its Forms 10-K, 10-Q,
8-K and other reports and filings with the Securities and Exchange Commission
(the "SEC").
GOVERNMENTAL REGULATION
In the United States, lotteries are not permitted in a particular jurisdiction
unless expressly authorized by law in such jurisdiction. Once authorized, the
ongoing operation of a lottery is highly regulated. Lottery authorities, which
generally conduct an intensive investigation of the Company and its employees
prior to and after the award of a lottery contract, may require the removal of
any Company employees deemed to be unsuitable and are generally empowered to
disqualify the Company from receiving a lottery contract or operating a lottery
system as a result of any such investigation. Certain jurisdictions also require
extensive personal and financial disclosure and background checks from persons
and entities beneficially owning a specified percentage (typically 5% or more)
of the Company's securities. The failure of such beneficial owners to submit to
such background checks and provide such disclosure could jeopardize the award of
a lottery contract to the Company or provide grounds for termination of an
existing lottery contract.
The international jurisdictions in which the Company markets its lottery systems
also usually have legislation and regulations governing lottery operations. The
regulation of lotteries in these international jurisdictions typically varies
from the regulation of lotteries in the United States. In addition, restrictions
are often imposed on foreign corporations seeking to do business in such
jurisdictions. As a result, the Company has found it desirable in a number of
instances to ally itself as a subcontractor or joint venture partner with one or
more local companies in seeking international lottery contracts.
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MAINTENANCE OF BUSINESS RELATIONSHIPS AND CERTAIN LEGAL MATTERS
A significant portion of the Company's revenues and cash flow is derived from
its portfolio of long-term online lottery service contracts. The Company's
online lottery service contracts typically have an initial term of five years
and usually provide the customer with options to extend the contract under the
same terms and conditions for additional periods generally ranging from one to
five years. The Company's customers have generally exercised some or all of the
extension options under their contracts or negotiated extensions on different
terms and conditions. Upon the expiration of a contract, lottery authorities may
award new contracts through a competitive procurement process. There can be no
assurance that, in the future, the Company's contracts will be extended or that
it will be awarded new contracts as a result of competitive procurement
processes. The Company's lottery contracts typically permit a lottery authority
to terminate the contract at any time for failure to perform and other specified
reasons, and many of such contracts permit the lottery authority to terminate
the contract at will and do not specify the compensation, if any, to which the
Company would be entitled were such termination to occur. The termination of or
failure to renew one or more lottery contracts could, depending upon the
circumstances, have a material adverse effect on the Company's business,
financial condition and results and prospects.
The Company regularly engages public affairs and governmental relations
advisors, including lobbyists, in various jurisdictions to advise legislators,
other governmental officials and the public in connection with lottery
legislation, to monitor potential lottery legislation and to advise the Company
in connection with the Company's lottery proposals. The Company also makes
contributions to various political parties and associations but does not make
contributions to individual candidates or their campaigns.
As previously publicly reported, in October 1994, the U.S. Attorney's Office for
the District of New Jersey indicted J. David Smith, the former sales manager of
the Company (who resigned in early 1994 for reasons unrelated to the
indictments), and two other individuals who served as consultants to the Company
through their wholly-owned company, The Benchmark Group, Inc. ("Benchmark"). The
indictment alleged essentially that, unbeknownst to the Company, Mr. Smith had
received kickbacks from the consultants for his own benefit. The indictment did
not charge the Company with any wrongdoing, and the actions complained of did
not affect the Company's New Jersey lottery operations. The trial of Mr. Smith
and the two consultants commenced in September 1996 in the U.S. District Court
for New Jersey, and on October 4, 1996, Mr. Smith and one of the two consultants
were found guilty of all charges. The other consultant, Joseph LaPorta, was
found not guilty. The New Jersey U.S. Attorney immediately announced in a press
release that a grand jury investigation in that jurisdiction was continuing but
did not specify the scope of such investigation. In the midst of these events,
the New Jersey Lottery Commission awarded the Company a contract to continue
operating its State lottery. In October 1998, the Court sentenced Mr. Smith to a
prison term of 63 months, ordered him to pay restitution to the Company in the
amount of $169,500 and fined him $20,000. Mr. Smith filed a notice of appeal in
the United States Court of Appeals for the Third Circuit and in April 1999 oral
argument on this appeal was heard. In November 1998, the U.S. Attorney's Office
for the
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District of New Jersey advised the Company that currently GTECH is not
the subject or target of an ongoing grand jury investigation by that office.
In 1995, the Texas U.S. Attorney's Office also issued grand jury document
subpoenas to the Company, and the Company has cooperated with this
investigation.
In February 1999, a witness appearing before the Moriarty Tribunal, an
investigative body convened by the Irish Parliament and chaired by Mr. Justice
Moriarty to investigate the business affairs generally of former Taoiseach
(Prime Minister) of Ireland Charles Haughey, testified that in February 1993 Guy
B. Snowden, then Chief Executive Officer of the Company, had invested pound
sterling 67,000 (approximately $100,000) of his personal funds in a company
owned by Mr. Haughey's son. Mr. Haughey had resigned as Taoiseach in February
1992. In July 1992, the An Post Irish National Lottery Company, the Irish
lottery authority (the "NLC"), issued a Request for Proposals respecting online
and instant ticket lottery goods and services, and in September 1992 the
Company, which was the then incumbent provider of lottery goods and services to
the NLC under an agreement awarded to the Company in 1987, submitted a Proposal
to the NLC in response to the NLC's Request for Proposals. In November 1992,
the NLC selected the Company to provide online and instant ticket goods and
services to the NLC under the terms of the competitive procurement and,
following negotiations, a definitive agreement was entered into between the NLC
and the Company in March 1993. The Tribunal has requested that the Company
provide various documents regarding the Company's business in Ireland. The
Company is cooperating with the Tribunal. In addition, the Company has made its
own inquiry into the facts surrounding Mr. Snowden's investment and the extent,
if any, of the Company's involvement in or knowledge of that investment. The
Company's investigation has determined that no Company funds were used to make
Mr. Snowden's investment, and there is no information to suggest that Mr.
Snowden ever sought reimbursement for the investment from the Company. Further,
there is no information to suggest that Mr. Snowden informed anyone else at the
Company of his investment at the time or that his investment was related in any
way to the renewal of the Company's contract to supply systems and support to
the NLC. Mr. Snowden has advised the Company through counsel that (i) his
investment was a strictly personal one, (ii) the investment was made from his
personal funds, (iii) he never sought reimbursement for any portion of his
investment from the Company or any other entity, and (iv) his investment was
not related to the NLC and was not intended to and did not influence the NLC's
decision to renew the Company's contract.
No charges of wrongdoing have ever been brought against the Company by any grand
jury or other governmental authority.
The Company does not believe that it has engaged in any wrongdoing in connection
with these matters. However, since current investigations are still or maybe
underway and are conducted in whole or in part in secret, the Company lacks
sufficient information to determine with certainty their ultimate scope and
whether the government authorities will assert claims resulting from these or
other investigations that could implicate or reflect adversely upon the Company.
Because the Company's reputation for integrity is an important factor in its
business dealings
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with lottery and other governmental agencies, if government authorities were to
make an allegation of, or if there were to be a finding of, improper conduct on
the part of or attributable to the Company in any matter, such an allegation or
finding could have a material adverse effect on the Company's business,
including its ability to retain existing contracts and to obtain new or renewal
contracts. In addition, continuing adverse publicity resulting from these
investigations and related matters could have such a material adverse effect.
In November 1998, Benchmark and Joseph LaPorta, the consultant and shareholder
of Benchmark who was found not guilty in the criminal proceeding described in
the paragraph above respecting J. David Smith, filed suit in the Superior Court
of New Jersey (Atlantic County - Law Division) against GTECH and Victor
Markowicz, the Company's former Co-Chairman, alleging that GTECH had wrongfully
terminated and otherwise breached a May 1992 contract, as amended, between the
Company and Benchmark pursuant to which Benchmark provided government relations
services on behalf of GTECH in New Jersey. The complaint filed by Benchmark and
Mr. LaPorta also alleged that GTECH had breached an implied covenant of good
faith and fair dealing by allegedly authorizing and directing Benchmark to make
payments that were not within the contemplation of the contract and by
terminating its contract with Benchmark after allegedly receiving substantial
benefits from Benchmark; that GTECH had committed fraud upon Benchmark by
allegedly making knowingly false representations to Benchmark prior to
termination of the May 1992 contract; and that GTECH and Mr. Markowicz had
committed fraud upon and had made negligent representations to Benchmark by
allegedly concealing that certain payments which the Company is said to have
directed that Benchmark make to third parties were allegedly made for the
personal benefit of Mr. Markowicz and unspecified others. The complaint seeks
unspecified compensatory and punitive damages and costs and such other further
relief as the Court deems equitable and just. In December 1998, the Company
filed a motion to dismiss, or in the alternative for summary judgment. The
Company believes that Benchmark's complaint, and the allegations underlying the
complaint, are wholly without merit. The Company intends to continue to
vigorously defend itself in these proceedings.
In December 1998, Lawrence Littwin, the former Executive Director of the Texas
Lottery Commission from June 1997 to October 1997, filed suit against GTECH in
the United States District Court for the Northern District of Texas alleging
that GTECH, as operator of the Texas lottery, unlawfully attempted to have Mr.
Littwin removed as Executive Director of the Texas Lottery Commission in order
to continue its alleged unlawful control of the Texas Lottery Commission and the
Texas lottery. The specific causes of action alleged by Mr. Littwin include
alleged tortious interference by GTECH with Mr. Littwin's employment
relationship with the Texas Lottery Commission which caused him to be removed as
the Executive Director; alleged conspiracy with unspecified third parties to
maintain control of the Texas Lottery Commission and the Texas lottery; and
various alleged civil violations by GTECH of the Racketeer Influenced Corrupt
Organization Act (18 Sections 1961(4) and 1962(b), (c) and (d)) ("RICO").
Mr. Littwin's complaint seeks unspecified damages (including treble damages in
the case of RICO violations) and costs. Discovery is proceeding in this matter.
The Company believes that Mr. Littwin's complaint, and the allegations
underlying the complaint, are wholly without merit. The Company continues to
vigorously defend itself in these proceedings.
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FLUCTUATION OF QUARTERLY OPERATING RESULTS
The Company has experienced and may continue to experience significant
fluctuations in operating results from quarter to quarter due to such factors as
the amount and timing of product sales, the occurrence of large jackpots in
lotteries (which increase the amount wagered and the Company's revenue) and
expenses incurred in connection with lottery start-ups and other new ventures.
LIQUIDATED DAMAGES UNDER CONTRACTS
The Company's lottery contracts typically permit termination of the contract at
any time for failure of the Company to perform and for other specified reasons
and generally contain demanding implementation schedules and performance
schedules. Failure to perform under such contracts may result in substantial
monetary liquidated damages, as well as contract termination. Many of the
Company's lottery contracts also permit the lottery authority to terminate the
contract at will and do not specify the compensation, if any, to which the
Company would be entitled should such termination occur. Certain of the
Company's United States lottery contracts have contained provisions for up to
$700,000 a day in liquidated damages for late system start-up and provide for up
to $10,000 or more in penalties per minute for system downtime in excess of a
stipulated grace period, and certain of the Company's international customers
(most notably the United Kingdom's National Lottery) similarly reserve the right
to assess substantial monetary damages in the event of contract termination or
breach. Although such liquidated damages provisions are customary in the lottery
industry and the actual liquidated damages imposed are generally subject to
negotiation, such provisions in the Company's lottery contracts present an
ongoing potential for substantial expense. Liquidated damages are generally
deducted directly from revenues the Company has otherwise earned from the
lottery authorities and are budgeted by the Company on an annual basis. Lottery
contracts generally require the vendor (i.e., the Company) to post a performance
bond, which in some cases may be substantial, securing the vendor's performance
under such contracts.
Liquidated damages paid or incurred by the Company with respect to its contracts
equaled 0.50%, 0.23%, 0.25%, 0.21% and 0.35% of annual revenues in each of the
five fiscal years ending February 1995 through 1999, respectively.
IMPACT OF YEAR 2000
Many computer programs, including those used by the Company and its suppliers
and customers, use only two digits to identify a year and were not designed to
handle years beginning after 1999. This Year 2000 computer issue creates
potentially significant risks for the Company. If lottery, gaming or EBT systems
that the Company supplies to customers, or management information systems that
the Company uses internally, do not correctly recognize and process date
information beyond the year 1999, there could be an adverse impact on customers'
and/or the Company's operations. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below.
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GAMING OPPOSITION
While the Company believes that legalized gaming, especially lottery, generally
enjoys widespread public support, gaming opponents have continued to persist in
efforts to curtail the expansion of legalized gaming. Recently, for example, the
National Gaming Impact Study Commission, a commission created by the U.S.
Congress in 1997 to study the economic and social effects of legalized gambling,
narrowly voted to endorse a non-binding recommendation for a moratorium on the
spread of casinos, lotteries and slot machines in the United States.
STRENGTHENING OF COMPETITION
The online lottery industry is increasingly competitive in the United States and
internationally, which increased competition could adversely affect the
Company's ability to win renewals of contracts from its existing customers and
to win contract awards from other lottery authorities. In addition, such
increased competition may affect the profitability of contracts which the
Company does obtain. Through fiscal 2001 (which ends in February 2001), a number
of the Company's larger contracts are expected to come up for renewal, including
its contracts with the lottery authorities of New York, Ohio, Brazil (National
Lottery) and the United Kingdom. See "Competition" below.
FOREIGN CURRENCY EXCHANGE RATES
Foreign currency exchange exposure arises from currency transactions and
anticipated transactions denominated by the Company in a currency other than
U.S. dollars and from the translation by the Company of foreign currency balance
sheet accounts into U.S. dollar balance sheet accounts. The Company employs a
variety of strategies in its effort to mange its substantial foreign currency
exchange exposure. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation" below.
CERTAIN SIGNIFICANT DEVELOPMENTS SINCE THE START OF FISCAL 1999
LOTTERY CONTRACT AWARDS AND RELATED SIGNIFICANT DEVELOPMENTS
Since the start of fiscal 1999 (which ended on February 27, 1999) the Company
has received a number of service contract awards and extensions from lottery
authorities.
NEW-ONLINE CUSTOMERS. During fiscal 1999, the Company received awards to install
online lottery systems from two new online customers, and commenced online sales
under a contract
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signed in late fiscal 1998 with a third new online customer. In October 1998,
the Company announced that it had signed a product sales and services contract
to supply online lottery equipment, software and services to New South Wales
Lotteries Corporation following a competitive procurement. Under the terms of
the contract, the Company will replace the Lottery's existing system with new
central system hardware and PRO:SYS(TM) software. In addition, the Company will
replace the Lottery's existing terminal equipment with the Company's new
Altura(TM) terminal, the Company's latest generation online terminal. Also in
October 1998, the Company announced that following a competitive procurement it
had been selected to provide under a product sales and services contract a fully
integrated gaming system, consisting of online lottery equipment, software and
services, to Mifal Hapayis, the Israeli National Lottery. Online lottery sales
are scheduled to commence under the New South Wales Lotteries Corporation and
Mifal Hapayis contracts in March 2000 and August 1999, respectively. In
addition, in March 1998, online lottery sales commenced under the agreement
which it entered into in February 1998, prior to the start of fiscal 1999, with
Sport Toto Teskilat Mudurlugu (Sports Toto Organization Directorate), the
Company's second lottery customer in Turkey. Under the terms of this agreement,
the Turkish sports betting organization shares an existing lottery system
provided by the Company to Milli Piyango, the Turkish National Lottery.
In addition to contracts to provide online systems to the new customers
described above, in September 1998, the Company signed an agreement to provide
BingoVision(TM), the Company's online lottery game which combines a bingo
drawing with a television game show, and related services to five German state
lotteries: Berlin, Brandenburg, Saxony, Saxony-Anhalt and Thuringen. The Company
is currently the online vendor to two of these states, Saxony and Thuringen. The
Company will provide the technology to enable the online vendors in Berlin,
Brandenburg and Saxony-Anhalt to offer the game. This contract marks the first
implementation of a Company lottery game in a jurisdiction where the Company is
not the primary vendor.
OTHER NEW ONLINE CONTRACTS AND EXTENSIONS. Since the start of fiscal 1999, the
Company has been awarded new online service contracts by, or has received
contract extensions from, a number of its existing customers.
In March 1998, the Company announced that it had signed a new eight year
facilities management contract with the Michigan lottery authority to provide an
online lottery system and services. In February 1999, the Company entered into a
new five year contract to provide online products and services to the Arizona
lottery, including new central system hardware, PRO:SYS(TM) online gaming
software and approximately 2,500 ISYS(TM) terminals. The award has two one-year
extension options and followed a competitive procurement. In November 1998, the
Company announced that it had been selected under a three year agreement to
provide and to service the California lottery authority with instant ticket
vending machines leased from On-Point Technology Systems, Inc., a premier
supplier of automated, self-service lottery ticket vending machines. In March
1999, after the close of fiscal 1999, the Company announced it signed a new
six-year facilities management contract to provide online lottery products and
services to Loteria Electronica de Puerto Rico.
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In October 1998, the Company, reporting its sole loss in a competitive
procurement for fiscal 1999, announced that the Indiana lottery authority had
awarded a contract to provide equipment and services for a new online lottery
system to a competitor of the Company.
In addition to entering into the new facilities management contracts described
above, the Company entered into a number of significant product sale agreements
with existing customers since the start of fiscal 1999. In March 1998, the
Company announced that it had completed the first installation of its
PRO:SYS(TM) system in Asia under a product sales agreement with Singapore Pools
(Private) Limited and in February 1999, the Company announced that it had signed
another product sales agreement with this customer for the development and
installation of sports betting games. In May 1998, the Company entered into a
new contract to provide online lottery equipment, software and services under a
product sale and multi-year service agreement with South Australia Lotteries
Corporation. In July 1998, the Company announced that it had signed a product
sale and service agreement with AB Svenska Spel, a Swedish lottery authority, to
provide the latest version of its PRO:SYS(TM) software system, barcode readers
for the lottery's online retailers, GVT instant ticket validators and network
support equipment. In July 1998, the Company also announced that it had entered
into a product sales agreement to provide online lottery equipment and services
to DeLotto Stichting de Nationale Sporttotalisator of the Netherlands following
a competitive procurement. In December 1998, the Company announced that it had
signed a new contract with La Loterie Nationale de Belgique, Belgium's National
Lottery. In January 1999, the Company announced that it had entered into a new
product sales agreement with Dansk Tipstjeneste, Denmark's National Lottery
operator, to replace the lottery's existing terminals. In February 1999, the
Company signed a product sales agreement with Sports Toto Malayasia Sdn. Bhd.
for the Company's Spectra II terminals. Also in February 1999, the Company
announced that it had entered into a new product sales and services agreement to
provide online lottery products and services to the Idaho lottery authority.
In addition, since the start of fiscal 1999, the lottery authorities of
Colorado, Denmark, New York, Nebraska and Ohio have extended the terms of their
online contracts with the Company.
DREAMPORT AND NON-LOTTERY GAMING
Since the start of fiscal 1999, there have been several significant developments
respecting the Company's non-lottery gaming and entertainment business. In July
1998, the Company announced that it had entered into an agreement with la
Societe de la Loterie de la Suisse Romande - the non-profit lottery company
operating in the six French-speaking cantons in Switzerland - to provide,
through Dreamport, the Company's non-lottery gaming and entertainment
subsidiary, touch screen terminals, validation management terminals and
Dreamport's Video PRO:SYS(TM) central system for the operation of an electronic
instant lottery game. The system was sold, and the related technology licensed,
to the Loterie Romande. In January 1999, Dreamport announced that Turfway Park
LLC, a newly formed company where membership interests are owned equally by
Keeneland Association, Inc., Dreamport and a wholly-owned subsidiary of Harrah's
Entertainment, had entered into an agreement with Turfway Park Racing
Association, Inc. to purchase Turfway Park, a traditional racetrack located in
Florence, Kentucky (in the Cincinnati, Ohio market) featuring thoroughbred
racing and simulcast
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<PAGE> 13
wagering, and related assets for $37 million. This transaction closed in March
1999. In February 1999, Dreamport entered into a five-year distribution and
services agreement with Jenosys Technologies, Inc., a leading provider of
table-based and wireless electronic bingo systems, under which Dreamport will
act as the exclusive distributor of Jenosys electronic bingo products to
government agencies in the provinces of Canada. During fiscal 1999, Dreamport
also announced an agreement with Penn National Gaming, Inc. to sell the
Company's assets related to the provision of gaming technology at Charles Town
Races in West Virginia. See "Products and Services Introduced in Recent
Years---Non-Lottery Gaming Products and Services" below.
NEW PRODUCTS AND SERVICES
Since the start of fiscal 1999, the Company also has made several announcements
respecting new products and services. In March 1998, the Company announced its
agreement to provide to the Colorado lottery its new terminal product,
PlayerExpress(TM). PlayerExpress(TM), part of the Company's new generation of
terminals, which is designed specifically for large retail environments with
numerous checkout lanes, allows customers to conveniently play lottery at the
checkout area of their retail store as part of their regular shopping. The
Company subsequently entered into agreements with the Nebraska lottery authority
and (after the close of fiscal 1999) the New Zealand lottery authority to supply
Player Express(TM) terminals. In October 1998, the Company launched its
Altura(TM) family of terminals. Altura(TM), which represents the initial
offering of the Company's ninth generation of online lottery terminals, permits
applications to be written in the Java programming language enabling the rapid
development of a wide variety of games that are compatible with numerous
software environments. In July 1998, the Company acquired 80% of the equity of
Europrint Holdings Ltd. ("Europrint") and its wholly-owned subsidiaries,
including Interactive Games International ("IGI"), for a net cash purchase price
of $21.6 million, including related acquisition costs. The Company has the
option, and under certain circumstances the obligation, to acquire the remaining
20% of the equity of Europrint and IGI within five years from the date of
acquisition. The Company augmented its game design expertise with the
acquisition of Europrint, which is among the world's largest providers of media
promotional games, and IGI which has pioneered the development of interactive,
televised lottery games including BingoVision(TM) and SplitLevel(TM). In July
1998, the Company established a business unit, UWin!(TM), to provide
internet-based interactive games to its international customers in the
government-sponsored lottery market. In May 1999, after the close of fiscal
1999, the Company entered into a contract with the An Post National Lottery
Company, the Irish lottery authority, to provide, maintain and operate its
UWin!(TM) internet solution in the Republic of Ireland through March 2000.
OTHER NEWS
The Company also reported other important developments since the start of fiscal
1999. In April 1998 the Company announced that it had reached an agreement with
Camelot Group, plc, the operator of the United Kingdom's National Lottery, for
the repurchase of the equity formerly owned by the Company in Camelot for pound
sterling 51 million. The Company also reported significant developments
respecting the agreement announced in February 1998, by Transactive Corporation,
the Company's electronic benefits transfer (EBT) subsidiary, to sell to Citicorp
Services, Inc., Transactive's EBT contracts and certain related assets. In July
1998, the U.S. Department of Justice commenced a legal action to enjoin the
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<PAGE> 14
consummation of this transaction on anti-trust grounds and, in January 1999
Citicorp Services, Inc. terminated this agreement. The legal proceeding was
dismissed as a result of this termination and the Company announced that it
would continue to perform all EBT contracts through their terms. Finally, in
March 1999, after the close of fiscal 1999, the Company announced that Quick
Draw, the keno-style game operated in New York state on a lottery system
provided by the Company, would terminate effective April 1, 1999, and the game
did terminate as announced, due to the failure of the New York State legislature
to extend the legislation authorizing the game. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below.
MANAGEMENT DEVELOPMENTS
Since the beginning of fiscal 1999, there were a number of significant
managerial developments. In March 1998, Steven P. Nowick, who had joined the
Company as Senior Vice President, Corporate Development, in September 1997, was
elected Chief Operating Officer of the Company. The Company also strengthened
its management team by hiring Donald R. Sweitzer as the Company's Senior Vice
President of Government Relations in July 1998, Jean-Pierre Desbiens, as Senior
Vice President, Product Sales and Development, in August 1998, and David J.
Calabro, as the Company's Senior Vice President responsible for Company's
facilities management business, in March 1999, after the close of fiscal 1999.
The Company also announced the departure of Laurance W. Gay, formerly Senior
Vice President, Sales and Business Development, in March 1998, and Michael R.
Chambrello, formerly the Company's Executive Vice President, in July 1998.
LOTTERY INDUSTRY
Statements relating to the lottery industry contained in this Report are based
on information compiled by the Company, or derived from independent public
sources which the Company believes to be reliable. No assurance can be given,
however, regarding the accuracy of such statements. In general, there is less
publicly-available information concerning the international lottery industry
than the lottery industry in the United States.
Lotteries are operated by state and foreign governmental authorities and their
licensees in approximately 195 jurisdictions worldwide. Governments have
authorized lotteries primarily as a means of generating non-tax revenues. In the
United States, lottery revenues are frequently designated for particular
purposes, such as education, economic development, conservation, transportation
and aid to the elderly. Many states have become increasingly dependent on their
lotteries as revenues from lottery ticket sales are often a significant source
of funding for these programs.
Although there are many types of lotteries in the world, it is possible to
categorize government authorized lotteries in two principal groups: online
lotteries and off-line lotteries. An online lottery is conducted through a
computerized lottery system in which lottery terminals are connected to a
central computer system, typically by dedicated telephone lines. An online
lottery system is generally utilized for conducting games such as lotto, sports
pools, keno and numbers,
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<PAGE> 15
in which players make their own selections. Off-line lotteries feature lottery
games which are not computerized, including traditional off-line lottery games
and instant ticket games. Traditional off-line lottery games, in which players
purchase tickets which are manually processed for a future drawing, generally
are conducted only in international jurisdictions. Instant ticket games, in
which players scratch off a coating from a pre-printed ticket to determine if it
is a winning ticket, are conducted both internationally and in the United
States.
In general, online lotteries generate significantly greater revenues than both
traditional off-line lottery games and instant ticket games. In addition, there
are several other advantages to online lotteries as compared to traditional
off-line lotteries. Unlike traditional off-line lottery games, wagers can be
accepted and processed by an online lottery system until minutes before a
drawing, thereby significantly increasing the lottery's revenue in cases in
which a large prize has attracted substantial wagering interest. Online lottery
systems also provide greater reliability and security, allow a wider variety of
games to be offered and automate accounting and administrative procedures which
are otherwise manually performed.
Typically, approximately 50% of the gross revenues of an online lottery in the
United States is returned to the public in the form of prizes. Approximately 35%
is used by the state to support specific public programs or as a contribution to
the state's general funds. The remaining 15% is generally used to fund the
operations of the lottery, including the cost of advertising, sales commissions
to point-of-purchase retailers and service fees to vendors such as GTECH.
From 1971 through 1998, total annual lottery ticket sales in the United States
grew from approximately $147.5 million to approximately $34.1 billion, although
the Company has witnessed, over the last two years, a downward trend in sales
generated by its United States lottery customers. See "General" above.
Historically, most of the growth in ticket sales has occurred in the online
portion of the lottery business which accounted for approximately 59% of total
lottery ticket sales in 1998.
There are currently 38 jurisdictions operating online lotteries in the United
States. Implementation of lotteries in other jurisdictions, will depend upon
successful completion of legislative, regulatory and administrative processes.
Outside the United States, government operated or licensed lotteries, many of
which are off-line, have a long history. The international online lottery
industry has experienced significant growth. Since 1977, when there were no
online lotteries operating outside of the United States, 84 international
jurisdictions have implemented online lottery systems. A number of other
international jurisdictions, principally in Europe, Asia and Latin America, are
currently considering the implementation of online lotteries.
ONLINE LOTTERY CONTRACTS
The Company generally conducts business under one of three types of contractual
arrangements: Facilities Management Contracts, Operating Contracts and Product
Sales Contracts. Under a typical Facilities Management Contract, the Company
installs, operates and maintains a lottery
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<PAGE> 16
system, while retaining ownership of the lottery system. These contracts
generally provide for service fees directly from the lottery authority to the
Company based on a percentage of online lottery ticket sales. Under an Operating
Contract, the Company generally provides the same services as under a Facilities
Management Contract, but sells the lottery system and licenses the computer
software to the lottery authority. Ongoing service fees to the Company under an
Operating Contract are usually based on a percentage of lottery ticket sales.
Under a Product Sales Contract, the Company sells, delivers and installs a
turnkey lottery system or lottery equipment and licenses the computer software
for a fixed price, and the lottery authority subsequently operates and maintains
the lottery system.
The collection of lottery monies, the selection of winners, the financial
responsibility for the payment of prizes and the qualification of retail sales
agents are usually the sole responsibility of the lottery authority in each
jurisdiction in which the Company operates a lottery. The United Kingdom's
National Lottery provides an important exception to the general rule. Camelot, a
consortium of companies, is licensed by the United Kingdom government to operate
all aspects of the National Lottery with the exception of proceeds allocation.
FACILITIES MANAGEMENT CONTRACTS
The Company's Facilities Management Contracts generally require the Company to
install, operate and maintain an online lottery system for an initial term,
which is typically at least five years, and usually contain options permitting
the lottery authority to extend the contract under the same terms and conditions
for one or more additional periods, generally ranging from one to five years. In
addition, the Company's customers occasionally renegotiate extensions on
different terms and conditions. See "Certain Factors That May Affect Future
Performance- Liquidated Damages Under Contracts" above.
The Company's revenues under Facilities Management Contracts are generally based
upon a percentage of gross online lottery ticket sales. The level of lottery
ticket sales within a given jurisdiction is determined by many factors,
including population density, the types of games played and the games' design,
the number of terminals, the size and frequency of prizes, the nature of the
lottery's marketing efforts and the length of time the online lottery system has
been in operation.
Under its Facilities Management Contracts, the Company retains title to the
lottery system and typically provides its customers with the services necessary
to operate and manage the lottery system. The Company installs and commences
operations of a lottery system after being awarded a Facilities Management
Contract and, following the start-up of the lottery system, is responsible for
all aspects of the system's operations. The Company typically operates lottery
systems in each jurisdiction on a stand-alone basis through the installation of
two or more dedicated central computer systems, although in a few instances
several jurisdictions share the same central system. In addition, the Company
employs a dedicated work force in each jurisdiction, consisting of a site
director, marketing personnel, computer and hotline operators, communications
specialists and customer service representatives who service and maintain the
system.
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<PAGE> 17
Under certain of the Company's Facilities Management Contracts the lottery
authority has the right to purchase the Company's lottery system during the
contract term at a predetermined price, which is calculated so that it exceeds
the Company's net book value of the system at the time the right is exercisable.
The Company's role with respect to the continued operation of a lottery system
in the event of the exercise of such a purchase option generally is not
specified in such contracts and thus would be subject to negotiation. Under many
of the Company's Facilities Management Contracts, the lottery authority also has
the option to require the Company to install additional terminals and/or add new
lottery games. Such installations may require significant expenditures by the
Company. However, since the Company's revenues under such contracts generally
depend on the level of lottery ticket sales, such expenditures have generally
been recovered through the revenues generated by the additional equipment or
games and revenues from existing equipment.
Under a number of the Company's lottery contracts (including the Georgia, New
York, Texas and United Kingdom contracts), in addition to providing, operating
and maintaining the online lottery system in these jurisdictions, GTECH is
providing a wide range of support services and equipment for the lottery's
instant ticket games, such as marketing, distribution and automation of
validation, inventory and accounting systems, for which it receives fees based
upon a percentage of the revenues of the instant ticket games.
Revenues from Facilities Management Contracts are accounted for as service
revenues in the Company's Income Statements.
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<PAGE> 18
The table below sets forth the lottery authorities with which the Company had
Facilities Management Contracts as of April 15, 1999. Unless otherwise
indicated, the Company is the sole supplier of central computers and terminals
and services to each of the lottery authorities listed below. The table also
sets forth information regarding the term of each contract and, as of March 31,
1999, the approximate number of terminals installed in each jurisdiction.
FACILITIES MANAGEMENT CONTRACTS
<TABLE>
<CAPTION>
CURRENT
APPROXIMATE NO. OF LOTTERY DATE OF COMMENCEMENT OF DATE OF EXPIRATION OF EXTENSION
JURISDICTION TERMINALS INSTALLED(1) CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS*
<S> <C> <C> <C> <C>
UNITED STATES:
Arizona 2,466 1/99 9/99 (2) --
California (3) 13,850 10/93 10/03 --
Colorado 2,561 3/95 10/04 --
D.C. (4) 571 5/95 11/99 --
Georgia 6,614 4/93 9/03 --
Illinois 8,480 2/89 10/99 1 one-year
Indiana (5) 3,994 3/90 8/99 --
Iowa 1,512 4/91 6/01 1 two-year
Kansas 1,806 7/97 6/02 1 three-year
1 two-year
Kentucky 2,898 4/97 6/03 5 one-year
Louisiana 2,768 6/97 6/05 5 one- year
Maine (6) 995 7/90 6/00 --
Michigan 6,513 1/98 1/06 3 one-year
Missouri 2,623 7/96 7/01 1 two-year
Nebraska 870 4/94 6/04 --
New Hampshire (6) 988 7/90 6/00 --
New Jersey 5,980 6/96 6/01 5 years
New Mexico 1,198 6/96 11/03 5 one-year
New York 13,701 2/93 2/00 2 one-year
Ohio 6,662 10/93 6/01 --
Oregon 2,732 12/96 10/04 3 one-year
Rhode Island 949 1/97 7/02 5 one-year
Texas 15,347 3/92 8/02 --
Vermont (6) 474 7/90 6/00 --
</TABLE>
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<PAGE> 19
<TABLE>
<CAPTION>
CURRENT
APPROXIMATE NO. OF LOTTERY DATE OF COMMENCEMENT OF DATE OF EXPIRATION OF EXTENSION
JURISDICTION TERMINALS INSTALLED(1) CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS*
- ------------ ---------------------- ---------------- --------------------- --------
<S> <C> <C> <C> <C>
Washington State 2,449 9/95 6/01 3 years
West Virginia 1,386 2/92 6/00 2 one-year
Wisconsin 3,092 6/97 6/02 2 one-year
INTERNATIONAL:
Barbados
- -T.L. Lotteries 185 10/94 1/00 2 one-year
Brazil (7)
- -National
Lottery (7) 12,533 1/97 9/01 (7)
- -Minas Gerais 912 10/94 10/00 (7)
- -Parana 776 8/94 8/99 (7)
- -Santa Caterina 170 5/95 5/00 (7)
- -FGFS Sports Club 92 11/94 11/99 (7)
Chile
- -Polla Chilena de 1,699 12/93 8/99 --
Beneficencia S.A.
Czech Republic (8)
- -SAZKA 2,980 10/92 (8) (8)
Ireland (9)
- -An Post Nat'l 2,059 3/93 3/00 (9)
Lottery Company
Lithuania (10)
- -OLIFEJA 796 12/94 12/09 (10)
Poland (11)
- -Totalizator 5,191 3/91 10/01 (11)
Sportowy
Puerto Rico
- -Loteria 2,072 3/99 3/05 1 three-year
Electronica de
Puerto Rico
Slovakia
- -TIPOS, a.s. (12) 1,082 3/96 (12) --
</TABLE>
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<PAGE> 20
<TABLE>
<CAPTION>
CURRENT
APPROXIMATE NO. OF LOTTERY DATE OF COMMENCEMENT OF DATE OF EXPIRATION OF EXTENSION
JURISDICTION TERMINALS INSTALLED(1) CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS*
<S> <C> <C> <C> <C>
Spain
- -L'Entitat Autonoma 2,502 10/97 10/03 1 six-month
de Jocs I Apostes de
la Generalitat de
Catalunya
Trinidad & Tobago
- -National Lotteries 628 12/93 7/99 5 one-year
Control Board
United Kingdom
- -The National 9,739 7/94 9/01 --
Lottery (13)
</TABLE>
- --------------------
* Reflects extensions available to the lottery authority under the same terms as
the current contract. Lottery authorities occasionally negotiate extensions on
different terms and conditions.
(1) Total does not include instant ticket validation terminals.
(2) The Company has entered into a new five-year contract (with two
one-year extension options) with the Arizona lottery authority that
commences in September 1999.
(3) In addition, the Company is a subcontractor to High Integrity Systems,
Inc. ("HISI"), which has a contract with the California lottery
authority to install and maintain 6,309 terminals using HISI's
proprietary dial-up technology for online and instant ticket sales and
validation.
(4) Operated by Lottery Technology Enterprises, a joint venture in which
the Company has a 40% interest.
(5) The Indiana lottery authority has entered into a contract with the
competitor of the Company commencing in August 1999.
(6) The Maine, New Hampshire and Vermont lottery authorities share a
central computer system.
(7) Operated by GTECH Brasil Holdings, S.A. (formerly RACIMEC Informatica
Basileira, S.A.), a Brazilian company in which the Company owns all
voting stock. Each of the Brazilian agreements may be extended, at the
option of the respective lottery authority, for one or more extension
terms not to exceed, in aggregate, the duration of the base term.
(8) The contract with the Czech Republic lottery authority runs until seven
years after the installation of the 2,000th terminal or three years
after the installation of any terminals after the 2,000th terminal,
whichever is later.
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<PAGE> 21
(9) The contracts with the Ireland lottery authority may either be extended
for any period mutually acceptable to the Company and the lottery
authority or continue indefinitely until termination by the lottery
authority.
(10) The Company's contract with the Lithuania lottery authority
automatically extends from year-to-year unless either party gives
timely notice of non-renewal.
(11) The term of the Company's contract with the Poland lottery authority
automatically renews for an indefinite number of one-year extension
periods thereafter unless either party gives timely notice of
non-renewal.
(12) The Company's contract with TIPOS expires seven years after the
installation of the 1,000th terminal on the system.
(13) Operated by Camelot Group plc, a consortium of which the Company was,
until April 1998, a member, on a facilities management basis. The
Company will continue to sell equipment to Camelot Group plc for use by
The National Lottery.
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<PAGE> 22
OPERATING CONTRACTS
Under an Operating Contract, the Company generally operates and maintains the
lottery system and provides on-going software support services in the same
manner as under a Facilities Management Contract, except that the Company sells
the lottery system and licenses the software to the lottery authority at the
beginning of the contract rather than retaining ownership of the system. Ongoing
service fees to the Company under its Operating Contracts are usually based on a
percentage of lottery ticket sales. The initial contract term, extensions,
rebidding processes and termination rights for Operating Contracts are generally
substantially the same as those under Facilities Management Contracts.
Revenues from sales of lottery systems and equipment under Operating Contracts
are accounted for as product sales revenue, and services provided under such
contracts are accounted for as service revenues in the Company's Income
Statements.
The table below sets forth the lottery authorities with which the Company had
Operating Contracts as of April 15, 1999. Unless otherwise indicated, the
Company is the sole supplier of lottery equipment and services to each of the
lottery authorities listed below. The table also sets forth information
regarding the term of each contract and, as of March 31, 1999, the approximate
number of terminals installed in each jurisdiction.
OPERATING CONTRACTS
<TABLE>
<CAPTION>
APPROXIMATE NO. OF DATE OF EXPIRATION OF CURRENT
LOTTERY TERMINALS DATE OF COMMENCEMENT OF CURRENT CONTRACT TERM EXTENSION
JURISDICTION INSTALLED(1) CURRENT CONTRACT OPTIONS*
<S> <C> <C> <C> <C>
UNITED STATES:
Idaho 659 2/99 2/03 4 one-year
INTERNATIONAL:
Argentina
- -Loteria National Sociedad 801 11/93 4/01 1 two-year
del Estado
Turkey
- -Turkish National Lottery 3,591 2/96 11/01 (2)
</TABLE>
* Reflects extensions available to the lottery authority under the same
terms as the current contract. Lottery authorities occasionally negotiate
extensions on different terms and conditions.
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<PAGE> 23
(1) Total does not include instant ticket validation terminals.
(2) The term of the contract with the Turkey lottery authority shall
automatically renew for successive one-year extension terms unless
either party gives timely notice of non-renewal. In addition, the
Turkey lottery authority has the option to assume responsibility for
the provision of certain lottery services at any time after the second
anniversary of system start-up.
PRODUCT SALES CONTRACTS
The Company sells, delivers and installs online lottery systems for a fixed
price under Product Sales Contracts. The Company also sells additional terminals
and central computers to expand existing systems and/or replace existing
equipment under Product Sales Contracts.
In connection with its Product Sales Contracts, the Company generally designs
the lottery system, trains the lottery authority's personnel and provides other
services required to make and keep the system operational. The Company also
generally licenses its software to its customers for a fixed additional fee.
Historically, product sales revenues have been derived from the installation of
new online lottery systems and the sales of lottery terminals and equipment in
connection with the expansion of existing lottery systems. The size and timing
of these transactions at times has resulted in variability in product sales
revenues from quarter to quarter. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The table below lists certain of the Company's direct and indirect customers
that have purchased or as to which they have agreed to purchase lottery
terminals and other online lottery equipment from the Company since March 1,
1991. The Company has found the size and timing of product sales often difficult
to predict and has experienced variability in product sales revenues from period
to period.
Argentina --National Lottery of Argentina
Argentina --Provincial Lottery of Buenos Aires
Australia --Lotteries Commission of New South Wales
Australia --Lotteries Commission of South Australia
Australia --Tattersall Sweep Consultation
Australia --Lotteries Commission of West Australia
Austria --Osterreichische Lotto Toto Gesmbh
Belgium --Loterie Nationale de Belgique
Canada --Atlantic Lottery Corporation
Canada --British Columbia Lottery Corporation
Canada --Ontario Lottery Corporation
Canada --Saskatchewan Gaming Commission
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<PAGE> 24
Canada --Western Canada Lottery Corporation
Denmark --Dansk Tipstjanst
Finland --Oy Veikkaus AB
Germany --Sachsiche Lotto-GmbH
Germany --Lotterie Treuhandgesellschaft Mbh Thuringen
Iceland --Islensk Getspa
Iceland --Islenskar Getraunir
Israel --Mifal Hapayis
Malaysia --Pan Malaysian Pools
Malaysia --Lotteries Corporation (Sabah) Sdn. Bhd.
Malaysia --Sports Toto Malaysia Bhd.
Massachusetts -- Massachusetts State Lottery Commission
Netherlands --Stichting de Nationale Sport Totalisator
New Zealand --New Zealand Lotteries Commission
Philippines --Philippines Charity Sweepstake Office
Singapore --Singapore Pools (Pte) Ltd.
Spain --Sistemas Tecnicos de Loterias del Estado
Sweden --AB Svenska Spel
Switzerland --Sport-Toto Gesellschaft
Switzerland --Loterie de la Suisse Romande
Turkey --Spor Toto Teskilat Mudurlugu
United Kingdom --The National Lottery
CONTRACT AWARD PROCESS
In the United States, lottery authorities generally commence the contract award
process by issuing a request for proposals inviting proposals from various
lottery vendors. The request for proposals usually indicates certain
requirements specific to the jurisdiction, such as particular games which will
be required, particular pricing mechanisms, the experience required of the
vendor and the amount of any performance bonds that must be furnished. After the
bids have been evaluated and a particular vendor's bid has been accepted, the
lottery authority and the vendor generally negotiate a contract in more detailed
terms. Once the contract has been finalized, the vendor begins to install the
lottery system.
After the expiration of the initial contract term and all extensions thereof, a
lottery authority in the United States generally may either negotiate further
extensions or commence a new competitive bidding process. Internationally,
lottery authorities do not typically utilize as formal a bidding process, but
rather negotiate proposals with one or more potential vendors.
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<PAGE> 25
The Company's marketing efforts for its lottery products and services frequently
involve top management in addition to the Company's professional marketing
staff. These efforts consist primarily of marketing presentations to the lottery
authorities of jurisdictions in which requests for proposals have been issued.
Marketing of the Company's lottery products and services to lottery authorities
outside of the United States is often performed in conjunction with licensees
and consultants with whom the Company contracts for representation in specific
market areas. Although generally neither a condition of their contracts with the
Company nor a condition of their contracts with lottery authorities, such
licensees and consultants often agree with the Company to provide on-site
services after installation of the online lottery system.
Pursuant to a 1990 Distributorship and License Agreement (the "D&L Agreement")
between the Company and CGK Computer Gesellschaft Konstanz GmbH ("CGK"), a
subsidiary of Siemens AG, the Company granted to CGK the exclusive right to
distribute, service, sell and market the Company's online lottery systems and
components in selected European jurisdictions under separately negotiated
Memoranda of Understanding ("MOUs"). Although the D&L Agreement terminated
during fiscal 1996, CGK and the Company continue to fulfill their respective
obligations under certain MOUs and related agreements entered into under the D&L
Agreement.
From time to time, there are challenges or other proceedings relating to the
awarding of lottery contracts.
PRODUCTS AND SERVICES
The Company's lottery systems consist of lottery terminals, central computer
systems, systems and communications software and game software, and
communications equipment which connects the terminals and the central computer
systems. The systems' terminals are typically located in high-traffic retail
outlets, such as newsstands, convenience stores, food stores, tobacco shops and
liquor stores.
The Company's online lottery systems control and perform the following
functions: entry of wagers using a terminal's keyboard or a fully-integrated
optical mark recognition reader; automatic editing of each wager for correctness
by the originating terminal; encryption and transmission of the wager and
related data to the central computer installation(s); processing of each wager
by the central computers, including entry of the wager into redundant data
bases; transmission of authorization for the originating terminal to accept the
wager and print a receipt or ticket, winning ticket identification and
validation; and administrative functions, including determination of prize pools
and generation of management information reports.
The Company's systems are capable of handling in excess of 100,000 transactions
per minute, which rate is in excess of the requirements of any of its customers.
The basic functions listed above, as well as various optional or custom-designed
functions, are performed under internal controls designed for maximum security
and minimum processing time. Security is provided
24
<PAGE> 26
through an integrated system of techniques, procedures and controls supported by
hardware, software and human resources. Individual systems generally have
redundant capacity at multiple levels and sophisticated software to ensure
continuous service to the customer.
TERMINALS
The Company designs, manufactures and provides the point-of-sale terminals used
in its online lottery systems. Currently, approximately 153,000 of its model
GT-101 FX terminals, introduced in 1983, its model GT-101TF terminals,
introduced in 1985, and its model GT-401/OI terminals, introduced in 1989, are
installed in numerous jurisdictions. All of these terminals use advanced
microprocessors and software programs to provide the increased transaction
processing performance levels and communications interfaces required in the
online lottery industry. These terminals are designed to allow customization of
application functions to each lottery's specifications, including optical mark
recognition, ticket graphics printing, user and customer display options and
other application functions. The terminals' hardware facilitates independent
development of applications programs by the Company. The Company's Spectra(TM)
terminal series (GT-401 and 402 O/M), first introduced in 1989, is distinguished
by its modular internal and external architecture. The modular design provides
an enhanced level of flexibility to lottery jurisdictions by permitting them to
choose among a variety of options and terminal subsystem configurations,
including readers, printers, keyboards, displays, and communications interfaces.
As of February 27, 1999, a total of approximately 62,000 Spectra(TM) terminals
were installed in numerous international jurisdictions.
The Company's ISYS terminal series, (GT-502), introduced during fiscal 1996, is
an integral, single-unit terminal which features modular subassemblies, high
performance ticket printer and playslip reader subassemblies, an easy-to-use
design, and a host of new features and technologies. As of February 27, 1999,
approximately 53,000 ISYS terminals were installed in numerous lottery
jurisdictions.
During fiscal 1999, the Company announced its agreement to provide to the
Colorado lottery its new terminal, Player's Express(TM), which was designed
specifically for large retail environments with numerous checkout lanes. The
Company subsequently entered into agreements with the Nebraska lottery authority
and (after the close of fiscal 1999) the New Zealand lottery authority to supply
PlayerExpress(TM) terminals. As of February 27, 1999, approximately 90
PlayerExpress(TM) terminals were installed. In addition, during fiscal 1999, the
Company also announced the launch of its Altura(TM) family of terminals. The
Company expects the first Altura(TM) terminals to be installed during fiscal
2000. See "Products and Services Introduced in Recent Years" below.
SOFTWARE
The Company designs and provides all applications software for its lottery
systems. The Company's highly sophisticated and specialized software is designed
to provide the following system characteristics: rapid processing, storage and
retrieval of transaction data in high volumes and in multiple applications; the
ability to down-line load (i.e., to reprogram the lottery terminals from the
central computer installation via the communications system to add new games); a
high degree of security and redundancy to guard against unauthorized access and
tampering and to
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ensure continued operations without data loss; and a comprehensive management
information and control system. In addition to featuring the aforementioned
characteristics, the Company's latest generation software system, PRO:SYS(TM),
is based on client server architecture and provides open interfaces which allow
for the integration and support of third-party and commercial modules and
applications. See "Products and Services Introduced in Recent Years" below.
CENTRAL COMPUTERS
Each of the Company's lottery systems contains one or more central computer
sites to which the lottery terminals are connected. The Company's central
computer systems are manufactured by Compaq Computer Corporation (formerly
Digital Equipment Corporation), and Stratus Computer, Inc. The specifications
for the configuration of the Company's central computer installations are
designed to provide continuous availability, a high throughput rate and maximum
security. Central computer installations typically include: redundant mainframe
computers, various peripheral devices (such as magnetic storage devices,
management terminals and hard copy printers), and various safety, environmental
control and security subsystems (including a back-up power supply), which are
all manufactured by third parties, and a microcomputer-based communication and
switching subsystem. In addition, the Company supplies management information
systems that provide lottery personnel access to important financial and
operational data without compromising the security of the online system.
COMMUNICATIONS
The Company's lottery terminals are typically connected to the central computer
installations by dedicated telephone lines owned or leased by the jurisdiction
in which the system is located. Due to the varying nature of telecommunications
services available in lottery jurisdictions, the Company has developed the
capability to interface with a wide range of communications technologies,
including UHF Radio capability (narrow-band and Spread Spectrum), GSAT/VSAT,
Microwave, Integrated Services Digital Networking (ISDN), Data Over Voice (DOV),
fiber optic and cellular telephone. In Argentina, Barbados, Brazil, the Spanish
province of Catalunya, Chile, The Czech Republic (to which the Company is
supplying the DL-201F, the Company's latest radio technology), Estonia,
Lithuania, Mexico, New Mexico, Poland, Puerto Rico, Slovakia, Trinidad and
Tobago and Venezuela, the Company utilizes UHF Radio Data-Link Communications
system in lieu of telephone lines to provide a data communications pathway
between the lottery terminals and the central computers. The Company also uses
this technology in the United States to supplement the existing telephone
networks in Ohio, Oregon, Rhode Island, Texas, Washington and the District of
Columbia. The Company's GSAT satellite technology makes it feasible to serve
large market areas where telephone lines are either unavailable, unreliable or
too costly. GSAT currently operates in the United States in remote areas of
Colorado, New Mexico, Texas and Washington, and internationally in Argentina,
the Czech Republic, Brazil, Chile, Poland and the United Kingdom. The Company
has also implemented UHF radio in conjunction with GSAT to further enhance
reliability and cost savings in remote areas.
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GAMES
An important factor in maintaining and increasing public interest in lottery
games is innovation in game design. The Company's GameScape(TM) group, in
conjunction with lottery authorities, utilizes principles of demographics,
sociology, psychology, mathematics and computer technology to design customized
lottery games which are intended to appeal to the populations served by its
lottery systems. The principal characteristics of game design include: frequency
of drawing, size of pool, cost per play and setting of appropriate odds. The
Company believes that its expertise in game design has enhanced the marketing of
its lottery systems and has contributed to increases in the revenues of the
Company's customers.
The Company's GameScape(TM) group currently has a substantial number of
variations of lottery games in its software library and several promising new
games under development. The Company believes that this game library and the
"know how" and experience accumulated by its professionals since the Company's
inception make it possible for the Company to meet the requirements of its
customers for specifically tailored games on a timely and comprehensive basis.
During fiscal 1999, the Company augmented its game design expertise by acquiring
Europrint Holdings Limited (among the world's largest providers of media
promotional games) and its wholly-owned subsidiaries including Interactive Games
international, Inc. (which has pioneered the development of interactive,
televised lottery games including BingoVision(TM) and SplitLevel(TM)). See
"Certain Significant Developments Since the Start of Fiscal 1999" above.
MARKETING
In United States jurisdictions in which the Company has been awarded a lottery
contract, the Company is frequently asked to assist the lottery authority in the
marketing of lottery games to the public. Such assistance generally includes
advice with respect to game design, and promotion and development and
distribution of terminals and advertising programs. As part of such assistance,
the Company developed "GMark," a computerized marketing analysis system used to
determine favorable locations for new lottery terminals. The lottery authorities
of California, Florida, Georgia, Illinois, Missouri, New Jersey, New York, Ohio,
Rhode Island, Texas, Washington and Wisconsin currently utilize GMark systems,
and many customers contact the Market Research Group at GameScape(TM) from time
to time to obtain GMark services.
WARRANTY
Because the Company retains title to the system under a Facilities Management
Contract, no warranty is provided on the Company's products supplied under such
contracts. The Company does repair or replace such products as necessary to
fulfill its obligations under such contract. There is no standard warranty on
products manufactured by the Company. A typical warranty provides that the
Company will repair or replace defective products for a period of time (usually
one year) from the date a product is delivered and tested. Product warranty
expenses for the
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fiscal years 1999, 1998 and 1997 were not material. The Company typically does
not provide a warranty on products it sells that are manufactured by third
parties, but attempts to pass the manufacturer's warranty, if any, on to the
customer. With respect to computer software, the Company typically modifies its
software as necessary so that the software conforms to the specifications of the
contract with the customer.
PRODUCTS AND SERVICES INTRODUCED IN RECENT YEARS
ONLINE LOTTERY
In recent years, lottery authorities have recognized that by offering new games
or products, the lotteries are often able to generate significant additional
revenues. An important part of the Company's strategy is to develop new products
and services for its customers in order to increase their lottery revenues. The
Company's principal online lottery products and services introduced in recent
years are keno, instant ticket support services and televised lottery games,
such as BingoVision(TM). In addition, the Company has recently launched its
Altura(TM) series terminals, Players Express(TM) terminal and PRO:SYS(TM)
software system to enhance the functionality and appeal of its existing software
and terminal lines.
KENO. While new online jurisdictions offer growth by providing access to new
players, more mature markets, such as the United States, rely principally upon
the introduction of new games to provide growth. One such game introduced by the
Company is keno. In keno, players typically choose up to 10 numbers from a field
of 80 and attempt to match their numbers against any 20 numbers which are
randomly selected by a central computer system. Alternatively, the player may
choose up to 10 numbers and wager that none of such numbers will match the 20
numbers randomly selected. This game combines the multiple prize payouts of a
lotto-type game with the immediacy of an instant scratch-off lottery game. It is
also unique in its play-style and distribution, which decreases the risk that
the game will cannibalize existing online lottery revenues. Keno is more
interactive than typical online lottery games and is designed to be played in
the company of others. While most lotto and numbers games are found in
convenience stores and supermarkets, places visited frequently and often
individually, keno outlets are often located in restaurants, taverns and bowling
alleys and other social settings which tend to be visited by groups of people.
From the Company's introduction in April 1990 of the first online keno game for
the Lotteries Commission of South Australia through the end of fiscal 1999, the
Company had assisted lottery authorities in Belgium, Brazil (Parana, Minas
Gerais, Santa Caterina and Goias), California, The Czech Republic, Georgia,
Kansas, Lithuania, Massachusetts, New York, Oregon, Rhode Island, Catalunya
(Spain), the Slovak Republic, Switzerland (La Societe de la Loterie de la Suisse
Romande), Trinidad and Tobago, West Virginia and Venezuela (Loteria de Caracas)
in implementing online keno games.
Keno illustrates the impact that new games can have on lottery revenues. Since
the United States introduction of keno in 1991, United States keno revenues have
grown significantly, exceeding $1.8 billion and accounting for more than 9% of
total United States online lottery revenues in
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1998. The popularity of keno has led the Company to explore the development of
new games based upon keno. Most notably, the Company developed in recent years
Keno Plus(TM), a new product that combines expanded keno game characteristics
with new hardware and enhanced product support.
Keno has been the subject of legal challenges in recent years. Most notably, in
June 1996, the California Supreme Court in Western Telecon, Inc. et al v.
California State Lottery unexpectedly reversed trial and appellate court
decisions and found the California keno game to be a banked game rather than a
lottery because it provides for a fixed prize that is not dependent upon the
size of the prize pool. Accordingly, the Court concluded that the keno game was
not authorized by the California lottery law, and the California State Lottery
suspended operation of the keno game in June 1996. In September 1996, the
Company launched a parimutuel monitor game designed by the Company and the
California State Lottery as a replacement for the suspended game. Although the
new game, like keno, features frequent drawings, its payouts are based upon a
prize pool determined by sales rather than by predetermined or fixed amounts.
Keno was also the subject of an unsuccessful legal challenge in New York which
began in August 1995. There can be no assurances that legal challenges to keno
will not be brought in the future in these or other jurisdictions, nor can there
be any assurances respecting the results of such legal challenges, if any, upon
the operations of keno in jurisdictions serviced by the Company.
In March 1999, after the close of fiscal 1999, the Company announced that Quick
Draw, the keno-style lottery game operated in New York State provided by the
Company, would terminate effective April 1, 1999, and the game did terminate as
announced, due to the failure by the New York State legislature to extend the
legislation authorizing the game. See Item 7, "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" below.
INSTANT TICKET SUPPORT SERVICES. The Company provides certain products, systems
and services to the instant ticket lottery industry. The Company's online
support systems for the instant ticket lottery business provide comprehensive
functionality, including: instant ticket validation; retailer accounting;
inventory control and tracking; ticket stock distribution; electronic funds
transfer; finance and sales tracking reports; and marketing support.
In order to automate and increase the security of instant ticket lotteries, the
Company developed the GTECH Validation Terminal ("GVT"), a point-of-sale device
that facilitates instant ticket validation and provides access to the Company's
online instant ticket support systems for instant ticket agents who are not part
of a lottery's online lottery system. The Company also offers add-on validation
terminals which attach to its online lottery terminals and provide the same
functionality as the GVT, while using the existing communications network.
The Company is providing marketing, distribution, online validation, inventory
control and accounting support services and equipment (but not the printing of
the instant tickets) for the Texas lottery's instant ticket games. In addition,
the Company currently provides instant ticket support services to lottery
authorities in Arizona, California, Colorado, District of Columbia, Georgia,
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts,
Michigan, Missouri, New Hampshire, New Jersey, New Mexico, New York, Ohio,
Oregon, Rhode Island,
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Texas, Vermont, Washington and Wisconsin. Internationally, the Company currently
supplies lottery authorities in Australia, Belgium, Brazil, Chile, Denmark,
Finland, Ireland, Netherlands, New Zealand, Spain (Catalunya), Sweden and the
United Kingdom with instant ticket support services.
TELEVISION LOTTERY GAMES. The Company in recent years has offered a product line
of televised lottery games. Players buy tickets from online lottery retailers
and mark them while following a live, televised game show which includes a draw
of numbers.
Through the use of proprietary game-tracking software, the Company is able to
display, live, how many at-home players are winners or about to become winners,
with each new numbers draw. The Company has implemented BingoVision(TM), a
television lottery game featuring a bingo draw, in Estonia, Lithuania, New
Zealand, Slovakia, Belgium, and five German states; has implemented
SplitLevel(TM), a televised game featuring displayed boards of numbers with
winners determined by the number of matches from these boards in Estonia; and is
actively marketing these and other games to other lottery authorities.
THE PRO:SYS(TM) SOFTWARE SYSTEM. PRO:SYS(TM) is the Company's latest software
system. Employing a user friendly interface, lotteries can use PRO:SYS(TM) to
manage all aspects of their gaming environment, including online, instant ticket
sales and accounting and video games. Features such as promotions management and
information analysis allow lottery authorities to tailor the system to their
individual needs. PRO:SYS(TM) was first installed in September 1994 for Societe
de la Loterie de la Suisse Romande, Switzerland. Since that time, the Company
has installed PRO:SYS(TM) in systems used by the lottery authorities of Arizona,
Washington, D.C.; Colorado; Idaho; Ontario, Canada; Sachsische Lotto-GmbH in
Leipzig, Germany; Washington State; Missouri; Denmark; New Mexico;
Massachusetts; New Jersey; Thuringen, Germany; Kansas; Kentucky; Ohio; Oregon;
Rhode Island; Wisconsin; New Zealand; Belgium; Finland; Sweden; and Switzerland
and is in the process of installing PRO:SYS(TM) in two additional jurisdictions.
THE ISYS(TM) TERMINAL SERIES. During fiscal 1996, the Company introduced its
ISYS(TM) terminal series. ISYS(TM) is an integral, single-unit terminal which
features modular subassemblies, high performance ticket printer and playslip
reader subassemblies, an easy-to-use design, and a host of new features and
technologies. The Company believes that ISYS(TM) improves upon previous terminal
designs by featuring simplified wager entry via intuitive keyboard and screen
formats, improved system status monitoring and the latest instant ticket
validator technology. The Company has installed ISYS(TM) in systems used by
lottery authorities in Brazil, Massachusetts, Missouri, New Jersey, New Mexico,
Turkey, Washington State, District of Columbia, Wisconsin and W. Australia,
Kansas, and Rhode Island. See "Products and Services--Terminals" above.
THE PLAYER EXPRESS(TM) TERMINAL. During fiscal 1999, the Company announced the
introduction of its new terminal, the Player Express(TM). Player Express(TM),
which had its inaugural installation under the Company's contract with the
Colorado lottery authority, was designed as part of the Company's attempt to
provide a total solution for selling lottery tickets in large retail
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environments with numerous checkout lanes. Player Express(TM) allows consumers
to conveniently play lottery at the checkout area of retail stores as part of
their regular shopping.
THE ALTURA(TM) TERMINAL. During fiscal 1999, the Company announced the launch of
its Altura(TM) family of terminals. Altura(TM), which represents the initial
offering of the Company's ninth generation of online lottery terminals, permits
applications to be written in the Java programming language enabling the rapid
development of a wide variety of games that are compatible with numerous
software environments.
VIDEOSITE.(TM) During fiscal 1998, the Company acquired VideoSite, Inc., a
leading provider of multimedia broadcasting software. VideoSite is in the
process of developing lottery and retail advertising and promotional products
which will use its broadcasting software to complement the Company's
video-based gaming software products.
NON-LOTTERY GAMING PRODUCTS AND SERVICES
In September 1995, the Company incorporated Dreamport, Inc. to pursue gaming
opportunities other than online lottery including video lottery and
venue-based gaming.
Dreamport provides a comprehensive array of creative management and technology
solutions, and development and strategic services to the gaming and
entertainment markets as well as video lottery systems and other gaming
technology. Dreamport's video lottery machine gaming systems combine the
security and integrity of the Company's traditional online lottery systems with
entertainment-based video games. These video lottery machine gaming systems
include a controlling central computer system, video lottery terminal gaming
machines (which the Company acquires through an exclusive OEM manufacturing
relationship with Bally Gaming Systems, Inc.), the Company's ticket validation
terminals, and a self-diagnostic communications network. Games offered by these
video lottery machine gaming systems include poker, blackjack, keno, bingo, reel
games and electronic instant lottery games.
The Company entered the video lottery machine gaming business during fiscal 1991
and currently provides machine gaming video lottery products and services to
lottery jurisdictions in Minas Gerais, Santa Catarina and Parana, Brazil;
Switzerland; Alberta, British Columbia, Saskatchewan, Canada; Oregon; and Rhode
Island.
Through a joint venture with Full House Resorts, Inc., the Company also provides
financing, gaming development and management services to the Midway Slots and
Simulcast Emporium at Harrington Raceway in Delaware and the Huron Potawatomi
Tribe in Battle Creek, Michigan.
In March 1999, the Company, in equal partnership with Harrah's Entertainment,
Inc. and Keeneland Association, purchased the assets of Turfway Park, a
thoroughbred racecourse located in Florence, Kentucky (in the Cincinnati, Ohio
market) featuring thoroughbred racing and simulcast wagering. Included with the
purchased assets was a 24% ownership interest in, and management contract for,
Kentucky Downs, a thoroughbred racetrack and simulcast center on the Kentucky
border in close proximity to the Nashville, Tennessee market. See "Certain
Significant Developments Since the Start of Fiscal 1999 - Dreamport and
Non-Lottery Gaming" above.
PRODUCT DEVELOPMENT
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The Company devotes substantial resources in order to enhance its present
products and systems and develop new products. In fiscal 1999, the Company spent
approximately $40.2 million on research and development, as compared to $36.5
million in fiscal 1998 and $31.0 million in fiscal 1997. As of February 27,
1999, the Company (including subsidiaries) had approximately 450 full-time
employees, including certain members of senior management, engaged in research
and development.
INTELLECTUAL PROPERTY
Although the Company occasionally seeks patent protection on certain
technological developments, the Company generally has not sought to obtain
patents on its products, and it is doubtful whether patents could be obtained in
many instances. The Company believes that its technical "know-how," trade
secrets and the creative skills of its personnel are of substantially more
importance to the success of the Company than the benefit which patent
protection ordinarily would afford. The Company typically requires customers,
employees, licensees, subcontractors and joint venture partners who have access
to proprietary information concerning the Company's products to sign
non-disclosure agreements, and the Company relies on such agreements, other
security measures and trade secret law to protect such proprietary information.
PRODUCTION, ASSEMBLY AND COMPONENTS
The Company purchases most of the parts, components and subassemblies (some of
which are designed by the Company) necessary for its terminals and other
products from outside sources and assembles them into finished products. The
Company offers central systems manufactured by Compaq Computer Corporation
(formerly Digital Equipment Corporation) and Stratus Computer, Inc. for its
lottery systems.
BACKLOG
The backlog of the Company's orders for sales of its products and services
believed by the Company to be firm and the fixed fee portion of service
contracts amounted to approximately $305.5 million as of February 27, 1999, as
compared to a backlog of approximately $235 million as of February 28, 1998.
Approximately $148.1 million, or 48.5% of the backlog at February 27, 1999, is
not expected to be filled during fiscal 2000. Not included in such backlog are
(i) amounts which are payable to the Company under its lottery contracts based
on a percentage of lottery ticket sales which amounts, historically, have
represented a substantial portion of the Company's revenues and (ii) revenues
related to the Company's Transactive subsidiary, which revenues are variable in
nature.
COMPETITION
The online lottery business is highly competitive in the United States and
internationally. Both in the United States and internationally, price is an
important, but usually not the sole criterion for selection. Other significant
factors that influence the award of lottery contracts are: the ability to
optimize lottery revenues through technical capability and applications
knowledge; the quality,
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dependability and upgrade capability of the system; the marketing and gaming
experience, financial condition and reputation of the vendor; and the
satisfaction of other requirements and qualifications that the lottery authority
may impose.
During fiscal 1999, the Company's principal competitors in the online lottery
business (and the number of online lottery jurisdictions currently serviced or
under contract worldwide by such competitors) are as follows: Automated Wagering
International, Inc., a subsidiary of Powerhouse Technologies, Inc. (formerly,
Video Lotteries Technologies, Inc.) (9); Autotote Corporation (3) ("Autotote");
Scientific Games Holdings Corporation (which acquired Telecontrol, the European
lottery operation formerly owned by Autotote, during fiscal year 1998, as
described below) (8, all of which are jointly serviced with International des
Jeux); International Totalizator Systems, Inc. (6); and International des Jeux
(Lotto France) (8, all of which are jointly serviced by Telecontrol and
International des Jeux); and Essnet/Alcatel (15).
Two additional competitors for European online lottery business have emerged in
recent years. During fiscal 1996, CGK Computer Gesellschaft Konstanz mbH
("CGK"), a subsidiary of Siemens AG, and the Company agreed to terminate their
1990 Distributorship and License Agreement pursuant to which CGK had exclusive
right to distribute, service, sell and market the Company's online lottery
systems and components in specified European jurisdictions. Subsequent to August
1995, the effective date of this termination, CGK has been a direct competitor
of the Company in Europe. Further, in April 1997, Scientific Games Holdings
Corporation completed the purchase of TeleControl, as mentioned above. Under the
terms of the acquisition agreement, Scientific Games will have the right to
license and purchase Autotote's wagering terminals for use in lottery
applications.
In March 1999 (after the close of fiscal 1999), Anchor Gaming, an operator and
developer of gaming machines and casinos, and Powerhouse Technologies, Inc.,
announced the signing of a definitive merger agreement. The merger of these two
companies is likely to provide Automated Wagering International, Inc., the
Company's leading competitor in the U.S. and a subsidiary of Powerhouse
Technologies, Inc., with enhanced financial resources.
Dreamport faces competition from numerous companies that seek to finance,
develop and manage destination gaming facilities, on and off of Native American
lands, as well as from technology providers. The principal competitors providing
video lottery technology in competition with the Company include Autotote
Systems, Inc., Spielo Manufacturing, Inc., Powerhouse Technologies, Inc., Video
Lottery Technologies, Inc., WMS Gaming, Inc., International Game Technology,
Inc. and Bally Manufacturing, Inc. some of which have supplied substantially
more systems and terminals than the Company.
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PERSONNEL
As of May 1, 1999 the Company had approximately 4,800 full-time employees
worldwide. The Company's employees are not represented by any labor union. The
Company believes that its relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters and main research and development and
production facility are located in its approximately 260,000 square foot
building located on approximately 26 acres in West Greenwich, Rhode Island,
which the Company leases from West Greenwich Technology Associates Limited
Partnership. The Company is a limited partner in, and owns 50% of, this
partnership. The Company's lease term runs until August 26, 2013 with two
five-year options to extend the term and also grants the Company an option to
purchase the property.
The Company owns approximately 24 acres adjoining its headquarters in West
Greenwich, Rhode Island.
The Company also owns an approximately 23,000 square foot office building in
Coventry, Rhode Island, which it uses for electronic benefits delivery and video
lottery operations, as well as an approximately 140,000 square foot
manufacturing and central storage facility in Coventry, Rhode Island.
The Company leases two office buildings of approximately 46,000 and 43,000
square feet in Boca Raton, Florida which it uses to support its Dreamport
operations, its Latin American marketing efforts and its Transactive national
call center operations. These agreements each provide for a base lease term
which expires in 2003 and for one or more extension options thereafter.
In addition, except in New York State, where the Company owns its back-up data
center facility, and in Austin, Texas, where the Company owns an approximately
39,000 square foot facility which is used by Transactive, the Company leases, or
is supplied by the relevant state authorities with, its data center facilities
in the various jurisdictions. The Company also leases office, depot maintenance
and warehouse space in various other locations.
The Company leases facilities in Watford and London, England from which it bases
its European sales efforts. The Company also maintains an office in Brussels,
Belgium which provides a base of additional support for its European operations.
The Company's facilities are in good condition and are adequate for its present
needs.
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ITEM 3. LEGAL PROCEEDINGS
In September 1996, Jack M. Janis and Linda Janis, both individually and on
behalf of a class of persons similarly situated, filed suit against the
California State Lottery Commission, Southland Corporation and the Company in
the Supreme Court of the State of California (County of Los Angeles). This suit
alleged, in light of the June 1996 decision of the California Supreme Court,
Western Telcon, Inc. et. al. V. California State Lottery (which held that the
California State Lottery's keno game as then structured was not a lottery game
and therefore was not authorized by California lottery law), that the defendants
were unjustly enriched and were guilty of unfair business practices and
misleading advertising in connection with the sale of keno tickets from January
1, 1992 through suspension of the keno game in June 1996. The suit sought
restitution of all amounts realized by the defendants through the sale of keno
tickets less funds paid to public schools pursuant to relevant California law
and proceeds paid to holders of winning keno tickets, together with costs,
disbursements and prejudgment interest. In 1997, the Court granted the Company
summary judgment but granted the plaintiffs limited leave to amend their
complaint; the plaintiffs filed an amended complaint; and the Court granted the
Company's motion to strike and for summary judgment as to the amended complaint,
this time without leave to amend. Plaintiffs filed a notice of appeal, and in
November 1998, the California Court of Appeal affirmed. Plaintiffs then sought
review by the California Supreme Court, which denied review in March 1999,
effectively ending the case.
The Company monitors, and occasionally affirmatively becomes involved in,
litigation involving Indian gaming in states where such litigation may, directly
or indirectly, concern or call into question the legal rights and operations of
state lotteries to which the Company provides contract services. The purpose of
this effort is to protect state lottery interests, and thus the Company's
revenue streams, from service contracts. As previously publicly reported, one
such piece of litigation is Rumsey Indian Rancheria v. Wilson, currently pending
in the Ninth Circuit Court of Appeals on appeal from the U.S. District Court for
the Eastern District of California, which involves a suit by several California
Indian tribes against the State and Governor of California under the federal
Indian Gaming Regulatory Act ("IGRA"). The Indian Tribes claimed in the District
Court that certain elements of the California State Lottery (which is a customer
of the Company) ("CSL") and the equipment on which it is run involve the
operation of slot machines and, therefore, under IGRA, the tribes also must be
permitted to operate slot machines. The State of California argued at times that
the CSL does not involve the operation of slot machines; however, the State at
times appeared to be taking the position that, if and to the extent the CSL does
involve the operation of slot machines, it must be terminated because the CSL is
not exempt from the California law prohibiting the operation of slot machines.
The Company filed amicus curiae briefs in the District Court arguing that the
CSL does not involve the operation of slot machines and that even if it does,
the CSL is exempt from the State law prohibition on slot machines. In September
1998, the Court entered summary judgment for the defendants. The Indian Tribes
have since appealed the District Court's decision, and, as noted above, the
appeal is now pending before the Ninth Circuit Court of Appeals.
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In July 1998, the U.S. Department of Justice filed suit in the U.S. District
Court for the District of Delaware, U.S. v. Citicorp, Inc., Citicorp Services,
Inc., GTECH Holdings Corporation and Transactive Corporation, seeking to enjoin
the consummation of a transaction between Citicorp Services, Inc. and the
Company's Transactive subsidiary respecting the sale to Citicorp of
Transactive's electronic benefits transfer contracts and certain related assets
(which transaction is described in particularity in connection with the
discussion of the $99.4 million-$60.6 million after-tax -- special charge
recorded by the Company in the fourth quarter of fiscal 1998 in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Special Charge.") The Department of Justice alleged in the suit
that the proposed sale of assets would tend substantially to lessen competition
in the electronic benefits transfer market in violation of Section 7 of the
Clayton Act, as amended (15 U.S.C. Section 18), and would constitute an
unreasonable restraint of trade in violation of Section 1 of the Sherman Act (15
U.S.C. Section 1). In January 1999, the Company announced the termination of the
agreement between Citicorp and Transactive, following which the parties to the
litigation entered into a settlement and the suit was dismissed. See "Certain
Significant Developments Since the Start of Fiscal 1999", above, and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Special Charges".
In April 1999, the Company was served with a lawsuit entitled Pantaleon
Arellano, et. al. and Estelle Arellano v. The California State Lottery, et. al.
in California Superior Court (Orange County), which was filed in March, 1999. In
this action, plaintiffs are a husband and wife who claim to have purchased a
winning ticket in the California State Lottery's ("CSL's") April 8, 1998 Super
Lotto drawing. That drawing resulted in the award of a $102 million jackpot,
which was split evenly among three holders of tickets bearing the winning
numbers. Plaintiffs here claim to have purchased a ticket for that drawing with
the same winning numbers; plaintiffs and the Company have been told that CSL
computer records reveal that the ticket plaintiffs hold was purchased after the
close of sales for that drawing, and after the winning numbers were announced.
If plaintiffs had purchased a winning ticket in the relevant drawing, they would
have a claim against the CSL for one-fourth of that jackpot amount, i.e.,
approximately $25.5 million. In their complaint, they attempt to state a claim
against both the CSL (and its Commission and the State of California) and the
Company for $104 million, apparently their approximation of the full amount of
the jackpot. They also seek to have this amount trebled, alleging that the
defendants' conduct in denying plaintiffs' claim to the jackpot was racially
motivated, and they seek various other amounts, including emotional distress
damages and attorney fees. The Company believes that this complaint, and the
allegations underlying the complaint, are wholly without merit. The Company
intends to defend itself vigorously in these proceedings.
For information respecting certain other legal proceedings, refer to Item 1,
"Certain Factors Affecting Future Performance - Maintenance of Business
Relationships and Certain Legal Matters" and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," of this report,
and Note G of Notes to Consolidated Financial Statements included in this
report. The Company also is subject to certain legal proceedings and claims
which management believes, on the basis of information presently available to
it, will not materially adversely affect the Company's consolidated financial
position or results of operations.
36
<PAGE> 38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Holding's security holders during the
last quarter of fiscal 1999.
37
<PAGE> 39
ADDITIONAL INFORMATION
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
EXECUTIVE OFFICERS OF THE COMPANY
The Executive Officers of Holdings as of May 7, 1999 are:
Name Age Position
William Y. O'Connor 54 Chairman (since February 1998), Chief
Executive Officer (since July 1997),
President (since December 1994) and director
(since July 1995). Mr. O'Connor also served
as Chief Operating Officer from December
1994 until March 1998. Previously, Mr.
O'Connor was the President and Chief
Executive Officer of Ascom Timeplex, a
telecommunications company, from 1992 to
1994 and prior to that was Corporate Senior
Vice President and President of the
Broadband Communications Group of
Scientific-Atlanta, Inc. from 1987 to 1992.
Stephen A. Davidson 55 Senior Vice President since September 1996
and Vice President - Human Resources from
July 1992 to September 1996.
Steven P. Nowick 45 Chief Operating Officer since March 1998 and
Senior Vice President since July 1997.
Previously, Mr. Nowick was President,
Corporate Product Management, of Ameritech
Corporation, a telecommunications company,
from 1994 to 1997 and Practice Leader with
respect to telecommunications and related
areas of practice with Booz, Allen &
Hamilton, a consultancy, from 1992 to 1994.
Thomas J. Sauser 55 Senior Vice President and Chief Financial
Officer since February 1996. Mr. Sauser has
also served as Treasurer from February 1996
until July 1997 and again since November
1997. Previously, Mr. Sauser was Chief
Financial Officer and Senior Vice President
of EG&G, Inc. from 1994 through 1995. Prior
to this, Mr. Sauser was employed by IBM
Corporation where, from 1991 to 1994, he was
Assistant to the General Manager and Vice
President, Finance, Technical Operations and
HQ Services.
38
<PAGE> 40
Donald L. Stanford 48 Senior Vice President, with responsibility
for technology, for more than five years.
Donald R. Sweitzer 51 Senior Vice President - Government Relations
since July 1998. Previously, Mr. Sweitzer
was President of the Dorset Resource and
Strategy Group, a government affairs
consultancy, from November 1996 through June
1998, and President and Managing Partner of
Politics Inc., a political consulting firm,
from January 1995 through August 1996. Mr.
Sweitzer also served as Kentucky State
Director of Clinton/Gore 1996 Inc.,
President Clinton and Vice President Gore's
1996 political campaign vehicle, from August
1996 through November 1996, and as Political
Director of the Democratic National
Committee from April 1994 through January
1995.
Executive officers and other officers are elected or appointed by, and serve at
the pleasure of, the Board of Directors. Some are party to employment contracts
with the Company. The information set forth above reflects positions held with
Holdings except as expressly provided to the contrary.
For the purposes of calculating the aggregate market value of the shares of
Common Stock of Holdings held by nonaffiliates, as shown on the cover page of
this report, it has been assumed that all the outstanding shares were held by
nonaffiliates except for the shares beneficially owned by: directors of
Holdings, officers, and employees of and consultants to Holdings and GTECH.
However, this should not be deemed to constitute an admission that all such
persons or entities are, in fact, affiliates of Holdings, or that there are not
other persons who may be deemed to be affiliates of Holdings. Further
information concerning shareholdings of officers, directors and principal
shareholders of Holdings will be included in Holdings' definitive proxy
statement relating to its scheduled July 1999 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission.
39
<PAGE> 41
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The principal United States market on which Holdings' Common Stock is traded is
the New York Stock Exchange where it is traded under the symbol "GTK."
The following table sets forth on a per share basis the high and low sale prices
of Common Stock for the fiscal quarters indicated, as reported on the New York
Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
<S> <C> <C>
First Quarter (February 23-May 31, 1997) $34 1/2 $28 3/8
Second Quarter (June 1-August 30, 1997) $34 1/4 $29 3/4
Third Quarter (August 31-November 29, 1997) $35 7/16 $29 1/2
Fourth Quarter (November 30-February 28, 1998) $35 3/4 $26 3/16
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
<S> <C> <C>
First Quarter (March 1 - May 30, 1998) $40 5/8 $31
Second Quarter (May 31- August 29, 1998) $35 9/16 $27
Third Quarter (August 30 - November 28, 1998) $28 13/16 $21 3/4
Fourth Quarter (November 29 - February 27, 1999) $27 9/16 $20 5/16
</TABLE>
The closing price of the Common Stock on the New York Stock Exchange on May 3,
1999 was $26 3/8. As of May 3, 1999, there were approximately 1,050 holders of
record of the Common Stock.
During fiscal 1999, 5,688 shares of Holdings' unregistered Common Stock vested
under stock award plans. Pursuant to the terms of these plans, the shares were
issued for no cash consideration. Registration of such shares was not required
because the transaction did not constitute a "sale" under Section 2(3) of the
Securities Act of 1933 or, alternatively, the transaction was exempt pursuant to
the private offering provisions of the Act and the rules thereunder.
Holdings has never paid cash dividends on its Common Stock and has no current
plan to do so. The current policy of Holdings' Board of Directors is to reinvest
earnings in the operation and expansion of the Company's business. Further,
Holdings is a holding company and the operations of the Company are conducted
through Holdings' subsidiaries. Accordingly, the ability of Holdings to pay
dividends on its Common Stock would be dependent on the earnings and cash flow
of its subsidiaries and the availability of such cash flow to Holdings.
40
<PAGE> 42
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with Item 7--"Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Consolidated Financial Statements and the other
financial information included herein. The operating, balance sheet and per
share data in the table are derived from the consolidated financial statements
of the Company which were audited by independent auditors.
41
<PAGE> 43
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------------
February 27, February 28, February 22, February 24, February 25,
1999 1998 (a) 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Services (b) $ 887,395 $ 868,522 $ 789,534 $ 686,043 $ 547,767
Sales of products 85,528 122,045 114,738 58,047 147,340
---------- ---------- ---------- ---------- ----------
Total 972,923 990,567 904,272 744,090 695,107
Gross Profit:
Services (b) 295,608 265,038 237,872 244,139 194,097
Sales of products 25,703 48,230 47,297 13,595 41,468
---------- ---------- ---------- ---------- ----------
Total 321,311 313,268 285,169 257,734 235,565
Operating income (b) 141,720 (c) 44,104 (d) 127,091 117,983 104,481 (e)
Interest expense, net of interest income 23,326 24,578 16,388 12,107 13,065
Income from continuing operations before
extraordinary charge 89,063 27,214 77,803 66,627 52,319
Loss from operations of AmTote -- -- -- -- (6,583)
Loss on disposal of AmTote -- -- -- -- (43,444)
Extraordinary charge -- -- -- -- (1,420)
Net income 89,063 27,214 77,803 66,627 872
PER SHARE DATA:
BASIC:
From continuing operations $ 2.17 $ .65 $ 1.81 $ 1.54 $ 1.20
Net income 2.17 .65 1.81 1.54 .02 (f)
DILUTED:
From continuing operations 2.16 .64 1.80 1.53 1.20
Net income 2.16 .64 1.80 1.53 .02 (f)
OTHER DATA:
Earnings before depreciation, amortization,
interest, taxes and other noncash charges $ 376,158 $ 347,099 $ 326,054 $ 273,570 $ 221,832
Cumulative number of lottery terminals
shipped (g) 377,857 360,202 316,614 280,897 261,287
Number of lottery terminals sold 4,921 11,963 13,609 3,658 12,282
Number of lottery customers at year-end 81 78 79 74 72
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 3,755 $ 27,371 $ 36,914 $ 21,414 $ 6,086
Total assets 874,215 1,023,812 956,541 859,380 779,254
Long-term debt, less current portion 319,078 453,587 382,499 382,930 338,468
Shareholders' equity 283,906 345,210 358,133 296,725 232,931
</TABLE>
(a) 53-week year.
(b) The Company's Brazilian operations prior to January 31, 1996 were
included in the financial statements of the Company on the equity
method of accounting.
(c) Includes a special charge of $15.0 million or $.22 per basic share;
$.21 per diluted share. See Note P to the consolidated financial
statements.
(d) Includes a special charge of $99.4 million or $1.45 per basic share;
$1.44 per diluted share. See Note P to the consolidated financial
statements.
(e) Includes an $11.1 million special charge consisting of a $6.1 million
charge in connection with the reduction of the Company's workforce and
relocation of certain operating functions and $5.0 million to write off
its video gaming-related inventory.
(f) Includes the effect of operating losses of the Company's former AmTote
subsidiary - $.15 per share, loss on disposal of AmTote - $1.00 per
share, and extraordinary loss relating to early extinguishment of debt
- $.03 per share.
(g) Terminals shipped represents lottery terminals sold under product sale
contracts and lottery terminals supplied under service contracts.
F-1
<PAGE> 44
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this section and elsewhere in this report are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934. Such statements
include, without limitation, statements relating to (i) the future prospects for
and stability of the lottery industry and other businesses that the Company is
engaged in or expects to engage in, (ii) the future operating and financial
performance of the Company, (iii) the ability of the Company to retain existing
business and to obtain and retain new business, (iv) the Company's program to
address potential issues relating to the change of date to January 1, 2000
("Year 2000"), and (v) the results and effects of legal proceedings and
investigations. Such forward-looking statements reflect management's assessment
based on information currently available, but are not guarantees and are subject
to risks and uncertainties that could cause actual results to differ materially
from those contemplated in the forward-looking statements. These risks and
uncertainties include, but are not limited to, those set forth below and
elsewhere in this report and in the Company's press releases and its Forms 10-K,
10-Q, 8-K and other reports and filings with the Securities and Exchange
Commission (the "SEC").
General
The Company has derived substantially all of its revenues from the rendering of
services and the sale or supply of computerized online lottery systems and
components to government-authorized lotteries. Service revenues have been
derived primarily from lottery service contracts. These contracts are typically
at least five years in duration, and are generally based upon a percentage of a
lottery's gross online lottery sales. These percentages vary depending on the
size of the lottery and the scope of services provided to the lottery. Product
sale revenues have been derived primarily from the installation of new online
lottery systems and sales of lottery terminals and equipment in connection with
the expansion of existing lottery systems. The size and timing of these
transactions have resulted in variability in product sale revenues from period
to period. The Company currently anticipates that product purchases by lotteries
during fiscal 2000 will return to approximately fiscal 1998 levels.
The Company has taken steps to broaden its offerings of high-volume transaction
processing services outside of its core business of providing online lottery
services. For example, the Company's Dreamport subsidiary ("Dreamport") provides
gaming technology and a comprehensive array of management, development and
strategic services to the gaming and entertainment markets. Also, on July 1,
1998, the Company acquired 80% of the equity of Europrint Holdings Ltd.
("Europrint") and its wholly owned subsidiaries, including Interactive Games
International ("IGI"), for a net cash purchase price of $21.6 million, including
related acquisition costs. The Company has the option, and under certain
circumstances the obligation, to acquire the remaining 20% of the equity of
Europrint and IGI within five years from the date of acquisition. Europrint is
among the world's largest providers of media promotional games and IGI has
pioneered the development of interactive, televised lottery games.
The Company's business is highly regulated, and the competition to secure new
government contracts is often intense. Awards of contracts to the Company are,
from time to time, challenged by competitors. Further, there have been and
continue to be investigations of various types, including grand jury
investigations, conducted by governmental authorities into possible
improprieties and wrongdoing in connection with efforts to obtain and/or the
awarding of lottery contracts and related matters. Although the Company does not
believe that it has engaged in any wrongdoing in connection with these matters,
certain investigations that are conducted largely in secret are still under way.
Accordingly, the Company lacks sufficient information to determine with
certainty their ultimate scope and whether the government authorities will
assert claims resulting from these or other investigations that could implicate
or reflect adversely upon the Company. Because the Company's reputation for
integrity is an important factor in its business dealings with lottery and other
government agencies, if government authorities were to make an allegation of, or
if there were to be a finding of, improper conduct on the part of or
attributable to the Company in any matter, such an allegation or finding could
have a material adverse effect on the Company's business, including its ability
to retain existing contracts and to obtain new or renewal contracts. In
addition, continuing adverse publicity resulting from these investigations and
related matters could have such a material adverse effect. See Note G to the
Consolidated Financial Statements, Part I, Item 1, -- "Certain Factors That May
Affect Future Performance --Maintenance of Business Relationships and Certain
Legal Matters" and Part I, Item 3 -- "Legal Proceedings" herein for further
information concerning these matters and other contingencies.
The Company operates on a 52- to 53-week fiscal year ending on the last Saturday
in February. Fiscal 1998 was a 53-week year.
All references to the Consolidated Financial Statements of the Company and Notes
thereto, are to the Consolidated Financial Statements of the Company and Notes
thereto included in Item 8 herein.
F-2
<PAGE> 45
The following discussion should be read in conjunction with the table below.
<TABLE>
<CAPTION>
SUMMARY FINANCIAL DATA
Fiscal Year Ended
----------------------------------------------------------------------
February 27, February 28, February 22,
1999 1998 (a) 1997
-------------------- -------------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services $ 887,395 91.2% $ 868,522 87.7% $ 789,534 87.3%
Sales of products 85,528 8.8 122,045 12.3 114,738 12.7
--------- ----- --------- ----- --------- -----
Total 972,923 100.0 990,567 100.0 904,272 100.0
Costs and expenses:
Costs of services (b) 591,787 66.7 603,484 69.5 551,662 69.9
Costs of sales (b) 59,825 69.9 73,815 60.5 67,441 58.8
--------- ----- --------- ----- --------- -----
Total 651,612 67.0 677,299 68.4 619,103 68.5
--------- ----- --------- ----- --------- -----
Gross profit 321,311 33.0 313,268 31.6 285,169 31.5
Selling, general and administrative 124,433 12.8 133,284 13.5 127,080 14.0
Research and development 40,158 4.1 36,498 3.7 30,998 3.4
Special charge 15,000 1.5 99,382 10.0 -- --
--------- ----- --------- ----- --------- -----
Operating income 141,720 14.6 44,104 4.4 127,091 14.1
Other income (expense):
Interest income 4,079 0.4 5,733 0.6 4,424 0.5
Equity in earnings of
unconsolidated affiliates 7,113 0.7 24,376 2.5 16,727 1.8
Other income 25,447 2.6 711 0.1 4,439 0.5
Interest expense (27,405) (2.8) (30,311) (3.1) (20,812) (2.3)
--------- ----- --------- ----- --------- -----
Income before income taxes 150,954 15.5 44,613 4.5 131,869 14.6
Income taxes 61,891 6.3 17,399 1.8 54,066 6.0
--------- ----- --------- ----- --------- -----
Net income $ 89,063 9.2% $ 27,214 2.7% $ 77,803 8.6%
========= ===== ========= ===== ========= =====
</TABLE>
(a) 53-week year
(b) Percentages are computed based on cost as a percentage of related
revenue.
F-3
<PAGE> 46
Special Charges
In the fourth quarter of fiscal 1998 the Company's Board of Directors approved a
plan of repositioning and restructuring of the Company's operations (the "Plan")
and recorded a $99.4 million special charge ($60.6 million after-tax, or $1.45
per basic share; $1.44 per diluted share) related to the execution of the Plan.
The special charge consisted principally of costs to exit the electronic
benefits transfer (EBT) business conducted by the Company's Transactive
subsidiary ("Transactive"). In addition, the special charge included costs
associated with a worldwide workforce reduction, contractual obligations in
connection with the departures of the Company's former chairman and
vice-chairman from the Company and asset impairment charges relating to two of
the Company's lottery contracts.
The Company realized pre-tax savings in fiscal 1999 of approximately $43.0
million resulting from the Plan.
In February 1998, the Company entered into an asset purchase agreement with
Citicorp Services, Inc. ("Citicorp"), to sell EBT contracts and certain related
assets held by Transactive. In July 1998, the U.S. Department of Justice
commenced a legal action seeking to enjoin the consummation of the transaction,
and in January 1999 Citicorp terminated the agreement pursuant to a clause in
the contract that permitted termination by either party if the closing did not
occur within a timeframe that has expired. Principally as a result of the
contract termination, the Company recorded an additional special charge in the
fourth quarter of fiscal 1999 of $15.0 million ($8.9 million after-tax; or $.22
per basic and diluted share) in order to write down the assets held for sale to
their net realizable value. The proposed sale did not include the contracts or
assets in connection with Transactive's provision of benefit identification
cards to the state of New York, electronic payment file transfer services to the
city of New York, or hunting, fishing and recreational licenses to the state of
Texas. The Company plans to continue to honor those contracts and Transactive's
EBT contracts, but has decided not to pursue new opportunities in those areas or
seek new U.S. EBT contracts.
Results of Operations
COMPARISON OF FISCAL 1999 WITH 1998
Revenues for fiscal 1999 were $972.9 million, representing a $17.7 million, or
1.8%, decrease from revenues of $990.6 million in fiscal 1998.
Service revenues in fiscal 1999 were $887.4 million, representing an $18.9
million, or 2.2%, increase over the $868.5 million of service revenues in fiscal
1998. This increase resulted primarily from $11.3 million of higher service
revenues from the Company's existing lottery customer base, including higher
lottery jackpot activity, and $6.6 million of incremental service revenues from
Dreamport. The increase in service revenues reflects a $15.0 million reduction
in service revenue associated with having 13 weeks in the first quarter of
fiscal 1999 compared with 14 weeks in the first quarter of fiscal 1998.
In fiscal 1999, lottery sales by the Company's domestic customers declined
approximately 2% compared with fiscal 1998, primarily reflecting the continued
decline in sales in Texas and New
F-4
<PAGE> 47
York. This decline, coupled with contractual rate reductions in Texas,
California and Georgia, resulted in a decline in the Company's domestic service
revenues of 5.6%. Excluding Texas, lottery sales for the Company's domestic
customers increased approximately 5%.
Lottery sales by the Company's international customers increased approximately
19% in fiscal 1999 compared with fiscal 1998, driven primarily by growth in
Brazil, Mexico, Poland and Germany. This increase, coupled with contractual rate
increases in Brazil and Mexico and partially offset by the impact of the
reduction in the dollar value of foreign currencies, resulted in growth of 14%
in the Company's international lottery service revenues.
Worldwide sales by the Company's lottery customers increased approximately 5% in
fiscal 1999 versus fiscal 1998. Incorporating rate and currency changes, the
Company's total lottery service revenues grew 1.4%. The weakening of foreign
currencies impacted fiscal 1999 lottery service revenues. However, these effects
were offset by gains from financial hedges, reflected in other income. Had
average exchange rates in fiscal 1998 continued throughout fiscal 1999, service
revenues would have been approximately $30.0 million higher than reported.
As anticipated, product sales declined from $122.0 million in fiscal 1998 to
$85.5 million in fiscal 1999. This decrease resulted primarily from lower
terminal sales in fiscal 1999 than in fiscal 1998. The Company sold
approximately 4,900 lottery terminals during fiscal 1999, as compared to
approximately 12,000 lottery terminals during fiscal 1998. Fiscal 1998 product
sales included approximately 6,500 terminals to the state of Massachusetts
comprising part of the sale of a new online lottery central system to that
customer in the third quarter of fiscal 1998.
Gross margins on service revenues were 33.3% in fiscal 1999, up from 30.5% in
fiscal 1998, primarily due to cost reductions resulting from the restructuring
and repositioning Plan announced by the Company in February 1998, along with
higher lottery jackpot activity in fiscal 1999 than in fiscal 1998.
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales declined from 39.5%
in fiscal 1998 to 30.1% in fiscal 1999. This change was primarily due to a shift
in product mix along with the acquisition of Europrint, a business with lower
margins than the Company has realized historically.
Selling, general and administrative expenses in fiscal 1999 were $124.4 million,
representing an $8.9 million, or 6.6%, decrease from the $133.3 million incurred
in fiscal 1998. This decrease was primarily attributable to lower legal expenses
and a reduction in costs resulting from the restructuring and repositioning
Plan. These declines were partially offset by selling, general and
administrative expenses of Europrint and IGI. As a percentage of revenues,
selling, general and administrative expenses were 12.8% and 13.5% during fiscal
1999 and 1998, respectively.
Research and development expenses in fiscal 1999 were $40.2 million,
representing a $3.7 million, or 10.0%, increase over research and development
expenses of $36.5 million in fiscal 1998. This increase reflects costs
associated with the continuing development of the Company's Internet wagering
platform, as well as an increase in the number of new products in the
development pipeline. As a percentage of revenues, research and development
expenses were 4.1% and 3.7% during fiscal 1999 and 1998, respectively.
F-5
<PAGE> 48
Interest income in fiscal 1999 was $4.1 million, a decrease of $1.6 million from
interest income of $5.7 million earned during fiscal 1998. During fiscal 1998,
the Company had higher dollar-denominated cash balances on hand in Brazil than
in fiscal 1999 to fund the online lottery system implementation that was
completed for Caixa Economica Federal ("Caixa"), Latin America's largest
financial institution, in fiscal 1998.
Equity in earnings of unconsolidated affiliates in fiscal 1999 was $7.1 million,
a decrease of $17.3 million from the $24.4 million earned during fiscal 1998.
This decrease resulted principally from the Company's sale, in April 1998, of
its 22.5% equity interest in Camelot Group plc ("Camelot") back to Camelot for
$84.9 million. The book value of the Company's Camelot investment at the time of
sale was $51.8 million. A portion of the cash received by the Company would have
to be returned to Camelot in the event that Camelot's operating license is
revoked for certain reasons determined to be attributable to the Company.
Accordingly, the Company has deferred the recognition of the gain from the sale
of its investment and is recognizing such gain ratably over the remaining period
of Camelot's operating license, due to expire in September 2001. The sale of
this equity interest does not affect the Company's position as the principal
supplier of goods and services to Camelot, but has reduced the Company's equity
in earnings of unconsolidated affiliates.
Other income in fiscal 1999 was $25.4 million, an increase of $24.7 million over
the $.7 million earned in fiscal 1998. Other income in fiscal 1999 includes
foreign exchange gains associated with the Company's global asset protection and
foreign exchange management programs, as well as the amortization of the gain on
the sale of Camelot. The Company, through its asset protection strategy, avoided
a cash loss in Brazil by investing accumulated cash in dollar-denominated
investments while awaiting government approvals to repatriate these dollars to
the U.S. Subsequent to February 27, 1999, government approval was obtained and
this cash was repatriated. The success of the Company's foreign exchange
management program offset approximately 90% of the gross profit erosion that
resulted from the year to year weakening of foreign currencies.
Interest expense in fiscal 1999 was $27.4 million, a decrease of $2.9 million
from interest expense of $30.3 million incurred during fiscal 1998. This
decrease was primarily due to lower debt outstanding under the Company's
revolving credit facility, partially offset by higher average interest rates on
the Company's outstanding debt.
The Company's effective income tax rate increased from 39% in fiscal 1998 to 41%
in fiscal 1999 due principally to the loss of the beneficial tax effect of U.K.
equity earnings that were reported on an after-tax basis. This increase was
partially offset by the congressional extension of the Research and Development
tax credit. The Company's effective income tax rate was greater than the
statutory rate primarily due to state income taxes and certain expenses that are
not deductible for income tax purposes.
Subsequent Event
On April 1, 1999, after the close of fiscal 1999, Quick Draw, the keno-style
game operated in New York on a lottery system provided by the Company,
terminated due to the failure of the New York State Legislature to extend the
legislation authorizing the game. Quick Draw was authorized by the New York
State Legislature, and implemented by the New York State Lottery on September 5,
1995, to increase revenue for New York public schools. In the Lottery's fiscal
year ending March 31, 1999, Quick Draw sales totaled approximately $482.0
million.
The termination of the Quick Draw game in New York will not have a material
impact on the Company's results of operations for the first quarter of fiscal
2000. The Company believes that it is likely that the New York Legislature will
enact legislation that will provide for the continuation of Quick Draw during
the Company's fiscal 2000 second quarter, however, there can be no assurance
that this will be the case.
F-6
<PAGE> 49
COMPARISON OF FISCAL 1998 WITH 1997
Revenues for fiscal 1998 were $990.6 million, representing an $86.3 million, or
9.5%, increase over revenues of $904.3 million in fiscal 1997.
Service revenues in fiscal 1998 were $868.5 million, representing a $78.9
million, or 10.0%, increase over the $789.6 million of service revenues in
fiscal 1997. This increase resulted primarily from $46.5 million of higher
service revenues from the Company's existing lottery customer base, along with
$32.8 million of service revenues from a new online lottery system implemented
for the Caixa by the Company in Brazil. After a number of years of growth, the
Company witnessed, over the last three fiscal quarters of 1998, a downward trend
in the sales generated by its U.S. lottery customers.
Product sales for fiscal 1998 were $122.0 million, representing an increase of
$7.3 million, or 6.4%, over the $114.7 million of product sales in fiscal 1997.
This increase resulted primarily from higher central system sales in fiscal 1998
than in fiscal 1997, including a large product sale to the Massachusetts State
Lottery in the third quarter. These increases were partially offset by lower
terminal sales and lower sales of component parts and equipment to Camelot and
other members of the U.K. lottery consortium. The Company sold approximately
12,000 lottery terminals during fiscal 1998, as compared to approximately 13,600
lottery terminals during fiscal 1997.
Gross margins on service revenues were 30.5% in fiscal 1998, up from 30.1% in
fiscal 1997, primarily due to improved margins on certain existing lottery
contracts, partially offset by lower margins from new lottery and electronic
benefit contracts that began in fiscal 1998.
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales were 39.5% in fiscal
1998 compared with 41.2% in fiscal 1997.
Selling, general and administrative expenses in fiscal 1998 were $133.3 million,
representing a $6.2 million, or 4.9%, increase over the $127.1 million incurred
in fiscal 1997. This increase was primarily attributable to increased sales,
marketing and business development costs, along with higher administrative costs
that were necessary to support expanded operations (including Dreamport). As a
percentage of revenues, selling, general and administrative expenses were 13.5%
and 14.0% during fiscal 1998 and 1997, respectively.
Research and development expenses in fiscal 1998 were $36.5 million,
representing a $5.5 million, or 17.7%, increase over research and development
expenses of $31.0 million in fiscal 1997. This increase reflects higher
development activity for new hardware products, including the Company's latest
generation lottery terminal, the design and related software for new games, and
the costs associated with the continuing development of an Internet wagering
platform. As a percentage of revenues, research and development expenses were
3.7% and 3.4% during fiscal 1998 and 1997, respectively.
Interest income in fiscal 1998 was $5.7 million, an increase of $1.3 million
over interest income of $4.4 million earned during fiscal 1997. This increase
reflects higher dollar-denominated cash balances that were on hand in Brazil to
fund the online lottery system implementation recently completed for Caixa,
along with interest earned on sales-type lease receivables.
Equity in earnings of unconsolidated affiliates in fiscal 1998 was $24.4
million, an increase of $7.7 million over the $16.7 million earned during fiscal
1997. This increase was primarily due to higher equity income from Camelot,
along with higher equity income from Dreamport partnerships in Delaware and
Oregon.
F-7
<PAGE> 50
Other income in fiscal 1998 was $.7 million, a decrease of $3.7 million from the
$4.4 million earned in fiscal 1997. Other income of $4.4 million earned during
fiscal 1997 primarily represented the gain on the sale of the Company's
investment in Pacific Online Systems Corporation.
Interest expense in fiscal 1998 was $30.3 million, an increase of $9.5 million
over interest expense of $20.8 million incurred during fiscal 1997. This
increase was primarily due to higher average debt outstanding to fund the
online lottery system implementation for Caixa, along with higher average
interest rates.
The Company's effective income tax rate decreased to 39% in fiscal 1998 from 41%
in fiscal 1997 due principally to a reduction in nondeductible expenditures,
increased recognition of tax credits and the full-year effect of the
restructuring of financing and operations in Brazil. The Company's effective
income tax rate was greater than the statutory rate primarily due to state
income taxes and certain expenses that are not deductible for income tax
purposes.
Changes in Financial Position, Liquidity and Capital Resources
During fiscal 1999, the Company generated $286.3 million of cash from
operations. This cash, together with $84.9 million of cash received from the
sale of the Company's investment in Camelot, was used to pay down $117.0 million
on the Company's Credit Facility; to fund the purchase of $121.2 million of
systems, equipment and other assets relating to contracts; to repurchase $70.8
million of the Company' common stock and to fund the acquisition of Europrint
for $21.6 million.
Trade accounts receivable increased by $12.9 million, from $93.8 million at
February 28, 1998 to $106.7 million at February 27, 1999, primarily due to a
higher level of product sales in the fourth quarter of fiscal 1999 compared to
the fourth quarter of fiscal 1998, along with receivables of Europrint and IGI.
Inventories increased by $34.0 million, from $27.9 million at February 28, 1998
to $61.9 million at February 27, 1999, primarily due to spending related to
product sales expected to be delivered by November 1999 (see advance payments
from customers below).
Assets held for sale decreased by $14.2 million, due to the termination of the
agreement to sell Transactive EBT contracts and certain related assets to
Citicorp. The write-off of these assets is included in the fiscal 1999 special
charge.
The cost of systems, equipment and other assets relating to contracts decreased
by $46.9 million, from $1,204.6 million at February 28, 1998 to $1,157.7 million
at February 27, 1999. This decrease reflects $102.2 million relating to the
devaluation of the Brazilian currency in January 1999, partially offset by the
continuing installation of a new lottery system in Michigan and the expansion of
lottery systems in several domestic and international locations.
Current deferred income taxes decreased by $11.5 million, from $40.9 million at
February 28, 1998 to $29.4 million at February 29, 1999, primarily due to the
acceleration of tax deductions relating to capitalized software costs.
F-8
<PAGE> 51
Investments in and advances to unconsolidated affiliates decreased by $54.0
million, from $64.8 million at February 28, 1998 to $10.8 million at February
27, 1999, primarily due to the sale of the Company's investment in Camelot.
The special charge accrual decreased by $27.6 million, from $33.6 million at
February 28, 1998 to $6.1 million at February 27, 1999, due to severance and
related payments and legal costs in connection with the previously reported
Branson litigation and judgement in the U.K.
Advance payments from customers increased by $30.0 million, from $.5 million at
February 28, 1998 to $30.5 million at February 27, 1999. This increase reflects
the down payments received on product sales orders from six international
customers and that portion of the deferred gain from the sale of the Company's
investment in Camelot that will be recognized in other income in fiscal 2000.
Income taxes payable, that are reported net of income tax refunds receivable,
increased by $32.5 million, from $25.4 million at February 28, 1998 to $57.9
million at February 27, 1999. This increase was primarily due to an income tax
refund received relating to the fiscal 1998 special charge and the timing of
income tax payments, including those related to the sale of the Company's
investment in Camelot.
Long-term debt, less current portion decreased by $134.5 million, from $453.6
million at February 28, 1998 to $319.1 million at February 27, 1999. This
decrease was primarily due to the application of the proceeds received from the
sale of the Company's investment in Camelot and free cash flow generated during
fiscal 1999 to the Credit Facility.
Other liabilities increased by $10.7 million, from $19.2 million at February 28,
1998 to $29.9 million at February 27, 1999, reflecting the long-term portion of
the deferred gain from the sale of the Company's investment in Camelot.
The Company's business is capital-intensive. Although it is not possible to
estimate precisely, due to the nature of the business, the Company currently
anticipates that the level of capital expenditures for systems, equipment and
other assets relating to contracts required during fiscal 2000 will be in a
range of $200.0 million to $220.0 million. The principal sources of liquidity
for the Company are expected to be cash generated from operations and borrowings
under the Company's Credit Facility. As of May 1, 1999 the Company had utilized
approximately $36.5 million of its $400 million Credit Facility. The Company
currently expects that its cash flow from operations and available borrowings
under its Credit Facility will be sufficient to fund its anticipated working
capital and ordinary capital expenditure needs, to service its debt obligations
and to fund anticipated internal growth in the foreseeable future.
F-9
<PAGE> 52
Inflation
The impact of inflation on the Company's operations has not been significant to
date. While the Company believes that its business is not highly sensitive to
inflation, there can be no assurance that a high rate of inflation in the future
would not have an adverse effect on the Company's operations, particularly in
emerging markets such as Brazil. The Company historically used the U.S. dollar
as the functional currency for its operations in Brazil due to the high levels
of inflation in the Brazilian economy. The Company began using the local
currency in Brazil as the functional currency on March 1, 1998 because of the
significant reduction in the rate of inflation in Brazil. At February 27, 1999,
the net book value of the Company's investments in Brazil was approximately $100
million.
Market Risk Disclosures
The primary market risk inherent in the Company's financial instruments and
exposures is the potential loss arising from adverse changes in interest rates
and foreign currency rates. The Company's exposure to commodity price changes is
not considered material and is managed through its procurement and sales
practices. The Company did not own any marketable equity securities during
fiscal 1999.
Interest rates
Interest rate market risk is estimated as the potential change in the fair value
of the Company's total debt or current earnings resulting from a hypothetical
10% adverse change in interest rates. At February 27, 1999, the estimated fair
value of the Company's fixed rate debt, as determined by an independent
investment banker, approximated $313.4 million. A hypothetical 10% adverse
change in interest rates would increase the estimated fair value of the
Company's fixed rate debt to $322.0 million. A hypothetical 10% favorable change
in interest rates would decrease the estimated fair value of the Company's fixed
rate debt to $305.1 million.
A hypothetical 10% adverse or favorable change in interest rates applied to
variable rate debt would not have a material affect on current earnings.
The Company uses various techniques to reduce the risk associated with future
increases in interest rates, the most significant being the private placement of
seven- and 10-year fixed rate debt on May 29, 1997.
Foreign Currency Exchange Rates
Foreign exchange exposures arise from current transactions and anticipated
transactions denominated in a currency other than an entity's functional
currency and from the translation of foreign currency balance sheet accounts
into U.S. dollar balance sheet accounts.
The Company seeks to manage its foreign exchange risk by securing payment from
its customers in U.S. dollars, by sharing risk with its customers, by utilizing
foreign currency borrowings, by leading and lagging receipts and payments and by
entering into foreign currency exchange and option contracts. In addition, a
significant portion of the costs attributable to the Company's foreign currency
revenues are payable in the local currencies. Whenever possible, the Company
negotiates clauses into its contracts that allow for price adjustments should a
material change in foreign exchange rates occur.
The Company, from time to time, enters into foreign currency exchange and option
contracts to reduce the exposure associated with current transactions and
anticipated transactions denominated in foreign currencies. However, the Company
does not engage in currency speculation. At February 27, 1999, a hypothetical
10% adverse change in foreign exchange rates would result in a translation loss
of $17.0 million that would be recorded in the equity section of the Company's
balance sheet.
At February 27, 1999, a hypothetical 10% adverse change in foreign exchange
rates would result in a net transaction loss of $.8 million recorded in current
earnings after considering the effects of foreign exchange contracts currently
in place.
At February 27, 1999, a hypothetical 10% adverse change in foreign exchange
rates would result in a net reduction of cash flows from anticipatory
transactions in fiscal 2000 by $13.1 million. The percentage of fiscal 1999
anticipatory transactions that were hedged varied throughout fiscal 1999, but
averaged 65%.
As of May 1, 1999, the Company had approximately $67.8 million of outstanding
foreign currency exchange contracts to purchase foreign currencies (primarily
pounds sterling) and approximately $94.3 million of outstanding foreign currency
exchange and option contracts to sell foreign currencies (primarily Spanish
pesetas, Mexican pesos, pounds sterling and Brazilian reals).
F-10
<PAGE> 53
IMPACT OF YEAR 2000
The Year 2000 computer issue creates potentially significant risks for the
Company. If lottery, gaming or EBT systems that the Company supplies to
customers or management information systems that the Company uses internally do
not correctly recognize and process date information beyond the year 1999, there
could be an adverse impact on customers' and/or the Company's operations. The
Company is actively managing its program to assess the capability of its
lottery, gaming and EBT products and its interfaces to customer systems to
handle the Year 2000. With respect to customer systems, the major challenge for
the Company in remediating the Year 2000 issue is the multinational nature of
the Company's business and the high degree of global coordination that is
required with customers, suppliers and employees.
The Company has established a Year 2000 project team and a program office at its
corporate headquarters, made up of dedicated and shared resources, to provide
the guidance and support necessary to accomplish the Year 2000 initiative.
The status of the Company's six-phase program as of May 1, 1999 is as follows:
- - The inventory phase consists of compiling a comprehensive list of
software and hardware technologies in use by the Company. This phase is
complete.
- - The assessment phase consists of determining the compliance status of
each technology identified in the inventory phase. This phase is
complete.
- - The planning phase consists of developing plans to upgrade hardware
and/or software to Year 2000 compliance. This phase is complete.
- - The implementation phase consists of executing the tasks identified in
the planning phase. This phase is approximately 50% complete and is
expected to be completed by September 1, 1999.
- - The quality assurance phase consists of testing and validating systems
replaced or modified as part of the implementation phase. This phase
has begun for approximately 35% of our sites and is expected to be
completed by September 1, 1999.
- - The special case phase consists of developing and implementing specific
plans for any Year 2000 issues that cannot be handled by the previous
phases. This phase will include monitoring each site for change
control, contingency planning, monitoring vendor compliance issues and
other matters that may arise. This phase will commence in September
1999.
The Company is actively working with and seeking to enlist the cooperation of
its customers to ensure integration with their systems and telecommunications
networks. The Company is also actively working with critical suppliers of
products and services to determine that the suppliers' operations and the
products and services they provide are Year 2000 capable. The Company will
continue to monitor their progress toward Year 2000 capability.
The majority of the internal management information systems in use by the
Company (including SAP's R/3 system, System Union's SUN accounting system and
Hyperion's Pillar software) are Year 2000 compliant. The Company has a time
tracking system and an accounting system in Brazil that are not Year 2000
compliant. The Company is executing its plan to replace these two systems with
SAP's R/3 system by September 1999. The Company has a limited number of non-IT
systems that are primarily in use by the engineering and manufacturing
departments of the Company. The Company began the inventory and assessment of
these systems in October 1998 and plans to complete remediation by September 1,
1999.
The Company's contingency planning involves using already established problem
resolution processes to resolve any problems encountered during the Year 2000
timeframe. As a standard practice, the Company provides 24 hour a day
operational support. This support provides focused individuals in all
disciplines that respond in real time to operational issues. The Company's
contingency planning will include the expansion of the Year 2000 help desk team
and the creation of eight to 10 command centers worldwide to provide the
necessary response to issues that may arise as January 1, 2000 approaches.
The Company currently expects that the total cost of the Year 2000 program will
not exceed $25 million, including $5 million for the purchase of software and
hardware that will be capitalized and $20 million that will be expensed. As of
May 1, 1999 the Company had spent approximately $8.4 million on the program. The
total cost estimate does not include possible costs related to any customer or
other claims or the cost of internal software and hardware replaced in the
normal course of business but does include the cost to install new software and
hardware that is being accelerated to provide a solution to Year 2000 issues.
The total cost estimate is based on the Company's current assessment of the
program and is subject to change as the program progresses.
Year 2000 issues could have a significant impact on the Company's operations and
its financial condition and results if modifications cannot be completed on a
timely basis, unforeseen needs or problems arise, or systems operated by third
parties are not Year 2000 compliant. In addition to the potential for a
significant loss of revenues and possible damage claims by third parties
associated with Year 2000 issues, certain of the Company's United States lottery
contracts provide for up to $10,000 or more in liquidated damages per minute for
system downtime in excess of a stipulated grace period and certain of the
Company's international customers reserve the right to assess substantial
liquidated damages in the event that system downtime does occur. Based on
currently available information, management does not believe that the Year 2000
matters discussed above will cause significant operational or financial problems
for the Company; however there can be no assurance that this will be the case.
F-11
<PAGE> 54
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures are included in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
above.
<PAGE> 55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE> 56
Report of Independent Auditors
Board of Directors and Shareholders
GTECH Holdings Corporation
We have audited the accompanying consolidated balance sheets of GTECH Holdings
Corporation and subsidiaries as of February 27, 1999 and February 28, 1998 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended February 27, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Camelot Group plc (an entity in which
the Company had a 22.5% interest until April, 1998) have been audited by other
auditors whose report has been furnished to us; insofar as our opinion on the
consolidated financial statements of the Company relates to data included for
Camelot Group plc, it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluationg the overall financial statement presentation.
We believe our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of GTECH Holdings Corporation and
subsidiaries at February 27, 1999 and February 28, 1998 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended February 27, 1999, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Boston, Massachusetts
March 29, 1999
F-12
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CAMELOT GROUP PLC
We have audited the financial statements of Camelot Group plc as of January 31,
1998 and February 1, 1997, and for the years then ended which are expressed in
pounds sterling. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United Kingdom and the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly the
financial position of Camelot Group plc at January 31, 1998 and February 1,
1997, and the results of its operations, total recognised gains and losses and
cash flows for each of the years ended January 31, 1998 and February 1, 1997, in
conformity with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
net income expressed in pounds sterling for the years ended January 31, 1998 and
February 1, 1997 and the determination of shareholders' equity also expressed in
pounds sterling at January 31, 1998 and February 1, 1997 to the extent
summarized in footnote 24 to the financial statements.
Price Waterhouse
Chartered Accountants
London, England
March 23, 1998
F-13
<PAGE> 58
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 27, February 28,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,733 $ 8,250
Trade accounts receivable 106,693 93,778
Sales-type lease receivables 6,743 13,958
Inventories 61,893 27,853
Deferred income taxes 29,419 40,897
Assets held for sale -- 14,178
Other current assets 14,047 14,141
----------- -----------
TOTAL CURRENT ASSETS 226,528 213,055
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 397,561 526,856
GOODWILL 135,662 118,537
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 10,801 64,808
OTHER ASSETS 103,663 100,556
----------- -----------
TOTAL ASSETS $ 874,215 $ 1,023,812
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 43,402 $ 39,451
Accrued expenses 55,609 57,155
Special charge 6,058 33,631
Employee compensation 27,379 25,648
Advance payments from customers 30,458 504
Income taxes payable 57,907 25,392
Current portion of long-term debt 1,960 3,903
----------- -----------
TOTAL CURRENT LIABILITIES 222,773 185,684
LONG-TERM DEBT, less current portion 319,078 453,587
OTHER LIABILITIES 29,908 19,171
DEFERRED INCOME TAXES 18,550 20,160
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share--20,000,000 shares authorized, none issued -- --
Common Stock, par value $.01 per share--150,000,000 shares authorized,
44,152,565 and 43,922,627 shares issued; 38,722,063 and 41,284,146 shares
outstanding at February 27, 1999 and February 28, 1998, respectively 442 439
Additional paid-in capital 176,434 171,302
Equity carryover basis adjustment (7,008) (7,008)
Accumulated other comprehensive income (84,842) (42)
Retained earnings 345,018 255,955
----------- -----------
430,044 420,646
Less cost of 5,430,502 and 2,638,481 shares in treasury at
February 27, 1999 and February 28, 1998, respectively (146,138) (75,436)
----------- -----------
283,906 345,210
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 874,215 $ 1,023,812
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-14
<PAGE> 59
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
February 27, February 28, February 22,
1999 1998 (a) 1997
------------ ------------ ------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Services $ 887,395 $ 868,522 $ 789,534
Sales of products 85,528 122,045 114,738
--------- --------- ---------
972,923 990,567 904,272
Costs and expenses:
Costs of services 591,787 603,484 551,662
Costs of sales 59,825 73,815 67,441
--------- --------- ---------
651,612 677,299 619,103
--------- --------- ---------
Gross profit 321,311 313,268 285,169
Selling, general and administrative 124,433 133,284 127,080
Research and development 40,158 36,498 30,998
Special charge 15,000 99,382 --
--------- --------- ---------
Operating income 141,720 44,104 127,091
Other income (expense):
Interest income 4,079 5,733 4,424
Equity in earnings of
unconsolidated affiliates 7,113 24,376 16,727
Other income 25,447 711 4,439
Interest expense (27,405) (30,311) (20,812)
--------- --------- ---------
Income before income taxes 150,954 44,613 131,869
Income taxes 61,891 17,399 54,066
--------- --------- ---------
Net income $ 89,063 $ 27,214 $ 77,803
========= ========= =========
Basic earnings per share $ 2.17 $ .65 $ 1.81
========= ========= =========
Diluted earnings per share $ 2.16 $ .64 $ 1.80
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
(a) 53-week year
F-15
<PAGE> 60
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Equity Accumulated
----------------------- Additional Carryover Other
Issued Paid-in Basis Comprehensive Retained
Shares Amount Capital Adjustment Income Earnings
---------- ---------- ---------- ---------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at February 24, 1996 43,739,520 $ 437 $ 167,758 $ (7,008) $ (463) $ 150,938
Comprehensive income:
Net income - - - - - 77,803
Other comprehensive income:
Foreign currency translation - - - - 1,935 -
Comprehensive income
Purchase of 637,200
shares of common stock - - - - - -
Common stock issued
under stock award plans 106,131 1 1,947 - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at February 22, 1997 43,845,651 $ 438 $ 169,705 $ (7,008) $ 1,472 $ 228,741
Comprehensive income:
Net income - - - - - 27,214
Other comprehensive income:
Foreign currency translation - - - - (1,514) -
Comprehensive income
Purchase of 1,283,600
shares of common stock - - - - - -
Common stock issued
under stock award plans 76,976 1 1,597 - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at February 28, 1998 43,922,627 $ 439 $ 171,302 $ (7,008) $ (42) $ 255,955
Comprehensive income:
Net income - - - - - 89,063
Other comprehensive income:
Foreign currency translation - - - - (85,094) -
Net gain on derivative instruments - - - - 294 -
Comprehensive income
Purchase of 2,794,100
shares of common stock - - - - - -
Reissuance of 2,079 shares from treasury under
Director Stock election plan - - - - - -
Common stock issued
under stock award plans 229,938 3 5,132 - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at February 27, 1999 44,152,565 $ 442 $ 176,434 $ (7,008) $ (84,842) $ 345,018
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Treasury
Stock Total
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Balance at February 24, 1996 $ (14,937) $ 296,725
Comprehensive income:
Net income - 77,803
Other comprehensive income:
Foreign currency translation - 1,935
----------
Comprehensive income 79,738
Purchase of 637,200
shares of common stock (20,278) (20,278)
Common stock issued
under stock award plans - 1,948
---------- ----------
Balance at February 22, 1997 $ (35,215) $ 358,133
Comprehensive income:
Net income - 27,214
Other comprehensive income:
Foreign currency translation - (1,514)
----------
Comprehensive income 25,700
Purchase of 1,283,600
shares of common stock (40,221) (40,221)
Common stock issued
under stock award plans - 1,598
---------- ----------
Balance at February 28, 1998 $ (75,436) $ 345,210
Comprehensive income:
Net income - 89,063
Other comprehensive income:
Foreign currency translation - (85,094)
Net gain on derivative instruments - 294
----------
Comprehensive income 4,263
Purchase of 2,794,100
shares of common stock (70,757) (70,757)
Reissuance of 2,079 shares from treasury under
Director Stock election plan 55 55
Common stock issued
under stock award plans - 5,135
---------- ----------
Balance at February 27, 1999 $ (146,138) $ 283,906
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-16
<PAGE> 61
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
February 27, February 28, February 22,
1999 1998 (a) 1997
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 89,063 $ 27,214 $ 77,803
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 199,321 204,768 172,630
Special charge 15,000 99,382 --
Deferred income taxes (benefit) provision 9,868 (24,187) 22,441
Equity in earnings of unconsolidated affiliates,
net of dividends received (3,117) (8,632) (9,174)
Foreign currency transaction gains (8,650) -- --
Other 2,405 8,214 (346)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Trade accounts receivable (10,716) 17,907 (36,952)
Inventories (33,479) 7,693 8,307
Special charge (26,105) (12,163) --
Other assets and liabilities 52,692 (26,061) (15,594)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 286,282 294,135 219,115
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets
relating to contracts (121,198) (283,542) (191,970)
Acquisitions (net of cash acquired) (19,687) (20,976) (2,000)
Investments in and advances to unconsolidated affiliates (529) (5,414) (9,817)
Cash received from affiliates 1,906 6,644 11,203
Proceeds from sale of investments 84,904 -- 5,895
Other (22,627) (20,592) (12,341)
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (77,231) (323,880) (199,030)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 117,706 541,605 6,107
Principal payments on long-term debt (254,768) (472,542) (4,358)
Purchases of treasury stock (70,757) (40,221) (20,278)
Other 4,771 (2,108) 1,802
--------- --------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (203,048) 26,734 (16,727)
Effect of exchange rate changes on cash (6,520) (724) 108
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (517) (3,735) 3,466
Cash and cash equivalents at beginning of year 8,250 11,985 8,519
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,733 $ 8,250 $ 11,985
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest payments (net of amounts capitalized) $ 27,574 $ 23,647 $ 20,523
Income tax payments 24,945 32,188 30,045
Income tax refunds (13,345) (2,904) (335)
</TABLE>
See Notes to Consolidated Financial Statements
(a) 53-week year
F-17
<PAGE> 62
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: GTECH Holdings Corporation ("Holdings") conducts
business through its consolidated subsidiaries and unconsolidated affiliates and
has, as its only asset, an investment in GTECH Corporation ("GTECH"), its
wholly-owned subsidiary. The consolidated financial statements include the
accounts of Holdings, GTECH and all majority and wholly-owned subsidiaries
(collectively referred to herein as the "Company"). Significant intercompany
accounts and transactions have been eliminated in preparing the Consolidated
Financial Statements. Investments in 20% to 50% owned affiliates are accounted
for using the equity method and investments in less than 20% owned affiliates
are accounted for using the cost method.
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
Industry Segment and Nature of Operations: The Company operates predominately in
one business segment that provides online, high speed, highly-secured
transaction processing systems to the worldwide lottery industry. The Company's
lottery service contracts are generally subject to a new competitive procurement
process after the expiration of the contract term and any extensions thereof.
The Company's business is highly regulated, and the competition to secure new
government contracts is often intense.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"). The Company adopted the provisions of FAS 131
during fiscal 1999. The new rules established revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. It also established
standards for related disclosures about products and services, geographic areas
and major customers. The adoption of FAS 131 did not affect the Company's
results of operations or financial position, but did affect the disclosure of
segment information contained in the notes to the consolidated financial
statements (See Note N).
Fiscal Year: The Company operates on a 52- to 53-week fiscal year ending on the
last Saturday in February. Fiscal 1999 and 1997 were 52-week years and fiscal
1998 was a 53-week year.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition: Service revenues are recognized as the services are
performed. Liquidated damages are expensed as incurred.
Revenues from product sales or sales-type leases are recognized when
installation is complete and the product is accepted by the customer. In those
instances where the Company is not responsible for installation, revenue is
recognized when the product is shipped.
Foreign Currency Translation: The functional currency for the majority of the
Company's foreign operations is the applicable local currency. The translation
of the applicable foreign currencies into U.S. dollars is performed for balance
sheet accounts using exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange rate during the
period. The gains or losses resulting from such translation are reported in
accumulated other comprehensive income, whereas gains or losses resulting from
foreign currency transactions are included in results of operations. The Company
recognized net foreign exchange gains (losses) of $15,268,000, $(573,000) and
$336,000 in fiscal 1999, 1998 and 1997, respectively, that are included as a
component of other income in the Company's consolidated income statements.
For those foreign subsidiaries operating in a highly inflationary economy or
having the U.S. dollar as their functional currency, nonmonetary assets are
translated at historical rates and monetary assets and liabilities are
translated at current rates. Translation adjustments are included in the
determination of net income.
<PAGE> 63
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
Research and Development: Research and development expenses are charged to
operations as incurred.
Stock-Based Compensation: The Company grants stock options for a fixed number of
shares of the common stock of Holdings ("Common Stock") to employees and
non-employee directors with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and, accordingly, recognizes no compensation expense
for stock option grants.
Derivatives: The Company uses derivative financial instruments principally to
manage the risk of foreign currency exchange rate fluctuations and accounts for
its derivative financial instruments in accordance with Financial Accounting
Standards Board Statement 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"). The adoption of FAS 133 by the Company
effective August 30, 1998 (the first day of its fiscal 1999 third quarter) did
not have a material effect on the earnings or the financial position of the
Company.
From time to time, the Company enters into foreign currency exchange and option
contracts to reduce the exposure associated with certain firm commitments,
variable service revenues and certain assets and liabilities denominated in
foreign currencies. These contracts generally have maturities of 12 months or
less, and are regularly renewed to provide continuing coverage throughout the
year. The Company does not engage in currency speculation.
The Company records contracts used to hedge firm commitments at fair value in
its consolidated balance sheet and the related gains or losses on these
contracts are immediately recognized in earnings. The Company records certain
contracts used to protect the Company against foreign exchange risk on its
variable service revenues at fair value in its consolidated balance sheet. The
related gains or losses on these contracts are either deferred in shareholders'
equity (accumulated other comprehensive income) or immediately recognized in
earnings dependent on whether the contract can be treated as a hedge. The
deferred gains and losses are subsequently recognized in earnings in the period
that the related items being hedged are received and recognized in earnings.
Contracts used to hedge assets and liabilities denominated in foreign currencies
are recorded in the Company's consolidated balance sheet and the related gains
or losses on these contracts are immediately recognized in earnings. Gains and
losses on foreign exchange contracts are included as a component of other
income in the Company's consolidated income statements.
Income Taxes: Deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted income tax rates and laws that will be in
effect when the temporary differences are expected to reverse. Additionally,
deferred tax assets and liabilities are separated into current and noncurrent
amounts based on the classification of the related assets and liabilities for
financial reporting purposes.
Cash Equivalents: The Company considers short-term, highly liquid investments
with an original maturity of three months or less at the date of purchase to be
cash equivalents.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Systems, Equipment and Other Assets Relating to Contracts: Systems, equipment
and other assets relating to contracts are stated on the basis of cost.
Depreciation is computed over the estimated useful lives of the assets using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. The estimated useful life is generally five years.
Capitalized Software Development Costs: Unamortized software development costs,
included in systems, equipment and other assets relating to contracts and other
assets in the Company's consolidated balance sheets, were $51,900,000 and
$41,024,000 at February 27, 1999 and February 28, 1998, respectively.
Amortization expense amounted to $12,821,000, $7,457,000 and $3,967,000 in
fiscal 1999, 1998 and 1997, respectively, and is included in cost of services in
the Company's consolidated income statements.
<PAGE> 64
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
Impairment of Long-Lived Assets: If facts and circumstances were to indicate
that the Company's long-lived assets might be impaired, the estimated future
undiscounted cash flows associated with the long-lived asset would be compared
to its carrying amount to determine if a write-down to fair value is necessary.
Goodwill: Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized on a straight-line basis principally over 40
years. As of February 27, 1999 and February 28, 1998, accumulated amortization
was $30,018,000 and $24,164,000, respectively.
New Accounting Pronouncements: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"). The Company adopted FAS 130 during fiscal
1999. The new rules established standards for the reporting of comprehensive
income and its components in financial statements. Comprehensive income consists
of net income and other gains and losses affecting shareholders' equity that,
under generally accepted accounting principles, are excluded from net income.
For the Company, such items consist primarily of gains and losses on certain
derivative financial instruments and foreign currency translation gains and
losses. The adoption of FAS 130 affected the presentation in the accompanying
consolidated statement of shareholders' equity. Prior year financial statements
have been reclassified to conform to the new requirements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires the expensing of start-up costs and was adopted
by the Company on February 29, 1999 (the first day of fiscal 2000). The adoption
of SOP 98-5 did not have a material impact on the results of operations or the
financial position of the Company.
NOTE B - BUSINESS ACQUISITIONS
On July 1, 1998, the Company acquired 80% of the equity of Europrint Holdings
Ltd. ("Europrint") and its wholly owned subsidiaries, including Interactive
Games International ("IGI"), for a net cash purchase price of $21,641,000,
including related acquisition costs. Europrint is a provider of media
promotional games and IGI has pioneered the development of interactive,
televised lottery games. The Company has the option, and under certain
circumstances the obligation, to acquire the remaining 20% of the equity of
Europrint and IGI within five years from the date of acquisition.
On October 3, 1997, the Company acquired 100% of the capital stock of VideoFax
Systems, Inc., a provider of multimedia broadcasting software, for cash
consideration of $15,362,000.
Pro forma information has not been provided because on an individual and
aggregate basis, the acquisitions were not material to the Company's operations.
<PAGE> 65
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
February 27, 1999 February 28, 1998
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Purchased components $ 27,323 $ 17,202
Finished subassemblies 2,922 1,719
Work in progress 23,309 7,789
Finished goods 8,339 1,143
------------------ ------------------
$ 61,893 $ 27,853
================== ==================
</TABLE>
NOTE D - SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS
Systems, equipment and other assets relating to contracts consists of:
<TABLE>
<CAPTION>
February 27, 1999 February 28, 1998
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Land and buildings $ 5,259 $ 5,226
Computer terminals and systems 1,007,202 1,035,977
Furniture and equipment 110,231 107,233
Contracts in progress 34,991 56,116
------------------ ------------------
1,157,683 1,204,552
Less accumulated depreciation and amortization 760,122 677,696
------------------ ------------------
$ 397,561 $ 526,856
================== ==================
</TABLE>
<PAGE> 66
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - UNCONSOLIDATED AFFILIATES
The Company has a 40% interest in Lottery Technology Enterprises ("LTE"), a 50%
interest in each of four joint ventures with Full House Resorts, Inc. ("Full
House") and a 50% interest in Union Temporal de Empress ("UTE"). LTE is a joint
venture comprised of the Company and District Enterprise for Lottery Technology
Applications of Washington, D.C., that holds a contract with the District of
Columbia Lottery and Charitable Games Control Board. The joint ventures with
Full House are engaged in the financing and development of Native American and
other casino gaming ventures. UTE is a joint venture comprised of the Company
and Luditec S.A. that provides facility management services to the Catalunya
Lottery in Spain.
In addition, as of February 28, 1998, the Company had a 22.5% interest in
Camelot Group plc ("Camelot"). Camelot is a consortium that operates the United
Kingdom lottery and was the largest of the Company's unconsolidated affiliates.
In April 1998, the Company sold its investment back to Camelot for $84,904,000.
The book value of the Camelot investment at the time of the sale was
$51,763,000. A portion of the cash received by the Company will have to be
returned to Camelot in the event that Camelot's operating license is revoked for
certain reasons determined to be attributable to the Company. Accordingly, the
Company has deferred the recognition of the gain from the sale of its investment
and is recognizing such gain ratably over the remaining period of Camelot's
operating license due to expire in September 2001. The deferred gain at February
27, 1999 is included in advance payments to customers and other liabilities in
the Company's consolidated balance sheets. The Company continues as the
principal supplier of goods and services to Camelot. The Company's investments
in and advances to Camelot amounted to $52,071,000 and $43,358,000 at February
28, 1998 and February 22, 1997, respectively. The Company's equity in the
earnings of Camelot amounted to $2,624,000, $20,988,000 and $14,394,000 for
fiscal 1999, 1998 and 1997, respectively.
The following is a summary of the combined financial condition of the Company's
unconsolidated affiliates along with their combined results of operations, for
those investments held at the fiscal year end presented, used as the basis for
applying the equity method of accounting:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
February 27, 1999 February 28, 1998 February 22, 1997
----------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Earnings data:
Revenues $ 34,950 $ 9,098,191 $ 7,319,017
Gross profit 8,683 295,169 235,610
Net income 8,847 99,833 65,743
Balance sheet data:
Current assets $ 4,659 $ 757,944 $ 646,082
Noncurrent assets 7,452 123,603 156,472
Current liabilities 3,617 599,365 556,011
Noncurrent liabilities 169 45,101 55,798
</TABLE>
The Company's share of undistributed earnings of affiliated companies included
in retained earnings was $2,258,000, $35,130,000 and $26,203,000 at February 27,
1999, February 28, 1998 and February 22, 1997, respectively. Dividends received
from unconsolidated affiliates were $3,996,000, $15,744,000 and $7,553,000 in
fiscal 1999, 1998 and 1997, respectively.
<PAGE> 67
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
February 27, 1999 February 28, 1998
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Revolving credit facility $ 18,000 $ 135,000
7.75% Series A Senior Notes due 2004 150,000 150,000
7.87% Series B Senior Notes due 2007 150,000 150,000
Other 3,038 22,490
------------------ ------------------
321,038 457,490
Less current portion 1,960 3,903
------------------ ------------------
$ 319,078 $ 453,587
================== ==================
</TABLE>
The Company has an unsecured revolving credit facility of $400,000,000 expiring
in June 2002 (the "Credit Facility"). At February 27, 1999, the weighted average
interest rate for all outstanding borrowings under the Credit Facility was
5.27%. The Company is required to pay a facility fee of .125% per annum on the
total revolving credit commitment. The restrictive provisions of the Credit
Facility include, among other things, requirements relating to the maintenance
of certain financial ratios, restrictions on additional indebtedness and
restrictions on the ability of the Company to make cash distributions on its
Common Stock under certain circumstances. At February 27, 1999, under the most
restrictive covenants, the Company had available $83,906,000 of retained
earnings for the payment of dividends. The Company has never paid cash dividends
on its Common Stock and does not plan to do so in the foreseeable future. The
current policy of the Company's Board of Directors is to reinvest earnings in
the operation and expansion of the business of the Company. On May 29, 1997, the
Company issued, in a private placement, $150,000,000 of unsecured 7.75% Series A
Senior Notes due 2004 and $150,000,000 of unsecured 7.87% Series B Senior Notes
due 2007 (collectively, the "Senior Notes"). Interest on each issue is payable
semiannually in arrears. The proceeds from the sale of the Senior Notes were
used to pay down the Credit Facility.
Up to $100,000,000 of the Credit Facility may be used for the issuance of
letters of credit. There were no letters of credit outstanding under the Credit
Facility as of February 27, 1999. The Company had outstanding, at February 27,
1999, $47,160,000 of letters of credit issued outside of the Credit Facility.
The weighted average annual cost for these letters of credit was .5%.
At February 27, 1999, long-term debt maturing over the next five fiscal years is
as follows:
<TABLE>
<CAPTION>
Fiscal Year (Dollars in thousands)
-----------
<S> <C>
2000 $ 1,960
2001 78
2002 ---
2003 19,000
2004 ---
Thereafter 300,000
</TABLE>
Interest costs incurred by the Company were $29,388,000, $34,659,000 and
$25,036,000 (of these amounts, $1,983,000, $4,348,000 and $4,224,000 were
capitalized as additional costs of qualifying property during the construction
period) during fiscal 1999, 1998 and 1997, respectively.
<PAGE> 68
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - COMMITMENTS AND CONTINGENCIES
Contracts
Contracts generally contain time schedules for, among other things, commencement
of system operations and the installation of terminals, as well as detailed
performance standards. The Company is typically required to furnish substantial
bonds to secure its performance under these contracts. In addition to other
possible consequences, including contract termination, failure to meet specified
deadlines or performance standards could trigger substantial penalties in the
form of liquidated damage assessments. Many of the Company's contracts permit
the customer to terminate the contract at will and do not specify the
compensation, if any, that the Company would be entitled were such a termination
to occur.
Legal Matters
As previously publicly reported, in October 1994, the U.S. Attorney's Office for
the District of New Jersey indicted J. David Smith, the former sales manager of
the Company (who resigned in early 1994 for reasons unrelated to the
indictments), and two other individuals who served as consultants to the Company
through their wholly-owned company, The Benchmark Group, Inc. ("Benchmark"). The
indictment alleged essentially that, unbeknownst to the Company, Mr. Smith had
received kickbacks from the consultants for his own benefit. The indictment did
not charge the Company with any wrongdoing, and the actions complained of did
not affect the Company's New Jersey lottery operations. The trial of Mr. Smith
and the two consultants commenced in September 1996 in the U.S. District Court
for New Jersey, and on October 4, 1996, Mr. Smith and one of the two consultants
were found guilty of all charges. The other consultant, Joseph LaPorta, was
found not guilty. The New Jersey U.S. Attorney immediately announced in a press
release that a grand jury investigation in that jurisdiction was continuing but
did not specify the scope of such investigation. In the midst of these events,
the New Jersey Lottery Commission awarded the Company a contract to continue
operating its State lottery. In October 1998, the Court sentenced Mr. Smith to a
prison term of 63 months, ordered him to pay restitution to the Company in the
amount of $169,500 and fined him $20,000. Mr. Smith filed a notice of appeal in
the United States Court of Appeals for the Third Circuit and in April 1999 oral
argument on this appeal was heard. In November 1998, the U.S. Attorney's Office
for the District of New Jersey advised the Company that currently GTECH is not
the subject or target of an ongoing grand jury investigation by that office.
In 1995, the Texas U.S. Attorney's Office also issued grand jury document
subpoenas to the Company, and the Company has cooperated with this
investigation.
In February 1999, a witness appearing before the Moriarty Tribunal, an
investigative body convened by the Irish Parliament and chaired by Mr. Justice
Moriarty to investigate the business affairs generally of former Taoiseach
(Prime Minister) of Ireland Charles Haughey, testified that in February 1993 Guy
B. Snowden, then Chief Executive Officer of the Company, had invested pound
sterling 67,000 (approximately $100,000) of his personal funds in a company
owned by Mr. Haughey's son. Mr. Haughey had resigned as Taoiseach in February
1992. In July 1992, the An Post Irish National Lottery Company, the Irish
lottery authority (the "NLC"), issued a Request for Proposals respecting online
and instant ticket lottery goods and services, and in September 1992 the
Company, which was the then incumbent provider of lottery goods and services to
the NLC under an agreement awarded to the Company in 1987, submitted a Proposal
to the NLC in response to the NLC's Request for Proposals. In November 1992, the
NLC selected the Company to provide online and instant ticket goods and services
to the NLC under the terms of the competitive procurement and, following
negotiations, a definitive agreement was entered into between the NLC and the
Company in March 1993. The Tribunal has requested that the Company provide
various documents regarding the Company's business in Ireland. The Company is
cooperating with the Tribunal. In addition, the Company has made its own inquiry
into the facts surrounding Mr. Snowden's investment and the extent, if any, of
the Company's involvement in or knowledge of that investment. The Company's
investigation has determined that no Company funds were used to make Mr.
Snowden's investment, and there is no information to suggest that Mr. Snowden
ever sought reimbursement for the investment from the Company. Further, there is
no information to suggest that Mr. Snowden informed anyone else at the Company
of his investment at the time or that his investment was related in any way to
the renewal of the Company's contract to supply systems and support to the NLC.
Mr. Snowden has advised the Company through counsel that (i) his investment was
a strictly personal one, (ii) the investment was made from his
<PAGE> 69
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - COMMITMENTS AND CONTINGENCIES-(CONTINUED)
personal funds, (iii) he never sought reimbursement for any portion of his
investment from the Company or any other entity, and (iv) his investment was not
related to the NLC and was not intended to and did not influence the NLC's
decision to renew the Company's contract.
No charges of wrongdoing have ever been brought against the Company by any grand
jury or other governmental authority.
The Company does not believe that it has engaged in any wrongdoing in connection
with these matters. However, since current investigations are still or maybe
underway and are conducted in whole or in part in secret, the Company lacks
sufficient information to determine with certainty their ultimate scope and
whether the government authorities will assert claims resulting from these or
other investigations that could implicate or reflect adversely upon the Company.
Because the Company's reputation for integrity is an important factor in its
business dealings with lottery and other governmental agencies, if government
authorities were to make an allegation of, or if there were to be a finding of,
improper conduct on the part of or attributable to the Company in any matter,
such an allegation or finding could have a material adverse effect on the
Company's business, including its ability to retain existing contracts and to
obtain new or renewal contracts. In addition, continuing adverse publicity
resulting from these investigations and related matters could have such a
material adverse effect.
In November 1998, Benchmark and Joseph LaPorta, the consultant and shareholder
of Benchmark who was found not guilty in the criminal proceeding described in
the paragraph above respecting J. David Smith, filed suit in the Superior Court
of New Jersey (Atlantic County - Law Division) against GTECH and Victor
Markowicz, the Company's former co-chairman, alleging that GTECH had wrongfully
terminated and otherwise breached a May 1992 contract, as amended, between the
Company and Benchmark pursuant to which Benchmark provided government relations
services on behalf of GTECH in New Jersey. The complaint filed by Benchmark and
Mr. LaPorta also alleged that GTECH had breached an implied covenant of good
faith and fair dealing by allegedly authorizing and directing Benchmark to make
payments that were not within the contemplation of the contract and by
terminating its contract with Benchmark after allegedly receiving substantial
benefits from Benchmark; that GTECH had committed fraud upon Benchmark by
allegedly making knowingly false representations to Benchmark prior to
termination of the May 1992 contract; and that GTECH and Mr. Markowicz had
committed fraud upon and had made negligent representations to Benchmark by
allegedly concealing that certain payments which the Company is said to have
directed that Benchmark make to third parties were allegedly made for the
personal benefit of Mr. Markowicz and unspecified others. The complaint seeks
unspecified compensatory and punitive damages and costs and such other further
relief as the Court deems equitable and just. In December 1998, the Company
filed a motion to dismiss, or in the alternative for summary judgment. The
Company believes that Benchmark's complaint, and the allegations underlying the
complaint, are wholly without merit. The Company intends to continue to
vigorously defend itself in these proceedings.
In December 1998, Lawrence Littwin, the former Executive Director of the Texas
Lottery Commission from June 1997 to October 1997, filed suit against GTECH in
the United States District Court for the Northern District of Texas alleging
that GTECH, as operator of the Texas lottery, unlawfully attempted to have Mr.
Littwin removed as Executive Director of the Texas Lottery Commission in order
to continue its alleged unlawful control of the Texas Lottery Commission and the
Texas lottery. The specific causes of action alleged by Mr. Littwin include
alleged tortious interference by GTECH with Mr. Littwin's employment
relationship with the Texas Lottery Commission which caused him to be removed as
the Executive Director; alleged conspiracy with unspecified third parties to
maintain control of the Texas Lottery Commission and the Texas lottery; and
various alleged civil violations by GTECH of the Racketeer Influenced Corrupt
Organization Act (18 Sections 1961(4) and 1962(b), (c) and (d)) ("RICO").
Mr. Littwin's complaint seeks unspecified damages (including treble damages in
the case of RICO violations) and costs. Discovery is proceeding in this matter.
The Company believes that Mr. Littwin's complaint, and the allegations
underlying the complaint, are wholly without merit. The Company continues to
vigorously defend itself in these proceedings.
<PAGE> 70
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - COMMITMENTS AND CONTINGENCIES-(CONTINUED)
In September 1996, Jack M. Janis and Linda Janis, both individually and on
behalf of a class of persons similarly situated, filed suit against the
California State Lottery Commission, Southland Corporation and the Company in
the Supreme Court of the State of California (County of Los Angeles). This suit
alleged, in light of the June 1996 decision of the California Supreme Court,
Western Telcon, Inc. et al. V. California State Lottery (which held that the
California State Lottery's keno game as then structured was not a lottery game
and therefore was not authorized by California lottery law), that the defendants
were unjustly enriched and were guilty of unfair business practices and
misleading advertising in connection with the sale of keno tickets from January
1, 1992 through suspension of the keno game in June 1996. The suit sought
restitution of all amounts realized by the defendants through the sale of keno
tickets less funds paid to public schools pursuant to relevant California law
and proceeds paid to holders of winning keno tickets, together with costs,
disbursements and prejudgment interest. In 1997, the Court granted the Company
summary judgment but granted the plaintiffs limited leave to amend their
complaint; the plaintiffs filed an amended complaint; and the Court granted the
Company's motion to strike and for summary judgment as to the amended complaint,
this time without leave to amend. Plaintiffs filed a notice of appeal, and in
November 1998, the California Court of Appeal affirmed. Plaintiffs then sought
review by the California Supreme Court, which denied review in March 1999,
effectively ending the case.
The Company monitors, and occasionally affirmatively becomes involved in,
litigation involving Indian gaming in states where such litigation may, directly
or indirectly, concern or call into question the legal rights and operations of
state lotteries to which the Company provides contract services. The purpose of
this effort is to protect state lottery interests, and thus the Company's
revenue streams, from service contracts. As previously publicly reported, one
such piece of litigation is Rumsey Indian Rancheria v. Wilson, currently pending
in the Ninth Circuit Court of Appeals on appeal from the U.S. District Court for
the Eastern District of California, which involves a suit by several California
Indian tribes against the State and Governor of California under the federal
Indian Gaming Regulatory Act ("IGRA"). The Indian Tribes claimed in the District
Court that certain elements of the California State Lottery (which is a customer
of the Company) ("CSL") and the equipment on which it is run involve the
operation of slot machines and, therefore, under IGRA, the tribes also must be
permitted to operate slot machines. The State of California argued at times that
the CSL does not involve the operation of slot machines; however, the State at
times appeared to be taking the position that, if and to the extent the CSL does
involve the operation of slot machines, it must be terminated because the CSL is
not exempt from the California law prohibiting the operation of slot machines.
The Company filed amicus curiae briefs in the District Court arguing that the
CSL does not involve the operation of slot machines and that even if it does,
the CSL is exempt from the State law prohibition on slot machines. In September
1998, the Court entered summary judgment for the defendants. The Indian Tribes
have since appealed the District Court's decision, and, as noted above, the
appeal is now pending before the Ninth Circuit Court of Appeals.
In July 1998, the U.S. Department of Justice filed suit in the U.S. District
Court for the District of Delaware, U.S. v. Citicorp, Inc., Citicorp Services,
Inc., GTECH Holdings Corporation and Transactive Corporation, seeking to enjoin
the consummation of a transaction between Citicorp Services, Inc. and the
Company's Transactive subsidiary respecting the sale to Citicorp of
Transactive's electronic benefits transfer contracts and certain related assets.
The Department of Justice alleged in the suit that the proposed sale of assets
would tend substantially to lessen competition in the electronic benefits
transfer market in violation of Section 7 of the Clayton Act, as amended (15
U.S.C. Section 18), and would constitute an unreasonable restraint of trade in
violation of Section 1 of the Sherman Act (15 U.S.C. Section 1). In January
1999, the Company announced the termination of the agreement between Citicorp
and Transactive, following which the parties to the litigation entered into a
settlement and the suit was dismissed.
In April 1999, the Company was served with a lawsuit entitled Pantaleon
Arellano, et al. and Estelle Arellano v. The California State Lottery, et al.
California Superior Court (Orange County), which was filed in March, 1999. In
this action, plaintiffs are a husband and wife who claim to have purchased a
winning ticket in the California State Lottery's ("CSL's") April 8, 1998 Super
Lotto drawing. That drawing resulted in the award of a $102 million jackpot,
which was split evenly among three holders of tickets bearing the winning
numbers. Plaintiffs here claim to have purchased a ticket for that drawing with
the same winning numbers; plaintiffs and the Company have been told that CSL
computer records reveal that the ticket plaintiffs hold was purchased after the
close of sales for that drawing, and after the winning numbers were announced.
If plaintiffs had purchased a winning ticket in the relevant
<PAGE> 71
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - COMMITMENTS AND CONTINGENCIES-(CONTINUED)
drawing, they would have a claim against the CSL for one-fourth of that jackpot
amount, i.e., approximately $25.5 million. In their complaint, they attempt to
state a claim against both the CSL (and its Commission and the State of
California) and the Company for $104 million, apparently their approximation of
the full amount of the jackpot. They also seek to have this amount trebled,
alleging that the defendants' conduct in denying plaintiffs' claim to the
jackpot was racially motivated, and they seek various other amounts, including
emotional distress damages and attorney fees. The Company believes that this
complaint, and the allegations underlying the complaint, are wholly without
merit. The Company intends to defend itself vigorously in these proceedings.
The Company also is subject to certain legal proceedings and claims which
management believes, on the basis of information presently available to it, will
not materially adversely affect the Company's consolidated financial position or
results of operations.
NOTE H - STOCK OPTION AND PURCHASE PLANS
The Company has three stock option plans that provide for the granting of
incentive stock options and nonqualified stock options to officers and other key
employees of the Company and non-employee members of the Company's Board of
Directors. All current outstanding options are nonqualified stock options. The
options granted under these plans are to purchase Common Stock at a price not
less than fair market value at the date of grant. The 1997 employee stock option
plan is the only plan where stock options may still be granted. The Company is
authorized to grant options for up to 2,800,000 shares of Common Stock under
this plan, and at February 27, 1999, 962,500 options had been granted. Employee
options generally become exercisable ratably over a four-year period from date
of grant. Employee options expire 10 years after date of grant unless an earlier
expiration date is set at time of grant. Non-employee director options are
exercisable approximately one year after date of grant and expire five years
after date of grant, subject to earlier exercise and termination in certain
circumstances.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for the plans. Accordingly, no compensation
expense has been recognized. Had compensation expense for options granted under
the plans after February 25, 1995 been determined based on the estimated fair
value at the grant dates for awards under the plan, the Company's pro forma net
income and basic and diluted earnings per share for fiscal 1999, 1998 and 1997
would have been $85,797,000 and $2.09 and $2.09, respectively, $25,267,000 and
$.60 and $.60, respectively, and $76,331,000 and $1.78 and $1.76, respectively.
The fair value of options granted after February 25, 1995 under the plans was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for fiscal 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.77%, 6.14% and 5.80%; volatility
factors of the expected market price of the Company's common stock of .40, .28
and .35; and a weighted-average expected life of the option of 5.3 years, 6.5
years and 4.0 years. The Company did not assume a dividend yield for fiscal
1999, 1998 or 1997. Under these assumptions, the weighted-average fair value of
an option to purchase one share granted in fiscal 1999, 1998 and 1997,
respectively, was approximately $15, $13 and $10.
<PAGE> 72
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - STOCK OPTION AND PURCHASE PLANS -(CONTINUED)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------------------------
February 27, 1999 February 28, 1998 February 22, 1997
-------------------------- ------------------------ --------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise under Exercise under Exercise
Options Price Options Price Options Price
--------- -------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,501,550 $ 25.127 1,356,175 $ 23.462 1,214,150 $ 21.964
Granted 1,012,500 34.044 252,000 32.392 245,500 28.446
Exercised (228,750) 22.295 (60,250) 18.043 (79,225) 17.433
Forfeited (202,000) 30.458 (46,375) 25.112 (24,250) 18.603
--------- ----------- -----------
Outstanding at end of year 2,083,300 $ 29.255 1,501,550 $ 25.127 1,356,175 $ 23.462
========= =========== ===========
Exercisable at end of year 890,550 $ 24.220 731,425 $ 23.063 402,675 $ 21.865
</TABLE>
Exercise prices for options outstanding under the plans are summarized as
follows:
<TABLE>
<CAPTION>
Weighted Average
----------------------- Weighted
Remaining Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
----------------- ----------- ----------- ---------- ----------- --------
February 27, 1999
<S> <C> <C> <C> <C> <C>
$16.88 - $22.19 349,175 5.8 $ 18.400 348,300 $ 18.390
$25.69 - $35.28 1,734,125 7.9 31.441 542,250 27.965
February 28, 1998
$16.88 - $22.19 486,300 6.9 $ 17.977 338,175 $ 18.048
$25.69 - $35.28 1,015,250 7.7 28.552 393,250 27.377
</TABLE>
In July 1998 shareholders approved the GTECH Holdings Corporation 1998 Employee
Stock Purchase Plan (the "Plan") that allows substantially all full-time
employees to acquire shares of Common Stock through payroll deductions over
six-month offering periods (May 1 and November 1). The purchase price is equal
to 85% of the shares' fair market value on either the first or last day of the
offering period, whichever is lower. Purchases are limited to 10% of an
employee's salary, up to a maximum of $25,000 per calendar year. The Plan
expires upon the earlier of July 31, 2003 or the date the shares provided by the
plan have been purchased. A total of 750,000 treasury shares are available for
purchase under the Plan. At February 27, 1999, no shares of Common Stock had
been issued under the Plan.
<PAGE> 73
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
February 27, 1999 February 28, 1998 February 22, 1997
----------------- ----------------- -----------------
(Dollars and shares in thousands, except per share amounts)
Numerator:
<S> <C> <C> <C>
Net income $ 89,063 $ 27,214 $ 77,803
Denominator:
Weighted average shares - Basic 40,957 41,887 42,976
Effect of dilutive securities:
Employee stock options 188 342 333
------------------ ------------------ ------------------
Weighted average shares - Diluted 41,145 42,229 43,309
================== ================== ==================
Basic earnings per share $ 2.17 $ .65 $ 1.81
================== ================== =================
Diluted earnings per share $ 2.16 $ .64 $ 1.80
================== ================== =================
</TABLE>
NOTE J - INCOME TAXES
The components of income before income taxes were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
February 27, 1999 February 28, 1998 February 22, 1997
----------------- ----------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
United States $ 51,773 $ 4,883 $ 93,990
Foreign 99,181 39,730 37,879
------------------ ------------------ ------------------
$ 150,954 $ 44,613 $ 131,869
================== ================== ==================
</TABLE>
Significant components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
February 27, 1999 February 28, 1998 February 22, 1997
----------------- ----------------- -----------------
(Dollars in thousands)
Current:
<S> <C> <C> <C>
Federal $ 3,135 $ 17,254 $ 11,050
State 4,448 5,154 5,970
Foreign 44,440 19,178 14,605
------------------ ------------------ ------------------
Total Current 52,023 41,586 31,625
------------------ ------------------ ------------------
Deferred:
Federal $ 14,216 $ (21,504) $ 20,040
State 2,521 (2,683) 2,401
Foreign (6,869) --- ---
------------------ ------------------ ------------------
Total Deferred 9,868 (24,187) 22,441
------------------ ------------------ ------------------
Total Provision $ 61,891 $ 17,399 $ 54,066
================== ================== ==================
</TABLE>
<PAGE> 74
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES-(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities were
as follows:
<TABLE>
<CAPTION>
February 27, 1999 February 28, 1998
----------------- -----------------
(Dollars in thousands)
Deferred tax assets:
<S> <C> <C>
Special charge $ 29,796 $ 24,947
Accruals not currently deductible for tax purposes 16,177 17,422
Cash collected in excess of revenue recognized 7,643 2,446
Other 4,544 2,856
------------------ ------------------
58,160 47,671
Deferred tax liabilities:
Depreciation (36,293) (17,937)
Advance payments from customers (7,065) (7,502)
Other (3,933) (1,495)
------------------ ------------------
(47,291) (26,934)
------------------ ------------------
Net deferred tax assets $ 10,869 $ 20,737
================== ==================
</TABLE>
Undistributed earnings of foreign subsidiaries, excluding accumulated net
earnings of foreign subsidiaries that, if remitted, would result in little or no
additional tax because of the availability of foreign tax credits, amounted to
$3,000,000 at February 27, 1999. These earnings reflect full provision for
foreign income taxes and are intended to be indefinitely reinvested in foreign
operations. United States taxes that would be payable upon the remittance of
these earnings are estimated to be $365,000.
The effective income tax rate on income before income taxes differed from the
statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
February 27, 1999 February 28, 1998 February 22, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal income tax using statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 3.0 3.6 4.0
Equity in earnings of unconsolidated
affiliates --- 3.2 (2.7)
Nondeductible expenses 1.6 4.2 1.4
Goodwill 1.1 3.7 1.1
Tax credits (.8) (6.5) ---
Other 1.1 (4.2) 2.2
------------------ ------------------ -----------------
41.0% 39.0% 41.0%
================== ================== =================
</TABLE>
<PAGE> 75
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - TRANSACTIONS WITH RELATED PARTIES
Sales of products and services to Camelot and the other members of the U.K.
lottery consortium were $53,355,000 and $53,298,000 in fiscal 1998 and 1997,
respectively. At February 28, 1998, the Company had receivables net of advance
payments of $7,159,000, from Camelot and the other members of the consortium. In
April 1998, the Company sold its 22.5% equity interest in Camelot (See Note E).
Sales of products and services to LTE were $4,155,000, $3,907,000 and $3,714,000
in fiscal 1999, 1998 and 1997, respectively. At February 27, 1999 and February
28, 1998, the Company had receivables of $278,000 and $326,000, respectively,
from LTE.
At February 27, 1999 and February 28, 1998, the Company had a note receivable
from Full House of $3,000,000. The note was interest free until January 25, 1998
and interest bearing thereafter at the prime rate. Interest is payable monthly.
The principal balance of the note is due on January 25, 2001.
The Company paid rent of $2,612,000, $2,612,000 and $2,619,000 to West Greenwich
Technology Associates Limited Partnership (that is 50% owned by the Company and
50% owned by an unrelated third party), in fiscal 1999, 1998 and 1997,
respectively, for the Company's West Greenwich, Rhode Island corporate
headquarters and research and development and main production facility. The
agreement calls for rent payments to escalate to $3,510,000 beginning March 1,
1999, and to $3,531,000 beginning March 1, 2004.
During fiscal 1995, the Company, pursuant to the terms of an employment
agreement with William Y. O'Connor, its Chairman and Chief Executive Officer,
made loans to him to enable him to retire certain third-party indebtedness. The
loans consisted of $400,000 under a line of credit arrangement that required no
interest and that was repaid during fiscal 1997 and $500,000 bearing interest at
the rate of 6.0% per annum that was repayable in full on or before November 1,
1999. During fiscal 1998, the Company extended the due date of the $500,000 loan
from November 1, 1999 to January 1, 2000 and agreed to forgive the principal
amount of the loan in four equal installments on August 1, 1997, January 1,
1998, January 1, 1999, and January 1, 2000. Interest will continue to accrue at
6.0% per annum on the outstanding principal balance of the loan. Loans
outstanding, including interest, at February 27, 1999 and February 28, 1998,
amounted to $127,000 and $281,000, respectively.
NOTE L - LEASES
The Company leases certain facilities, equipment and vehicles under
noncancelable operating leases that expire at various dates through fiscal 2014.
Certain of these leases have escalation clauses and renewal options ranging from
one to 10 years. The Company is required to pay all maintenance, taxes and
insurance relating to its leased assets.
Future minimum lease payments, by year and in the aggregate, under noncancelable
operating leases with initial terms greater than one year, consist of the
following at February 27, 1999:
<TABLE>
<CAPTION>
Fiscal Year (Dollars in thousands)
-----------
<S> <C> <C>
2000 $ 29,307
2001 26,389
2002 16,996
2003 15,253
2004 12,193
Thereafter 46,554
---------------
Total minimum lease payments $ 146,692
===============
</TABLE>
Rental expense for operating leases was $28,358,000, $28,937,000 and $27,471,000
for fiscal 1999, 1998 and 1997, respectively.
<PAGE> 76
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - EMPLOYEE BENEFITS
The Company has two defined contribution 401(k) retirement savings and profit
sharing plans (the "Plans") covering substantially all full-time employees in
the United States and the Commonwealth of Puerto Rico. Under these Plans, an
eligible employee may elect to defer receipt of a portion of base pay for each
year. The Company will contribute this amount on the employee's behalf to the
Plans and will also make a matching contribution equal to 50% of the amount that
the employee has elected to defer, up to a maximum matching contribution of 2
1/2% of the employee's base pay. The Company, at its discretion, may contribute
additional amounts to the Plans on behalf of employees based upon its profits
for a given fiscal year. Participants are 100% vested at all times in their
entire account balance in the Plans. Benefits under the Plans generally will be
paid to participants upon retirement or in certain other limited circumstances.
In fiscal 1999, 1998 and 1997, the Company recorded expense under these plans of
$7,578,000, $5,706,000 and $7,010,000, respectively.
The Company has a defined contribution Supplemental Retirement Plan that
provides additional retirement benefits to certain key employees. The Company,
at its discretion, may contribute additional amounts to this plan on behalf of
such key employees equal to the percentage of profit sharing contributions
contributed for the calendar year multiplied by the key employees' compensation
(as defined) for such year. In fiscal 1999, 1998 and 1997 the Company recorded
expense under this plan of $415,000, $952,000 and $1,254,000, respectively.
<PAGE> 77
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA
The Company presently has one reportable segment. The Lottery segment provides
online, high speed, highly secured transaction processing systems to the
worldwide lottery industry. The accounting policies of the Lottery segment are
the same as those described in the summary of significant accounting policies.
Executive management of the Company evaluates segment performance based on net
operating profit after income taxes. All other revenues (as reported below) are
comprised principally of revenues from the Company's Transactive and Dreamport
subsidiaries (See Note P for additional information regarding the Company's
Transactive subsidiary).
The Company's business segment data is summarized below:
<TABLE>
<CAPTION>
February 27, 1999 Lottery All Other Consolidated
----------------- ------------ --------- ------------
OPERATING DATA:
<S> <C> <C> <C>
Revenues from external sources $ 873,984 $ 98,939 $ 972,923
Net operating profit after income taxes 110,846 2,456 113,302
Interest income 3,065 1,014 4,079
Equity in earnings of unconsolidated affiliates 2,791 4,322 7,113
Depreciation and amortization 187,736 11,585 199,321
BALANCE SHEET DATA (AT END OF PERIOD):
Segment assets 786,006 88,209 874,215
Investment in and advances to
unconsolidated affiliates 68 10,733 10,801
CASH FLOW DATA:
Capital expenditures 114,209 6,989 121,198
February 28, 1998
-----------------
OPERATING DATA:
Revenues from external sources $ 929,191 $ 61,376 $ 990,567
Net operating profit (loss) after income taxes 120,689 (9,995) 110,694
Interest income 3,763 1,970 5,733
Equity in earnings of unconsolidated affiliates 21,369 3,007 24,376
Depreciation and amortization 189,168 15,600 204,768
BALANCE SHEET DATA (AT END OF PERIOD):
Segment assets 955,878 67,934 1,023,812
Investment in and advances to
unconsolidated affiliates 52,593 12,215 64,808
CASH FLOW DATA:
Capital expenditures 257,806 25,736 283,542
February 22, 1997
-----------------
OPERATING DATA:
Revenues from external sources $ 860,398 $ 43,874 $ 904,272
Net operating profit (loss) after income taxes 107,179 (12,872) 94,307
Interest income 3,017 1,407 4,424
Equity in earnings of unconsolidated affiliates 15,066 1,661 16,727
Depreciation and amortization 159,803 12,827 172,630
BALANCE SHEET DATA (AT END OF PERIOD):
Segment assets 860,651 95,890 956,541
Investment in and advances to
unconsolidated affiliates 43,610 13,083 56,693
CASH FLOW DATA:
Capital expenditures 174,189 17,781 191,970
</TABLE>
<PAGE> 78
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA-(CONTINUED)
The following is a reconciliation of net operating profit after income taxes to
net income as reported on the consolidated income statements:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------
February 27, 1999 February 28, 1998 February 22, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net operating profit after income taxes $ 113,302 $ 110,694 $ 94,307
Reconciling items, net of tax:
Interest expense (16,169) (18,490) (12,279)
Special charge (8,850) (60,623) ---
Other 780 (4,367) (4,225)
------------------ ------------------- -------------------
Net income $ 89,063 $ 27,214 $ 77,803
=================== =================== ==================
</TABLE>
The Company's geographic data is summarized below:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------
February 27, 1999 February 28, 1998 February 22, 1997
----------------- ----------------- -----------------
Revenues from external sources:
<S> <C> <C> <C>
United States $ 570,548 $ 622,244 $ 568,705
Brazil 118,611 88,589 55,770
Other foreign 283,764 279,734 279,797
------------------ ------------------ ------------------
$ 972,923 $ 990,567 $ 904,272
================== ================== ==================
</TABLE>
Revenues are attributed to countries based on the location of the customer.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------
February 27, 1999 February 28, 1998 February 22, 1997
----------------- ----------------- -----------------
Systems, equipment and other assets
relating to contracts:
<S> <C> <C> <C>
United States $ 260,585 $ 297,861 $ 369,405
Brazil 63,015 150,301 48,245
Other foreign 73,961 78,694 84,651
----------------- ------------------ ------------------
$ 397,561 $ 526,856 $ 502,301
================= ================== ==================
</TABLE>
For fiscal 1999, the aggregate revenues from Caixa Economica Federal in Brazil
represented 11.2% of the Company's consolidated revenues. For fiscal 1999, 1998
and 1997, the aggregate revenues from the state of Texas represented 10.6%,
14.2% and 15.8% of the Company's consolidated revenues, respectively. No other
customer accounted for more than 10% of the consolidated revenues in such years.
<PAGE> 79
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - FINANCIAL INSTRUMENTS
Cash and cash equivalents
Cash equivalents are stated at cost that approximates fair value.
Debt
The carrying amounts of the Company's borrowings under the Credit Facility
approximate fair value due primarily to its variable interest rate
characteristics and its short-term tenure. At February 27, 1999, the estimated
fair value of the Senior Notes as determined by an independent investment banker
approximated $313,449,000.
Foreign Currency Exchange Contracts
At February 27, 1999, the Company had contracts for the sale of foreign currency
of $80,296,000 (primarily Spanish pesetas, Mexican pesos and Brazilian reals)
and the purchase of foreign currency of $71,085,000 (primarily pounds sterling),
compared to contracts for the sale of $27,018,000 (primarily Spanish pesetas)
and the purchase of $9,466,000 (primarily pounds sterling) at February 28, 1998.
The fair values of the Company's foreign currency exchange contracts are
estimated based on quoted market prices of comparable contracts, adjusted
through interpolation when necessary for maturity differences. In the aggregate,
the carrying value of these contracts approximated fair value at February 27,
1999 and February 28, 1998.
The Company had minimal exposure to loss from nonperformance by the
counterparties to its forward exchange contract agreements at the end of fiscal
1999, and does not anticipate nonperformance by counterparties in the periodic
settlements of amounts due. The Company currently minimizes this potential for
risk by entering into forward exchange contracts exclusively with major,
financially sound counterparties, and by limiting exposure with any one
financial institution.
<PAGE> 80
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - SPECIAL CHARGE
In the fourth quarter of fiscal 1998, the Company recorded a $99,382,000 special
charge ($60,623,000 after-tax, or $1.45 per basic share; $1.44 per diluted
share). The special charge consisted principally of costs to exit the electronic
benefit transfer (EBT) business conducted by the Company's Transactive
subsidiary ("Transactive"). In addition, the special charge included costs
associated with a worldwide workforce reduction, contractual obligations in
connection with the departures of the Company's former Chairman and Vice
Chairman from the Company and asset impairment charges relating to two of the
Company's lottery contracts.
In February 1998, the Company entered into an asset purchase agreement with
Citicorp Services, Inc. ("Citicorp"), to sell EBT contracts and certain related
assets held by Transactive. In July 1998, the U.S. Department of Justice
commenced a legal action seeking to enjoin the consummation of the transaction,
on anti-trust grounds and in January 1999 Citicorp terminated the agreement
pursuant to a clause in the contract that permitted termination by either party
if the closing did not occur within a timeframe that has expired. Principally as
a result of the contract termination, the Company recorded an additional special
charge of $15,000,000 ($8,850,000 after-tax, or $.22 per basic and diluted
share) in the fourth quarter of fiscal 1999 in order to write down the assets
held for sale in connection with this transaction to their net realizable value.
Those assets consisted primarily of EBT contract assets.
The major components of the special charge accrual at February 27, 1999 are
contractual obligations relating to exiting the EBT business of $1,627,000,
severance payments to be made to terminated employees of $1,464,000 and costs
associated with the termination of a consulting contract in fiscal 1999 of
$2,000,000. During fiscal 1999, the Company made severance payments of
$7,868,000 to 464 terminated employees.
A summary of the special charge activity is as follows:
<TABLE>
<CAPTION>
Disposition Worldwide Executive Asset
of EBT Workforce Contractual Impairment
Business Reduction Obligations Charges Other Total
------------- ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Special charge $ 43,556 $ 12,484 $ 17,950 $ 14,903 $ 10,489 $ 99,382
Cash expenditures (241) (204) (9,437) --- (2,281) (12,163)
Noncash charges (37,386) --- --- (15,098) (1,104) (53,588)
------------- ------------ ------------ ------------ -------------- ------------
Balance 2/28/98 5,929 12,280 8,513 (195) 7,104 33,631
------------ ------------ ------------ ------------ ------------- -----------
Change in estimate 13,601 (2,948) (20) 2,604 1,763 15,000
Cash expenditures (3,662) (7,868) (8,493) (1,543) (4,539) (26,105)
Noncash charges (14,241) --- --- (866) (1,361) (16,468)
------------- ----------- ------------ ------------ -------------- ------------
Balance 2/27/99 $ 1,627 $ 1,464 $ --- $ --- $ 2,967 $ 6,058
============ ============ ============ =========== ============= ===========
</TABLE>
<PAGE> 81
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
fiscal 1999 and 1998:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------ -----------
(Dollars in thousands, except per share amounts)
Fiscal year ended February 27,1999:
<S> <C> <C> <C> <C>
Service revenues $ 221,881 $ 224,582 $ 226,076 $ 214,856
Sales of products 10,398 8,952 25,599 40,579
Gross profit 75,679 78,199 87,753 79,680
Net income 18,679 21,848 26,476 22,060
Basic earnings per share $ .45 $ .53 $ .64 $ .55
Diluted earnings per share $ .45 $ .53 $ .64 $ .55
Fiscal year ended February 28,1998:
Service revenues $ 225,930 $ 209,139 $ 213,116 $ 220,337
Sales of products 19,241 17,671 51,649 33,484
Gross profit 77,128 74,093 82,005 80,042
Net income (loss) 19,320 20,225 23,933 (36,264)
Basic earnings per share $ .46 $ .48 $ .57 $ (.87)
Diluted earnings per share $ .46 $ .48 $ .57 $ (.87)
</TABLE>
There were 13 weeks in the first quarter of fiscal 1999 and 14 weeks in the
first quarter of fiscal 1998.
The Company recorded special charges of $15,000,000 and $99,382,000 in the
fourth quarters of fiscal 1999 and fiscal 1998, respectively (See Note P).
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly diluted earnings per share in
fiscal 1999 and the sum of the quarterly basic earnings per share in fiscal 1998
do not equal the total computed for the year.
NOTE R - SUBSEQUENT EVENT
In March 1999, the Company announced that Quick Draw, the keno-style game
operated in New York State on a lottery system provided by the Company, would
terminate effective April 1, 1999. The game did terminate as announced, due to
the failure of the New York State legislature to extend the legislation
authorizing the game.
<PAGE> 82
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE> 83
PART III
INCORPORATED BY REFERENCE
The information called for by Item 10--"Directors and Executive Officers of the
Registrant" (other than the information concerning executive officers set forth
after Item 4 herein), Item 11--"Executive Compensation," Item 12--"Security
Ownership of Certain Beneficial Owners and Management" and Item 13--"Certain
Relationships and Related Transactions" of Form 10-K is incorporated herein by
reference Holding' definitive proxy statement for its Annual Meeting of
Shareholders scheduled to be held in July 1999, which definitive proxy statement
is expected to be filed with the Commission not later than 120 days after the
end of the fiscal year to which this report relates.
<PAGE> 84
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statement Schedules and Exhibits:
Page(s)
(1) Report of Ernst & Young LLP, Independent Auditors
(2) Report of Price Waterhouse, Independent Accountants
The following consolidated financial statements of GTECH Holdings Corporation
and subsidiaries are included in Item 8:
Consolidated Balance Sheets at
February 27, 1999 and February 28, 1998
Consolidated Income Statements
Fiscal year ended February 27, 1999
Fiscal year ended February 28, 1998, and
Fiscal year ended February 22, 1997
Consolidated Statements of Shareholders' Equity--
Fiscal year ended February 27, 1999,
Fiscal year ended February 28, 1998, and
Fiscal year ended February 22, 1997
Consolidated Statements of Cash Flows--
Fiscal year ended February 27, 1999
Fiscal year ended February 28, 1998, and
Fiscal year ended February 22, 1997
Notes to Consolidated Financial Statements
SCHEDULES OMITTED:
All schedules are omitted as they are not applicable or the information is shown
in the financial statements or notes thereto.
<PAGE> 85
(3) EXHIBITS:
3.1 Restated Certificate of Incorporation of Holdings, as amended
(incorporated by reference to Exhibit 3.1 to the Form S-l of Holdings
and GTECH Corporation ("GTECH"), Registration No. 33-31867 (the "1990
S-1").
3.2 Certificate of Amendment to the Certificate of Incorporation of
Holdings (incorporated by reference to Exhibit 3.2 to the Form S-1 of
Holdings, Registration No. 33-48264 (the "July 1992 S-1")).
3.3 Amended and Restated By-Laws of Holdings (incorporated by reference to
Exhibit 3 of Holdings' 10-Q for the quarterly period ended August 29,
1998.
4.1 Amended and Restated Credit Agreement, dated as of June 18, 1997, among
GTECH, certain lenders and Bank of Montreal, Banque Paribas, Fleet
National Bank, The Bank of Nova Scotia and BankBoston, N.A., as
Co-Agents; The Bank of New York, as Documentation Agent, and
NationsBank, as Administrative Agent (incorporated by reference to
Exhibit 4.1 of Holdings' 10-Q for the quarterly period ended May 31,
1997.)
+4.2 Amendment No. 1 to Amended and Restated Credit Agreement, dated as of
February 26, 1999, among GTECH, certain lenders, and Bank of Montreal,
Banque Paribas, Fleet National Bank, the Bank of Nova Scotia and Bank
Boston, NA, as Co-Agents; The Bank of New York, as Documentation Agent
and Nations Bank, as Administrative Agent.
4.3 Note and Guarantee Agreement, dated as of May 15, 1997, among GTECH
Holdings and certain financial institutions (incorporated by reference
to Exhibit 4.2 of Holdings' 10-Q for the quarterly period ended May 31,
1997).
+4.4 Amendment No. 1 to Note and Guarantee Agreement dated as of May 15,
1997, dated as of February 22, 1999.
4.5 Specimen Form of certificate of Common Stock (incorporated by reference
to Exhibit 4.18 of the December 1992 5-1).
10.1 Amended and Restated Employment Agreement dated September 19, 1997
between GTECH, Holdings and William Y. O'Connor (incorporated by
reference to Exhibit 10.1 of Holdings' 10-Q for the quarterly period
ended August 30, 1997).*
10.2 First Amendment to Employment Agreement dated as of April 6, 1998
between GTECH, Holdings and William Y. O'Connor. (incorporated by
reference to Exhibit 10.11 of Holdings' 1998 10-K).*
<PAGE> 86
10.3 Restricted Rights Arrangement between Holdings and Mr. O'Connor
(incorporated by reference to Exhibit 10.44 of Holdings' 1995 10-K).*
+10.4 Agreement dated January 15, 1999 by and between Steven P. Nowick and
Holdings.*
10.5 Amended and Restated Employment Agreement dated as of December 1, 1995
between GTECH and Laurance W. Gay.*
10.6 Agreement dated July 15, 1997 between Holdings and Laurance W. Gay
(incorporated by reference to Exhibit 10.3 of Holdings' 10-Q for the
quarterly period ended August 30, 1997).*
10.7 Severance Agreement and Release dated March 9, 1998 between GTECH,
Holdings and Laurance W. Gay.*
+10.8 Form of Agreement entered into between Holdings and certain members of
senior management and list of signatories to Agreements and dates.
10.9 GTECH Corporation Executive Perquisites Program (incorporated by
reference to Exhibit 10.8 of Holdings' 1993 10-K).*
10.10 Form of Indemnification Agreement (incorporated by reference as Exhibit
10.14 of GTECH's 1992 10-K).
10.11 List of Indemnification Agreement signatories and dates (incorporated
by reference to Exhibit 10.17 of Holdings' 1996 10-K).
10.12 Form of Executive Separation Agreement and Schedule of Recipients (form
of Executive Separation Agreement incorporated by reference to Exhibit
10.18 of Holdings' 1996 10-K).*
10.13 Supplemental Retirement Plan effective January 1, 1992 and List of
participants (form of Supplemental Retirement Plan incorporated by
reference to Exhibit 10.16 of GTECH's 1992 10-K). (List incorporated by
reference to Exhibit 10.21 of Holdings' 1998 10-K)*
10.14 Contract for the Texas Lottery Operator for the State of Texas between
GTECH and the Texas Comptroller of Public Accounts--Lottery Division,
dated March 7, 1992 (incorporated by reference to Exhibit 10.44 of
GTECH's 1992 10-K).
10.15 Amendment to the Contract for the Texas Lottery Operator for the State
of Texas between GTECH and the Texas Comptroller of Public
Accounts--Lottery Division, dated June 1, 1994 (incorporated by
reference to Exhibit 10 of Holdings' 10-Q for the quarterly period
ended May 25, 1996).
<PAGE> 87
10.16 Second Amendment to the Contract for the Texas Lottery Operator for the
State of Texas between GTECH and the Texas Comptroller of Public
Accounts--Lottery Division, dated May 28, 1996 (incorporated by
reference to Exhibit 10.1 to the Form S-3 of Holdings, Registration No.
333-3602).
10.17 Purchase and Sale Agreement dated 8 February 1994 between Camelot Group
plc and GTECH (incorporated by reference to Exhibit 10.31 of Holdings'
1995 10-K).
10.18 Terminals Supply Agreement dated 8 February 1994 among Camelot Group
plc, International Computers Limited and GTECH (incorporated by
reference to Exhibit 10.32 of the Company's 1995 10-K).
10.19 Field Services Agreement dated 8 February 1994 among Camelot Group plc,
International Computers Limited and GTECH (incorporated by reference to
Exhibit 10.33 of Holdings' 1995 10-K).
10.20 Lottery Technology Support Services Agreement dated 8 February 1994
between Camelot Group plc and GTECH (incorporated by reference to
Exhibit 10.34 of Holdings' 1995 10-K).
10.21 Letter dated March 31, 1998 to William Y. O'Connor, Chairman and Chief
Executive Officer of GTECH, from Tim Holley, Chief Executive Officer of
Camelot Group plc (incorporated by reference to Exhibit 10.1 of
Holdings' 8-K filed on May 5, 1998).
10.22 Letter dated April 1, 1998 to William Y. O'Connor, Chairman and Chief
Executive Officer of GTECH, from Tim Holley, Chief Executive Officer of
Camelot Group plc (incorporated by reference to Exhibit 10.2 of
Holdings' 8-K filed on May 5, 1998).
10.23 Agreement dated April 20, 1998 between Camelot Group plc and GTECH U.K.
Limited for the purchase by Camelot Group plc of 11,250,000 of its own
shares (incorporated by reference to Exhibit 10.3 of Holdings' 8-K
filed on May 5, 1998).
10.24 Deed of Variation, dated April 20, 1998, between De La Rue plc, Racal
Electronics plc, Cadbury Schweppes plc, International Computers
Limited, GTECH UK Limited, Holdings, Camelot Group plc, the Director
General of the National Lottery and the Secretary of State for Culture,
Media & Sport (incorporated by reference to Exhibit 10.4 of Holdings'
8-K filed on May 5, 1998).
10.25 Exit Agreement between De La Rue plc, Racal Electronics plc, GTECH U.K.
Limited, Cadbury Schweppes Public Limited Company, International
Computers Limited, GTECH Corporation and Camelot Group (incorporated by
reference to Exhibit 10.5 of Holdings' 8-K filed on May 5, 1998).
10.26 Amended and Restated Agreement of Limited Partnership by and among
GTECH, GP Technology Associates, L.P. and GP Technology, Inc. dated
August 26, 1993;
<PAGE> 88
Certificate of Limited Partnership of West Greenwich Technology
Associates, L.P. dated August 26, 1993; Amended and Restated Indenture
of Lease between GTECH and West Greenwich Technology Associates, L.P.
dated August 26, 1993 (incorporated by reference to Exhibit 10.24 of
Holdings' 1994 10-K).
10.27 Business Agreement dated December 28, 1990 between Digital Equipment
Corporation and GTECH; Work Statement Number NED91188 dated March 11,
1991 to GTECH from Digital Equipment Corporation; First Addendum dated
March 19, 1991 to Digital Work Statement Number NED91188 dated March
11, 1991 to GTECH from Digital Equipment Corporation (incorporated by
reference to Exhibit 10.57 of the July 1992 S-1).
10.28 Maintenance Agreement Number 117A dated December 1, 1989, between GTECH
and Concurrent Computer Corporation (incorporated by reference to
Exhibit 10.58 of the July 1992 S-1).
10.29 1992 Outside Directors' Director Stock Unit Plan (incorporated by
reference to Exhibit 10.55 of Holdings' 1993 10-K).*
10.30 1994 Stock Option Plan, as amended and restated (incorporated by
reference to Exhibit 10.1 of Holdings' 10-Q for the quarterly period
ended May 31, 1997).*
10.31 1996 Non-Employee Directors' Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.2 of Holdings' 10-Q for
the quarterly period ended May 31, 1997).*
10.32 1997 Stock Option Plan (incorporated herein by reference to the
Appendix of Holdings' 1997 Notice of Annual Meeting and Proxy
Statement).*
10.33 Holdings' 1998 Non-Employee Directors' Stock Election Plan
(incorporated by reference to Exhibit 4.2 to the Form S-8 of Holdings,
Registration Number 333-5781).
10.34 Income Deferral Plan - 1998 (incorporated by reference to Exhibit 10 of
the Holdings' 10-Q for the quarterly period ended November 28, 1998).*
10.35 Trust Agreement, dated December 18, 1998, by and between Holdings and
The Bank of New York, as Trustee, respecting the Income Deferral Plan -
1998 (incorporated by reference to Exhibit 10.1 of the Holdings' 10-Q
for the quarterly period ended November 28, 1998.)*
+21.1 Subsidiaries of the Company.
+23.1 Consent of Ernst & Young, LLP.
+23.2 Consent of Price Waterhouse.
<PAGE> 89
+27.1 Fiscal 1999 Financial Data Schedule.
- ----------------------------
+ Filed herewith.
* Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
Certain instruments defining the rights of holders of long-term debt have not
been filed pursuant to item 601(b)(4)(iii)(A) of Regulation SK. Copies of such
instruments will be furnished to the Commission upon request.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the last quarter of the
fiscal year covered by this report.
<PAGE> 90
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in West Greenwich, Rhode Island, on
May 11, 1999.
GTECH HOLDINGS CORPORATION
By: /s/ William Y. O'Connor
----------------------------------------------
William Y. O'Connor, Chairman of the Board and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ William Y. O'Connor Director, Chairman of the Board, Chief Executive Officer May 11, 1999
- ----------------------- (principal executive officer)
William Y. O'Connor
/s/ Thomas J. Sauser Senior Vice President & Chief Financial Officer May 11, 1999
- ---------------------- (principal financial officer)
Thomas J. Sauser
/s/ Robert J. Plourde Vice President and Corporate Controller (principal May 11, 1999
- ---------------------- accounting officer)
Robert J. Plourde
</TABLE>
<PAGE> 91
SIGNATURE TITLE DATE
/s/ Robert M. Dewey, Jr. Director May 11, 1999
- ----------------------------------
Robert M. Dewey, Jr.
/s/ Burnett W. Donoho Director May 11, 1999
- ----------------------------------
Burnett W. Donoho
/s/ Moore Director May 11, 1999
- ----------------------------------
The Rt. Hon. Lord Moore
of Lower Marsh, P.C.
/s/ Emmett Paige, Jr. Director May 11, 1999
- ----------------------------------
Lt. Gen. (Ret.) Emmett Paige, Jr.
/s/ Anthony Ruys Director May 11, 1999
- ----------------------------------
Anthony Ruys
<PAGE> 1
Exhibit 4.2
AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment Agreement") is made and entered into as of this 26th day of February,
1999 (the "Effective Date"), by and among GTECH CORPORATION, a Delaware
corporation having its principal place of business in West Greenwich, Rhode
Island (the "Borrower"), NATIONSBANK, NATIONAL ASSOCIATION, a national banking
association organized and existing under the laws of the United States of
America ("NationsBank"), in its capacity as administrative agent for the Lenders
(in such capacity, the "Administrative Agent"), THE BANK OF NEW YORK, a New York
chartered bank, in its capacity as Documentation Agent for the Lenders (in such
capacity, the "Documentation Agent"), BANK OF MONTREAL, PARIBAS, FLEET NATIONAL
BANK, THE BANK OF NOVA SCOTIA AND BANKBOSTON, N.A., in their capacity as
co-agents for the Lenders (in such capacity, the "Co-Agents" and together with
the Administrative Agent and the Documentation Agent, the "Agents"), and the
Lenders from time to time party to the Credit Agreement (as defined below).
WITNESSETH:
WHEREAS, the Borrower, the Lenders and the Agents have entered into that
certain Amended and Restated Credit Agreement dated as of June 18, 1997 (as
amended, modified, restated, amended and restated or supplemented from time to
time, the "Credit Agreement"), pursuant to which the Lenders have made available
to the Borrower a revolving credit facility; including thereunder a letter of
credit facility. Capitalized terms not otherwise defined herein shall have the
respective meanings assigned thereto in the Credit Agreement; and
WHEREAS, the Borrower has requested that the Agents and the Lenders agree
to amend the Credit Agreement in certain respects as set forth herein; and
WHEREAS, the Agents and the Lenders have agreed to amend the Credit
Agreement; and
NOW, THEREFORE, in consideration of the premises and conditions herein set
forth, it is hereby agreed as follows:
1. Amendments to Credit Agreement. The Credit Agreement is hereby
amended, effective as of the Effective Date, as follows:
(a) Section 1.02 of the Credit Agreement is hereby amended by
deleting the definition of "Consolidated Shareholders' Equity" and
inserting in its place the following:
"Consolidated Shareholders' Equity" means, at any time as of
which the amount thereof is to be determined, shareholders' equity
of the Parent, the Borrower and its Subsidiaries as
<PAGE> 2
determined in accordance with Generally Accepted Accounting
Principles applied on a Consistent Basis; provided, however, that in
calculating Consolidated Shareholders' Equity, any amount of
Brazilian foreign currency translation adjustment, whether positive
or negative, shall be excluded in all cases.
(b) Section 1.02 of the Credit Agreement is hereby amended by
adding each of the following definitions in their proper alphabetical order in
the Credit Agreement:
"Year 2000 Compliant" means all computer applications
(including those affected by information received from its suppliers
and vendors) that are material to the Borrower's or any of its
Subsidiaries' business and operations are able to perform properly
date-sensitive functions involving all dates on and after January 1,
2000.
"Year 2000 Problem" means the risk that computer applications
used by the Borrower or any of its Subsidiaries (including those
affected by information received from its suppliers and vendors) may
be unable to recognize and perform properly date-sensitive functions
involving certain dates on and after January 1, 2000.
(c) Section 6.01 of the Credit Agreement is hereby amended by
adding the following new subsection (u):
(u) The Borrower and its Subsidiaries have (i) initiated a
review and assessment of all areas within its and each of its
Subsidiaries' business and operations (including those affected by
information received from suppliers and vendors) that could
reasonably be expected to be adversely affected by the Year 2000
Problem, (ii) have developed a plan and timeline for addressing the
Year 2000 Problem on a timely basis, and (iii) to date, have
implemented that plan on a timely basis. The Borrower intends that
all computer applications (including those affected by information
received from its suppliers and vendors) that are material to its or
any of its Subsidiaries' business and operations will, no later than
September 9, 1999, be Year 2000 Compliant, except to the extent that
a failure to do so could not reasonably be expected to have Material
Adverse Effect.
(d) Section 8.03 of the Credit Agreement is hereby deleted in its
entirety and the following new Section 8.03 is inserted in replacement thereof:
8.03 Consolidated Shareholders' Equity. Permit at any time
Consolidated Shareholders' Equity to be less than (a) $200,000,000
2
<PAGE> 3
during the current Fiscal Year and each Fiscal Year to and including
the Fiscal Year ending on the last Saturday of February 2000, and
(b) during each Fiscal Year thereafter, beginning with the Fiscal
Year commencing immediately following the last Saturday of February
2000, an amount equal to the sum of (i) the amount of Consolidated
Shareholders' Equity required under this Section 8.03 for the
immediately preceding Fiscal Year plus (ii) fifty percent (50%) of
Consolidated Net Income during the immediately preceding Fiscal
Year; provided, however, in no event shall the Consolidated
Shareholders' Equity requirement be decreased as a result of a net
loss of the Borrower and its Subsidiaries (i.e., negative
Consolidated Net Income) for any Fiscal Year. Any increase
calculated pursuant hereto shall be determined based upon financial
statements delivered in accordance with Section 7.01(a) hereof;
provided, however such increase shall be deemed effective as of the
first day of the Fiscal Year in which such financial statements are
delivered.
(e) The Credit Agreement is hereby amended by adding the following
new Section 7.20:
7.20 Year 2000 Compliance. In the event the Borrower discovers
or determines that any computer application (including those
affected by information received from its suppliers and vendors)
that is material to its or any of its Subsidiaries' business and
operations will not be Year 2000 Compliant on or before September 9,
1999, the Borrower will, promptly upon such discovery or
determination, deliver to the Administrative Agent and the Lenders
(i) a notice setting forth the identity of those applications and/or
systems that will not be Year 2000 Compliant on or before September
9, 1999, and the nature of the problem with such applications and/or
systems becoming Year 2000 Compliant, and (ii) a summary of the
Borrower's plan for of making such applications and/or systems Year
2000 Compliant in a timely manner and in no event later than
December 31, 1999. Notwithstanding the foregoing sentence, all
computer applications (including those affected by information
received from its suppliers and vendors) that are material to the
Borrower's or any of its Subsidiaries' business and operations will
be Year 2000 Compliant on or before December 31, 1999.
2. Consent of Guarantors. Each of the Guarantors joins in the execution
of this Amendment Agreement for the purposes of consenting to the amendments to
the Credit Agreement contained herein and for the further purpose of confirming
its guaranty of Obligations (among other things) as provided in the Guaranty
Agreement.
3. Conditions Precedent to Effectiveness. The effectiveness of this
Amendment Agreement shall be subject to fulfillment of the following conditions
precedent:
3
<PAGE> 4
(a) the Administrative Agent shall have received fifteen (15)
counterparts of this Amendment Agreement duly executed by the Borrower and
the Guarantors.
(b) the Administrative Agent shall have received evidence from the
Borrower either (i) of the existence in the Private Placement Debt
documents of a covenant measuring the net worth of the Borrower that is no
more restrictive, as determined by the Administrative Agent in its sole
discretion, than the Consolidated Shareholders' Equity covenant contained
in Section 8.03 of the Credit Agreement, or (ii) that the Private
Placement Debt documents do not contain a covenant measuring the net worth
of the Borrower.
(c) the Administrative Agent shall have received, for the benefit of
each of the Lenders according to their respective Applicable Commitment
Percentages as of the date hereof, an amendment fee equal to one-eighth of
one percent (1/8%) of the Total Revolving Credit Commitment as of the date
hereof; and
(d) the Administrative Agent shall have received all other
documents, and the Borrower shall have taken all other actions, necessary
in the reasonable discretion of the Administrative Agent to effectuate the
purpose and intent of this Amendment Agreement.
4. Representations and Warranties. By its execution and delivery of
this Amendment Agreement, the Borrower represents and warrants to the Agents and
the Lenders as follows:
(a) The representations and warranties made by the Borrower in
Article VI of the Credit Agreement are true and correct on and as of the
date hereof;
(b) There has been no material adverse change in the condition,
financial or otherwise, of the Borrower and its Subsidiaries, taken as a
whole, since the date of the most recent financial reports of the Borrower
received by the Administrative Agent and the Lenders under Section 7.01 of
the Credit Agreement; and
(c) No event has occurred and is continuing which constitutes, and
no condition exists which upon the consummation of the transaction
contemplated hereby would constitute, a Default or an Event of Default on
the part of the Borrower under the Credit Agreement.
5. Entire Agreement. This Amendment Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter. No promise, condition, representation
or warranty, express or implied, not herein set
4
<PAGE> 5
forth shall bind any party hereto, and no one of them has relied on any such
promise, condition, representation or warranty.
6. Full Force and Effect of Credit Agreement and other Loan Documents.
Except as hereby specifically amended, modified or supplemented, the Credit
Agreement and all other Loan Documents are hereby confirmed and ratified in all
respects and shall remain in full force and effect according to their respective
terms.
7. Counterparts. This Amendment Agreement may be executed in any number of
counterparts, each of which shall be deemed an original as against any party
whose signature appears thereon, and all of which shall together constitute one
and the same instrument.
8. Credit Agreement. All references in any of the Loan Documents to the
"Credit Agreement" shall mean the Credit Agreement as amended hereby.
9. GOVERNING LAW. THIS AMENDMENT AGREEMENT SHALL IN ALL RESPECTS BE
GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY OTHERWISE
APPLICABLE PRINCIPLES OF CONFLICT OF LAWS.
[Signature pages follow.]
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have caused this Amendment Agreement to be
duly executed by their duly authorized representatives, all as of the day and
year first above written.
BORROWER:
GTECH CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
GUARANTORS:
GTECH TRANSACTIVE GTECH HOLDINGS
RHODE ISLAND CORPORATION CORPORATION
CORPORATION
By:______________________ By:______________________ By:______________________
Name:____________________ Name:____________________ Name:____________________
Title:___________________ Title:___________________ Title:___________________
AGENTS:
NATIONSBANK, NATIONAL ASSOCIATION, as
Administrative Agent for the Lenders
By:__________________________________
Name:________________________________
Title:_______________________________
AMENDMENT NO. 1
SIGNATURE PAGE 1 OF 4
<PAGE> 7
THE BANK OF NEW YORK, as Documentation
Agent for the Lenders
By:___________________________________
Name:_________________________________
Title:________________________________
LENDERS:
NATIONSBANK, NATIONAL ASSOCIATION
By:___________________________________
Name:_________________________________
Title:________________________________
THE BANK OF NEW YORK
By:___________________________________
Name:_________________________________
Title:________________________________
BANK OF MONTREAL
By:___________________________________
Name:_________________________________
Title:________________________________
AMENDMENT NO. 1
SIGNATURE PAGE 2 OF 4
<PAGE> 8
PARIBAS
By:___________________________________
Name:_________________________________
Title:________________________________
By:___________________________________
Name:_________________________________
Title:________________________________
FLEET NATIONAL BANK
By:___________________________________
Name:_________________________________
Title:________________________________
THE BANK OF NOVA SCOTIA
By:___________________________________
Name:_________________________________
Title:________________________________
BANKBOSTON, N.A.
By:___________________________________
Name:_________________________________
Title:________________________________
AMENDMENT NO. 1
SIGNATURE PAGE 3 OF 4
<PAGE> 9
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By:___________________________________
Name:_________________________________
Title:________________________________
CREDIT LYONNAIS NEW YORK BRANCH
By:___________________________________
Name:_________________________________
Title:________________________________
MELLON BANK, N.A.
By:___________________________________
Name:_________________________________
Title:________________________________
COMMERZBANK AG, NEW YORK BRANCH
By:___________________________________
Name:_________________________________
Title:________________________________
AMENDMENT NO. 1
SIGNATURE PAGE 4 OF 4
<PAGE> 1
Exhibit 4.4
GTECH HOLDINGS CORPORATION
GTECH CORPORATION
55 Technology Way
West Greenwich, Rhode Island 02817
New York, New York
As of February 22, 1999
Re: Amendment No. 1 to Note and Guarantee Agreement
dated as of May 15, 1997
To the Noteholders
Referred to Below
Ladies and Gentlemen:
Reference is made to the Note and Guarantee Agreement dated as of May
15, 1997 (the "Agreement") between GTECH CORPORATION, a Delaware corporation
(the "Company"), GTECH HOLDINGS CORPORATION, a Delaware corporation (the
"Guarantor" and, together with the Company, the "Obligors"), and the Purchasers
identified in Schedule A thereto, pursuant to which said Purchasers purchased
$300,000,000 aggregate principal amount of the Company's 7.75% Series A
Guaranteed Senior Notes due 2004 and 7.87% Series B Guaranteed Senior Notes due
2007 (the "Notes").
The Obligors have requested that the holders of the Notes (the
"Noteholders") agree, and the Noteholders party hereto are willing, to amend
various provisions of the Agreement, all on the terms and conditions of this
Amendment.
Accordingly, in consideration of the premises and the mutual agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions. Unless otherwise defined herein, all terms used
herein which are defined in the Agreement (as amended hereby) shall have their
respective meanings as therein defined.
Section 2. Amendments to Agreement. Subject to the satisfaction of the
conditions to effectiveness specified in Section 4 below, the Agreement is
amended as follows:
2.1. Amendment to Section 10.6. Section 10.6 of the Agreement is
amended to read in its entirety as follows:
<PAGE> 2
-2-
"10.6. INDEBTEDNESS.
The Guarantor will not at any time permit the ratio
of Consolidated Indebtedness to Consolidated EBDAIT to exceed 3.0 to
1.".
2.2. Amendment to Section 10.7. Section 10.7 of the Agreement is
amended to read in its entirety as follows:
"10.7. FIXED CHARGES.
The Guarantor will not at any time permit the Fixed Charges
Coverage Ratio to be less than 2.0 to 1.".
2.3 Amendments to Section 11. (a) Subsection (c) of Section 11 of the
Agreement is amended to read in its entirety as follows:
"(c) the Guarantor defaults in the performance of or
compliance with any terms contained in Section 7.1(d) or Section 10.2,
10.4, 10.5, 10.6, 10.7 or 10.8; or".
(b) The second parenthetical phrase contained in Subsection
(d) of Section 11 of the Agreement is amended to read in its entirety as
follows:
"(provided, that, with respect to any default arising under Section
10.1, such Obligor is proceeding diligently and in good faith to remedy
such default)".
2.4. Amendments to Schedule B. (a) Schedule B to the Agreement
is amended by deleting the defined term "Consolidated Shareholders' Equity"
contained therein.
(b) Schedule B to the Agreement is further amended by adding the
following defined term thereto in the appropriate alphabetical location:
"CONSOLIDATED FIXED CHARGES" means, with reference to
any period, the sum of (a) Consolidated Interest Expense for such
period plus (b) Consolidated Lease Rentals for such period.
"CONSOLIDATED INCOME AVAILABLE FOR FIXED CHARGES"
means, with reference to any period, the sum (without duplication) of
(i) Consolidated Net Income for such period, plus (to the extent
deducted in the computation of such Consolidated Net Income) (ii)
Consolidated Interest Expense for such period, (iii) Consolidated Lease
Rentals for such period and (iv) taxes on income of the Guarantor and
its Restricted Subsidiaries for such period, provided, however, that
there shall be excluded from the computation of Consolidated Net Income
for this purpose the special charge taken by the Guarantor in the
fiscal quarter of the Guarantor ending in February 1999 (in an amount
not in excess of $15,000,000) relating to the Guarantor's decision not
to seek renewal of contracts in the benefits distribution business of
Transactive Corporation.
<PAGE> 3
-3-
"CONSOLIDATED LEASE RENTALS" means, with reference to
any period, the sum of the rental and other obligations required to be
paid during such period by the Guarantor or any Restricted Subsidiary
as lessee under all leases of real or personal property (other than
Capital Leases), excluding any amounts required to be paid by the
lessee which are on the account of maintenance and repairs, insurance,
taxes, assessments and similar charges.
"FIXED CHARGES COVERAGE RATIO" means, as of any date
of determination, the ratio of (a) Consolidated Income Available For
Fixed Charges for the four fiscal quarters ending on, or most recently
prior to, such date to (b) Consolidated Fixed Charges for such four
fiscal quarters, all determined on a pro forma basis in accordance with
generally accepted financial practice giving effect to any acquisition
or disposition made during the relevant computation period as if such
acquisition or disposition were made on the first day of such period.
Section 3. Representations and Warranties. The Obligors
represent and warrant, jointly and severally, to the Noteholders on the date
hereof and as of the Effective Date as follows (and the parties hereto agree
that the following representations and warranties shall be deemed to have been
made pursuant to the Agreement for all relevant purposes thereof):
3.1. Power and Authority. Each Obligor has the corporate power
and authority to execute and deliver this Amendment and to perform the Agreement
as amended hereby (the "Amended Agreement").
3.2. Authorization, etc. This Amendment has been duly
authorized by all necessary corporate action on the part of each Obligor and has
been duly executed and delivered by each of the Obligors, and the Amended
Agreement constitutes a legal, valid and binding obligation of each Obligor,
enforceable against such Obligor in accordance with its terms except as such
enforcement may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
3.3. No Conflicts. The execution and delivery by the Obligors
of this Amendment and the performance by the Obligors of this Amendment and of
the Amended Agreement will not (i) contravene, result in any breach of, or
constitute a default under, or result in the creation of any Lien in respect of
any property of either Obligor or any Subsidiary under, any indenture, mortgage,
deed of trust, loan, purchase or credit agreement, lease, corporate charter or
by-laws, or any other agreement or instrument to which either Obligor or any
Subsidiary is bound or by which either Obligor or any Subsidiary or any of their
respective properties may be bound or affected, (ii) conflict with or result in
a breach of any of the terms, conditions or provisions of any order, judgment,
decree, or ruling of any court, arbitrator or Governmental Authority applicable
to either Obligor or any Subsidiary or (iii) violate any provision of any
statute or other rule or regulation of any Governmental Authority applicable to
either Obligor or any Subsidiary.
3.4. Governmental Authorizations. No consent, approval or
authorization of, or registration, filing or declaration with, any Governmental
Authority is required in connection
<PAGE> 4
-4-
with the execution and delivery of this Amendment or for the performance by the
Obligors of the Amended Agreement.
3.5. No Defaults. Both immediately prior and after giving
effect to this Amendment, no Default or Event of Default shall have occurred and
be continuing.
Section 4. Conditions to Effectiveness. This Amendment shall
become effective as of the date (the "Effective Date") when the following
conditions shall have been satisfied:
4.1. Execution and Delivery. This Amendment shall have been
duly executed and delivered by each Obligor and the Required Holders.
4.2. Acknowledgements by Subsidiary Guarantors. Each
Subsidiary Guarantor shall have acknowledged and consented to the execution and
delivery of this Amendment.
4.3 Rating Confirmation. Duff & Phelps Credit Rating Co.
shall have confirmed in writing its rating of each series of Notes of at least
BBB+.
Section 5. Miscellaneous.
5.1. Fees. Without limiting the provisions of Section 16.1 of
the Agreement, the Company agrees to pay the reasonable fees and expenses of
special counsel to the Noteholders, Milbank, Tweed, Hadley & McCloy LLP,
relating to the transactions contemplated hereby.
5.2. Ratification; Waiver. The Agreement, except as amended
pursuant hereto, is in all respects ratified and confirmed, and the terms,
covenants and agreements thereof shall remain in full force and effect.
5.3. References to Agreement and Notes. From and after the
Effective Date, all references to the Agreement in the Agreement, the Notes and
the Subsidiary Guarantees shall be deemed to be references to the Agreement as
amended by this Amendment.
5.4. Governing Law. This Amendment shall be construed in
accordance with and governed by the laws of the State of New York.
5.5. Execution in Counterparts. This Amendment may be executed
in counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
<PAGE> 5
-5-
If you are in agreement with the foregoing, please sign the
form of acceptance in the space provided below whereupon this Amendment shall
become a binding agreement between you, the Company and the Guarantor.
Very truly yours,
GTECH CORPORATION
By:_____________________________
Title:
GTECH HOLDINGS CORPORATION
By:_____________________________
Title:
The foregoing is hereby agreed to as of the date hereof:
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By:_____________________________
Title:
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By:_____________________________
Title:
<PAGE> 6
-6-
ALLSTATE LIFE INSURANCE COMPANY
By:_____________________________
Title:
By:_____________________________
Title:
Authorized Signatories
THE VARIABLE ANNUITY LIFE
INSURANCE COMPANY
AMERICAN GENERAL LIFE
INSURANCE COMPANY
By:_____________________________
Title:
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
By:_____________________________
Title:
THE GUARDIAN INSURANCE AND
ANNUITY COMPANY, INC.
By:_____________________________
Title:
<PAGE> 7
-7-
FORT DEARBORN LIFE INSURANCE
COMPANY
By:_____________________________
Title:
HARTFORD LIFE INSURANCE COMPANY
By:_____________________________
Title:
HARTFORD FIRE INSURANCE COMPANY
By:_____________________________
Title:
HARTFORD LIFE AND ACCIDENT
INSURANCE COMPANY
By:_____________________________
Title:
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By: Lincoln Investment
Management, Inc., its
Attorney-In-Fact
By:_____________________________
Title:
<PAGE> 8
-8-
FIRST PENN-PACIFIC LIFE
INSURANCE COMPANY
By: Lincoln Investment
Management, Inc., its
Attorney-In-Fact
By:_____________________________
Title:
LINCOLN NATIONAL REASSURANCE
COMPANY
By: Lincoln Investment
Management, Inc., its
Attorney-In-Fact
By:_____________________________
Title:
LINCOLN NATIONAL REINSURANCE
COMPANY (BARBADOS) LTD.
By: Lincoln Investment
Management, Inc., its
Attorney-In-Fact
By:_____________________________
Title:
PACIFIC LIFE INSURANCE
COMPANY
By:_____________________________
Title:
By:_____________________________
Title:
<PAGE> 9
-9-
LIFE INVESTORS INSURANCE COMPANY
OF AMERICA
By:_____________________________
Title:
MONUMENTAL LIFE INSURANCE COMPANY
By:_____________________________
Title:
PFL LIFE INSURANCE COMPANY
By:_____________________________
Title:
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
By:_____________________________
Title:
THE EQUITABLE OF COLORADO, INC.
By:_____________________________
Title:
<PAGE> 10
-10-
RELIASTAR BANKERS SECURITY
LIFE INSURANCE COMPANY
By:_____________________________
Title:
RELIASTAR LIFE INSURANCE COMPANY
By:_____________________________
Title:
RELIASTAR UNITED SERVICES
LIFE INSURANCE COMPANY
By:_____________________________
Title:
NORTHERN LIFE INSURANCE COMPANY
By:_____________________________
Title:
WASHINGTON SQUARE ADVISORS
PRIVATE PLACEMENT TRUST FUND
By:_____________________________
Its: Investment Advisor and
Authorized Signatory
KEYPORT LIFE INSURANCE COMPANY
By Stein Roe & Farnham
Incorporated, as Agent
By:_____________________________
Title:
<PAGE> 11
-11-
CONNECTICUT GENERAL LIFE
INSURANCE COMPANY
By CIGNA Investments, Inc.
By:_____________________________
Name:
Title:
CONNECTICUT GENERAL LIFE
INSURANCE COMPANY, on
behalf of one or more
separate accounts
By CIGNA Investments, Inc.
By:_____________________________
Name:
Title:
LIFE INSURANCE COMPANY OF
NORTH AMERICA
By CIGNA Investments, Inc.
By:_____________________________
Name:
Title:
PRINCIPAL LIFE
INSURANCE COMPANY
By:_____________________________
Title:
By:_____________________________
Title:
<PAGE> 12
-12-
CONSECO ANNUITY ASSURANCE COMPANY
"Conseco Capital Management, Inc.
acting as Investment Advisor"
By:_____________________________
Title:
The foregoing is hereby acknowledged and
consented to as of the date hereof:
TRANSACTIVE CORPORATION
By:_____________________________
Title:
GTECH RHODE ISLAND CORPORATION
By:_____________________________
Title:
<PAGE> 1
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of January 15, 1999, by and between
GTECH HOLDINGS CORPORATION, a Delaware corporation (the "Company"), and STEVEN
P. NOWICK ("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%.
"BASE SALARY" has the meaning set forth in Section 5(a) hereof.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means any of the following:
(i) any willful failure by Executive to substantially
perform his employment duties as described in Section
4 hereof;
(ii) Executive's engaging in serious misconduct which is
materially injurious to the Company;
(iii) any material breach by Executive of any of the terms
of Section 10, 11 or 14(a) hereof;
(iv) Executive's having been convicted of, or pleading
nolo contendere to, a felony, crime of moral
turpitude or a gambling-related offense; or
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<PAGE> 2
(v) Executive's abuse of illegal drugs or other
controlled substances or his habitual intoxication.
"CHANGE IN CONTROL" means the happening of any of the following:
(i) the members of the Board at the beginning of any
consecutive twenty-four calendar month period (the
"Incumbent Directors") cease for any reason other
than due to death to constitute at least a majority
of the members of the Board, provided that any
director whose election, or nomination for election
by the Company's stockholders, was approved by a vote
of at least a majority of the members of the Board
then still in office who were members of the Board at
the beginning of such twenty-four calendar month
period, shall be deemed an Incumbent Director;
(ii) any "person," including a "group" (as such terms are
used in Sections 13(d) and 14(d) of the Act, but
excluding the Company, any of its Affiliates, or any
employee benefit plan of the Company or any of its
Affiliates) is or becomes the "beneficial owner" (as
defined in Rule 13(d)(3) under the Act), directly or
indirectly, of securities of the Company representing
the greater of 30% or more of the combined voting
power of the Company's then outstanding securities;
(iii) the stockholders of the Company shall approve a
definitive agreement (1) for the merger or other
business combination of the Company with or into
another corporation if (A) a majority of the
directors of the surviving corporation were not
directors of the Company immediately prior to the
effective date of such merger or (B) the stockholders
of the Company immediately prior to the effective
date of such merger own less than 50% of the combined
voting power in the then outstanding securities in
such surviving corporation or (2) for the sale or
other disposition of all or substantially all of the
assets of the Company; or
(iv) the purchase of 30% or more of the Stock pursuant to
any tender or exchange offer made by any "person,"
including a "group" (as such terms are used in
Sections 13(d) and 14(d) of the Act), other than the
Company, any of its Affiliates, or any employee
benefit plan of the Company or any of its Affiliates.
"CHANGE OF CONTROL AGREEMENT" means the Agreement between Executive and
the Company, in the form of Exhibit A hereof, which shall be entered into
pursuant to Section 3(b) hereof.
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<PAGE> 3
"CHANGE OF CONTROL DATE" means the date on which a Change in Control
occurs, provided however that if a Change in Control occurs and if Executive's
employment with the Company is terminated prior to the date on which the Change
in Control occurs, and if it is reasonably demonstrated by Executive that such
termination of employment (i) was at the request of a third party who has taken
steps reasonably calculated to effect a Change in Control or (ii) otherwise
arose in connection with or in anticipation of a Change in Control, then the
"Change of Control Date" shall mean the date immediately prior to the date of
such termination of employment.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" has the meaning set forth in Section 5(a) hereof.
"COMMON STOCK" means the Common Stock, par value $.01 per share, of the
Company.
"COMPANY" means GTECH Holdings Corporation and any successor thereto.
"DISABILITY" shall mean permanent and total disability as determined
under the Company's long term disability program.
"EFFECTIVE DATE" means July 11, 1997.
"EXECUTIVE" means Steven P. Nowick.
"GOOD REASON" means any of the following events:
(i) the assignment to Executive of any duties
inconsistent, in a material respect, with the scope
of authority, duties and responsibilities of
Executive's position as provided in Section 4(b)
hereof (including the office to which he reports,
status, offices and titles but excluding any such
inconsistency that results primarily by reason of a
substantial increase or reduction in the size of the
Company or other substantial change in the character
or scope of the Company's operations and excluding
any interim relieving of Executive's duties pursuant
to Section 7(b) hereof);
(ii) a material reduction in the compensation and benefits
to which Executive has a right hereunder, but
excluding any such reduction pursuant to Section 6(f)
hereof other than a reduction which is greater than
ten percent (10%) of Base Salary or longer than one
year in duration;
(iii) a reduction in the title of Executive after March
1998 from that of Chief Operating Officer of the
Company; or
(iv) any material breach by the Company of the terms of
this Agreement.
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<PAGE> 4
"LIFE INSURANCE COVERAGE" has the meaning set forth in Section 9(c)
hereof.
"MANAGEMENT INCENTIVE BONUS" has the meaning set forth in Section 5(c)
hereof.
"MEDICAL COVERAGE" has the meaning set forth in Section 9(c) hereof.
"1994 PLAN" means the Company's 1994 Stock Option Plan, as amended from
time to time.
"1997 PLAN" means the Company's 1997 Stock Option Plan, as amended from
time to time.
"RETIREMENT" means retirement from active employment with the Company
with the express consent of the Board or in accordance with the retirement
policies of the Company.
"TERM" has the meaning set forth in Section 3(a) hereof.
2. EMPLOYMENT.
The Company hereby agrees to employ and retain Executive, and
Executive agrees to be employed and retained by the Company, to render services
to the Company and its subsidiaries, Affiliates and divisions for the period, at
the rate of compensation and upon the other terms and conditions set forth in
this Agreement.
3. TERM.
(a) The term of Executive's employment under this Agreement
shall commence on the Effective Date, and, subject to earlier termination as
provided in Section 8 hereof, shall continue for an initial term ending February
28, 2001 (the "Term"). On March 1, 2001, and on each subsequent March 1, the
Term shall automatically be extended through the last day of February of the
next succeeding calendar year, unless either party gives written notice to the
other, at least 180 days prior to said March 1, that it or he does not wish so
to extend the Term. (For example, on March 1, 2001, the Term shall automatically
be extended through February 28, 2002, unless either party has notified the
other not later than September 1, 2000 that such party does not wish to extend
the term, in which case the Term would end February 28, 2001). The initial Term
and any extended Term are 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.
(b) Simultaneously herewith, the Company and Executive shall
enter into an Agreement in the form of Exhibit A hereof (the "Change of Control
Agreement") which, subject to the following, shall provide the terms and
conditions respecting the Company's employment of Executive from and after the
Change of Control Date. Accordingly, in the event of a Change
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<PAGE> 5
of Control occurring during the Term, this Agreement shall terminate with effect
from the commencement of the Change of Control Date and the terms and conditions
governing the Company's employment of Executive shall be set forth in the Change
of Control Agreement. The termination of this Agreement in such circumstances
shall not be deemed to be the expiration or termination of Executive's Term of
Employment within the meaning of this Agreement and Executive shall have no
right to any compensation or benefit under Section 9 hereof by virtue of such
Change of Control. Notwithstanding the above, if, after a Change of Control, a
court having jurisdiction finds that the Change of Control Agreement is
unenforceable in whole or in part, then the Change of Control Agreement, and the
preceding sentence of Section 3(b) of this Agreement, shall be deemed to have
been null and void and without force or effect ab initio, in which case the
terms and conditions governing the Company's employment of Executive during the
Term shall be as set forth in this Agreement without reference to the Change of
Control Agreement.
4. POSITION AND DUTIES.
(a) Position. During the Term, Executive shall be retained and
shall serve as Senior Vice President and, commencing in March 1998, the Chief
Operating Officer of the Company and shall be a corporate officer of the
Company. Executive shall report directly to the Chief Executive Officer of the
Company. During the Term, Executive also agrees to serve, if elected, as a
senior executive officer and/or director of any subsidiary or Affiliate of the
Company.
(b) Duties. During the Term, Executive shall have the
authority and power to perform such duties consistent with those of the Senior
Vice President and Chief Operating Officer and 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 Relations Policy) and with any
applicable disclosure and other requirements of any governmental authority and
of any other entity with which the Company, its subsidiaries and Affiliates are
doing or propose to do business. Except for illness, vacations and holidays in
accordance with then-current Company policy, Executive shall devote his full
business time, attention, skill, undivided loyalty and best efforts to the
faithful performance of his duties hereunder; provided, however, that Executive
may (i) with the approval of the Chief Executive Officer, serve on corporate,
civic and charitable boards and committees, (ii) deliver lectures and fulfill
speaking engagements, and (iii) manage personal investments, so long as such
activities do not interfere with the performance of Executive's
responsibilities. Notwithstanding the foregoing, Executive shall be permitted to
continue to serve on Boards of Directors of other entities with the approval of
the Chief Executive Officer, which consent shall not be unreasonably withheld.
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<PAGE> 6
(c) Principal Place of Employment. Executive's principal place
of employment shall be at the Company's principal offices (currently located in
West Greenwich, Rhode Island) or at such other location as the Company hereafter
reasonably may require. Executive agrees to reside within reasonable daily
commuting distance by car of such offices.
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 $325,000 from the Effective Date through February 28, 1998
and at an annual rate of $360,000 commencing on March 1, 1998 (the "Base
Salary"), payable in equal installments not less frequently than monthly. The
Base Salary shall be increased on March 1, 1999, and each annual anniversary
thereof (the "Annual Adjustment Date") during the Term at a rate equal to the
annual rate of increase, if any, in the All Cities Consumer Price Index for
Urban Wage Earners and Clerical Workers ("CP1-W") as published by the United
States Department of Labor, Bureau of Labor Statistics, at the close of the
calendar year immediately preceding the applicable Annual Adjustment Date. The
Base Salary also shall be subject to possible further increase from time to time
in the sole discretion of the Board or the Compensation Committee of the Board
or another Committee of the Board designated for such purpose (the "Committee")
and the Chief Executive Officer. The Base Salary shall not be subject to
decrease except as provided in Section 6(f) hereof.
(b) Special Bonuses. In consideration of Executive's entering
into this Agreement, the Company paid to Executive during fiscal 1998 a one-time
bonus of $75,000.
(c) Management Incentive Bonus. With respect to each fiscal
year of the Company during the Term commencing with fiscal year 1999 (i.e. the
year ending February 28, 1999), Executive shall be eligible to earn a management
incentive bonus of up to a maximum of 200% of Executive's Base Salary for such
fiscal year (the "Management Incentive Bonus"). The amount of the Management
Incentive Bonus for a given fiscal year shall be determined based upon: (x) the
achievement by Executive of certain specified management objectives mutually
developed and agreed to by the Chief Executive Officer and Executive for such
fiscal year (the "MBOs"), and (y) the achievement by the Company of the
Company's business plan for such fiscal year (the "Business Plan"). If Executive
achieves his MBOs for a given fiscal year and the Company also achieves its
Business Plan for such fiscal year, then Executive will receive a Management
Incentive Bonus equal to: (xx) 100% of his Base Salary for such fiscal year
plus, (yy) to the extent the MBOs and the Business Plan were exceeded for such
fiscal year, such additional amounts as the Chief Executive Officer and
Committee may in their sole discretion decide, up to a maximum aggregate
Management Incentive Bonus of 200% of Executive's Base Salary. In all
circumstances not described in the preceding sentence, the decision as to
whether to award Executive a Management Incentive Bonus with respect to a fiscal
year and the amount of the Management Incentive Bonus, if so awarded, shall be
made in the sole discretion of the Chief Executive Officer and the Committee.
Any Management Incentive Bonus which Executive is awarded hereunder shall be
paid at the time executive bonuses customarily are paid
-6-
<PAGE> 7
by the Company, but in no event later than 120 days after the end of the fiscal
year with respect to which such Management Incentive Bonus is payable.
(d) Certain Requirements. Notwithstanding anything contained
in this Agreement to the contrary, Executive shall not be entitled to any
Management Incentive Bonus for a given fiscal year, if his employment hereunder
has terminated for any reason prior to the end of such fiscal year.
(e) Reimbursement of Expenses. Consistent with the Company's
established policies, the Company shall pay or reimburse Executive for all
reasonable and necessary travel and other expenses of Executive incurred by
Executive in performing his duties hereunder upon receipt of written
substantiation of such expenses.
6. BENEFITS.
(a) Other Arrangements. The payments provided in Section 5
hereof are in addition to any benefits to which Executive may be, or may become,
entitled under any benefit plan, program or arrangement (excluding any increase
in salaries, generally) of the Company for which senior executives are or may
become eligible.
(b) Benefits. Except as otherwise expressly provided herein,
Executive shall be entitled to receive, during the Term, benefits at least at
the level provided generally to other senior executives under any such benefit
plan, program or arrangement, subject, to Executive's meeting the eligibility
requirements of such plans, programs or arrangements, and in the case of benefit
plans, programs or arrangements providing for discretionary grants or awards, to
the discretion of the Board or applicable Committee.
(c) Stock Options. On July 11, 1997, the Company granted to
Executive options to purchase 130,000 shares of Common Stock under the Company's
1994 Stock Option Plan (the "1994 Plan"); and on March 9, 1998, the Company
granted to Executive options to purchase 60,000 shares of Common Stock under the
Company's 1997 Stock Option Plan (the "1997 Plan"). Further, assuming the Term
has not been terminated, the Executive shall be eligible, commencing in March
1999 and annually thereafter, to receive in each such year an additional grant
of options to purchase shares of Common Stock under the Company's 1997 Plan, or
any successor plan to the 1997 Plan, such additional grants to be made, in the
discretion of management and the Committee, on the basis of individual and
Company performance. Each time Executive receives a grant of stock options
pursuant to this Section 6(c), he shall be asked and shall agree 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(c). The terms and provisions of the options provided for in this
subsection (c) shall be essentially as set forth in Appendix A hereto.
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<PAGE> 8
(d) Deferred Compensation Arrangements. Executive shall be
entitled to participate in the Company's Income Deferral Plan 1998 (as amended
from time to time, the "Income Deferral Plan"). The Company shall contribute
$364,933.33 to the Income Deferral Plan for the account of Executive promptly
upon establishment of the Income Deferral Plan.
(e) Certain Specific Benefits and Arrangements. Without
limiting the generality of subsection (a) and (b) above (except as may otherwise
be specified in Appendix B hereto), Executive shall be entitled to the specific
benefits and arrangements set forth in Appendix B hereto.
(f) Possible Reduction. Notwithstanding anything contained in
this Agreement to the contrary, the Company shall have the right to reduce or
defer prospectively the compensation and benefits provided to or for Executive,
as in effect from time to time, pursuant to an across-the-board compensation
and/or benefit reduction or deferral program similarly affecting all senior
executive officers of the Company.
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(g) 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.
(b) Services During Disability. During the Term,
notwithstanding any Disability, Executive shall, to the extent that he is
physically and mentally able to do so, furnish information and assistance to the
Company, and, in addition, upon the reasonable request in writing on behalf of
the Board, or a senior executive officer designated by the Board, from time to
time, he shall make himself available to the Company, its subsidiaries and
Affiliates to undertake reasonable assignments consistent with his position and
his physical and mental health. During such period of service, he shall be
responsible and report to, and shall be subject to the supervision of the Board,
or a senior executive officer designated by the Board, as to the method and
manner in which he shall perform such assignments and shall keep the Board, or
such senior executive officer, as the case may be, appropriately informed of his
progress in each such assignment.
8. TERMINATION OF EMPLOYMENT.
(a) Expiration and Earlier Termination. Executive's Term of
employment shall terminate upon expiration of the Term and shall be subject to
earlier termination:
(i) upon the death or Retirement of Executive;
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<PAGE> 9
(ii) at the election of the Company in the event
of Executive's Disability (as provided in
Section 7(a) hereof);
(iii) upon discharge of Executive by the Company
for Cause or resignation of Executive other
than for Good Reason; and
(iv) upon discharge of Executive without Cause or
Executive's resignation for Good Reason.
As provided in Section 3(b) hereof, this Agreement shall terminate in the event
of a Change of Control in which event the terms of Executive's employment shall
be governed by the Change of Control Agreement. The termination of this
Agreement in such circumstances shall not be deemed to be the expiration or
termination of Executive's Term of Employment within the meaning of this
Agreement and Executive shall have no right to any compensation or benefit under
Section 9 hereof by virtue of such Change of Control.
(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 for any reason
described in clause (i) or (iii) of the definition of Cause or without Cause. In
the event of a proposed termination for Cause for any reason described in clause
(i) or (iii) of the definition of 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. Subject to providing such
opportunity to cure as may be required by the preceding sentence, after giving
such notice, the Company may relieve Executive of his duties on an interim basis
until such time as Executive shall have cured the grounds for termination if
cure is permitted or Executive's employment shall have been terminated and
Executive shall have been permanently relieved of his duties. 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), (iv) or (v) of
the definition of Cause in Section 1 hereof.
(c) Certain Obligations of Executive. Executive shall give the
Company not less than 60 days prior written notice of any intended termination
by Executive of Executive's employment whether for Good Reason or other than for
Good Reason. In the event of a proposed termination for Good Reason, such notice
shall specify the grounds for such termination, and Executive shall only be
entitled to terminate his employment for Good Reason if the Company shall have
failed to correct the specified grounds within said 60-day notice period.
Executive shall not be entitled to terminate for Good Reason unless he has given
notice to the Company of his intention so to terminate within 60 days following
the occurrence of the event alleged to constitute such Good Reason.
Notwithstanding the foregoing, in the event that Executive has given the Company
notice of his intention to resign for "Good Reason" or otherwise, the Board may
elect to have such resignation become effective immediately or at such other
date, not later than the effective date specified in the notice, as the Board
may determine.
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<PAGE> 10
(d) Upon expiration or earlier termination of Executive's Term
of Employment, Executive (unless otherwise requested by the Board) concurrently
shall resign any directorships which he holds with the Company, its subsidiaries
and Affiliates.
9. COMPENSATION, BENEFITS, ETC. UPON, AND EFFECTS OF, TERMINATION.
(a) Death, Retirement, Discharge for Cause and Certain
Expirations. If the Term of Executive's employment is terminated by reason of
his death, Retirement, or discharge by the Company for Cause, or by reason of
expiration of the Term, 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 and (ii) 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. Executive also shall be entitled, to the
extent not inconsistent with this Agreement, to receive such additional
benefits, if any, as he may be entitled to under the express terms of the
applicable benefit plans (other than bonus and severance plans) of the Company,
its subsidiaries and Affiliates.
(b) Resignation Other than for Good Reason. If the Term of
Executive's employment is terminated by reason of Executive's resignation other
than for Good Reason, Executive shall be entitled to the compensation and
benefits set forth in subsection (a) above.
(c) Disability, Discharge Without Cause and Resignation for
Good Reason. If the Term of Executive's employment is terminated by the Company
by reason of Executive's Disability as provided in Section 7(a) hereof, by the
Company without Cause or by reason of Executive's resignation for Good Reason,
Executive shall be entitled to the compensation and benefits set forth in
subsection (a) above, and the Company shall continue (i) for a period of three
years following the effective date of such termination, or until Executive's
earlier death, to continue to pay or cause to be paid when due his Base Salary
at the rate in effect immediately prior to the effective date of such
termination (disregarding any reduction pursuant to Section 6(f) hereof), and
(ii) for a period of one year following the effective date of such termination,
or until Executive's earlier death and subject to continued employee
contributions at levels not to exceed levels existing prior to termination, to
continue to provide the life insurance specified in Appendix B in the amount in
effect immediately prior to the effective date of such termination ("Life
Insurance Coverage") and to continue to provide the medical (including dental
and optical) coverage specified in Appendix B ("Medical Coverage") at
substantially the same level as provided to Executive at the effective date of
such termination. Following the one-year period, Executive shall only be
entitled to whatever medical coverage, if any, as is required to be provided by
applicable law.
(d) [Reserved].
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<PAGE> 11
(e) Termination of Certain Benefits Upon Reemployment. In the
event that, following termination of Executive's employment by the Company
without Cause or by Executive for Good Reason, Executive secures other
employment (including employment as a consultant) during the period in which the
Company is obligated to continue Medical Coverage or Life Insurance Coverage
under subsections (c) above, the Company's obligation to continue such Medical
Coverage and Life Insurance Coverage immediately shall terminate, except as may
otherwise be required by applicable law. However, subject to subsection (g)
below the securing of such other employment by Executive shall not affect the
Company's obligations with respect to the continued payment to Executive of this
Base Salary. Executive shall notify the Company promptly of his securing of any
such employment (including employment as a consultant).
(f) Consulting Services by Executive. If Executive's
employment is terminated by the Company for Disability, by the Company without
Cause or by Executive for Good Reason, Executive, in consideration of and during
the period of the continued payments under Sections 9(c), shall provide, to the
extent that he is physically and mentally able to do so, such reasonable
consulting services to the Company as the Company may from time to time request;
provided that, unless otherwise agreed to by Executive, such services (i) shall
not require in excess of an aggregate of 60 hours during any fiscal quarter,
(ii) may be rendered by telephone and shall not require Executive's presence in
person, and (iii) subject to Section 10(b) and 11, shall not preclude Executive
from engaging in other employment or activities. Such services shall be at the
direction and control of the Board or a senior executive officer designated by
the Board.
(g) Reductions, Forfeitures, etc. Notwithstanding the
foregoing: (i) any payments or benefits required to be paid or provided to
Executive pursuant to Sections 7(a) or 9(c) 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) the payments
and benefits required by this Section 9 shall be made or provided at such times
as they would have been paid or provided if Executive's employment had not been
terminated.
(h) 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.
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<PAGE> 12
10. CERTAIN OBLIGATIONS OF EXECUTIVE.
Executive further covenants with the Company as follows and
expressly agrees that all payments and benefits due Executive under this
Agreement shall be subject to Executive's compliance with the provisions of
Sections 10 and 11. 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, 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. During the Term, the Company shall maintain insurance covering
Executive at least as favorable in all material respects as its existing
Directors' and Officers' Insurance.
(b) Confidential Information, Proprietary Rights, etc. (i)
Executive shall not knowingly use for his own benefit or disclose or reveal to
any unauthorized person, during or after the Term, any trade secret or other
confidential information relating to the Company, including any customer lists,
customer needs, price and performance information, processes, specifications,
hardware, software, firmware, programs, devices, supply sources and
characteristics, business opportunities, marketing, promotional, pricing and
financing techniques, or other information relating to the business of the
Company; provided that such restriction on confidential information shall not
apply to information which is (i) proven to be generally available in the
industry, (ii) disclosed in published literature; (iii) obtained by Executive
after the Term from a third party without binder of secrecy; or (iv) required to
be disclosed by Executive by court order or other process of law, provided
however, that Executive shall to the extent circumstances allow, provide the
Company with prior written notice of such requirement and with the opportunity
to assist in opposing such court order or other process of law. 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.
(ii) All rights, title and interest in and to any ideas,
inventions, technology, processes, know-how, works, hardware, software,
firmware, programs, devices, trade secrets, trade names, trademarks or service
marks, which Executive may conceive, create, organize, prepare or 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.
(iii) Executive does hereby irrevocably constitute, authorize,
empower and appoint the Company, or any of its officers, such Executive's true
and lawful attorney (with full
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<PAGE> 13
power of substitution and delegation) in Executive's name, and in Executive's
place and stead, or in the Company's name, to take and do such action, and to
make, sign, execute, acknowledge and deliver any and all instruments or
documents which the Company, from time to time, may deem desirable or necessary
to vest in the Company, its successors and assigns, any of the rights, title or
interest granted pursuant to clause (ii) above for the use and benefit of the
Company, its successors and assigns.
11. NON-COMPETITION. (a) For the periods specified in clauses (i) and
(ii) below following termination of Executive's employment (irrespective of the
reason for such termination), Executive shall not engage or propose to engage,
directly or indirectly (which includes owning, managing, operating, controlling,
being employed by, acting as a consultant to, giving financial assistance to,
participating in or being connected in any material way with any business or
person so engaged) anywhere in the United States, including its territories and
possessions, or in any foreign country (the United States and any such foreign
country being deemed to be a separate "Territory") in any business which
competes or proposes to compete with any business in which the Company was
engaged or proposed to be engaged in such Territory at the time of the
termination of Executive's employment; provided, that Executive's ownership as a
passive investor of less than one percent of the issued and outstanding stock or
equity, or $100,000 principal amount of any debt securities, of any corporation,
partnership or other entity so engaged shall not by itself be deemed to
constitute such engagement by Executive. The Company shall be deemed to have
"proposed" to engage in a business within the meaning of the previous sentence
if, at the time of termination of Executive's employment, management of the
Company was actively considering entering such line of business (whether by
acquisition, internal development or otherwise) as evidenced by a written
business plan (or other reasonably detailed substantive delineation of business
objectives) in existence at such time and Executive was aware of such active
consideration.
The aforesaid prohibition on Executive's activities shall
extend (i) for a period of three years following termination of Executive's
employment with respect to the Lottery and Gaming Business (as defined below),
and (ii) for a period of one year following termination of Executive's
employment with respect to activities relating to any other business. As used
herein, the "Lottery and Gaming Business" shall mean the provision of products
or services of every nature relating to the operation of all manner of
lotteries, games of chance and parimutuel wagering however and wherever
conducted.
Executive shall not be deemed to have violated this Section
11(a) merely by virtue of employment by a non-competitive division or subsidiary
of a business entity or consolidated group that includes one or more divisions
or subsidiaries that does in fact compete with a business carried on by the
Company.
(b) Further, for a period of three years following termination
of Executive's employment (irrespective of the reason for such termination),
Executive shall not (i) disturb or interfere with any business relationship
between the Company and any of its employees, dealers, customers, suppliers or
other business associates, or (ii) solicit or cause to be solicited any
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<PAGE> 14
officer, employee, customer or shareholder of the Company to terminate such
person's relationship with the Company or to take other action contrary to the
best interests of the Company.
12. TAX WITHHOLDING.
The Company may withhold from any benefits payable under this
agreement all Federal, State, City, or other taxes as shall be required pursuant
to any law or governmental regulations or ruling.
13. EFFECT OF PRIOR AGREEMENTS.
This Agreement, including the Exhibit and Appendices hereto,
contains the entire understanding between the parties hereto with respect, to
the matters covered herein and supersedes any prior agreement, condition,
practice, custom, usage and obligation with respect to such matters insofar as
any such prior agreement, condition, practice, custom, usage or obligation might
have given rise to any enforceable right.
14. GENERAL PROVISIONS.
(a) Certain Representations and Warranties of Executive.
Executive represents to the Company that (i) the execution and performance of
this Agreement by Executive and his employment hereunder does not and will not
constitute a breach of any contract, agreement, obligation or understanding,
oral or written, to which he is a party or by which he is bound; (ii) the
employment and other personal background information provided by Executive to
Company is true and correct in all material respects and (iii) to the best of
Executive's knowledge, there is no factor relating to him or his family not
previously disclosed in writing to the Company which could reasonably be
expected, if he were a senior executive officer or director of the Company, to
disqualify the Company, its subsidiaries or Affiliates from, or materially
jeopardize their chances of, obtaining lottery contracts or other contracts in
the businesses in which they are engaged or propose to engage.
(b) Non-assignability. 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.
(c) Binding Agreement. This Agreement shall be binding upon,
and accrue to the benefit of, Executive and the Company and their respective
heirs, executors, administrator, successors and permitted assigns, including, in
the case of the Company, any person or entity acquiring all or substantially all
of the Company's assets.
(d) Amendment of Agreement. This Agreement may not be modified
or amended except by an instrument in writing signed by the parties hereto.
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<PAGE> 15
(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(b) 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. The Company and
Executive agree that the prevailing party in any legal proceeding respecting
this Agreement shall receive, from the other party, reimbursement for all costs
incurred in connection with such proceeding.
(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; if to the Company, addressed to GTECH Holdings
Corporation, 55 Technology Way, West Greenwich, Rhode Island 02817 and directed
to the attention of the Board with a copy to the Secretary of the Company; if to
a member of the Board, addressed to each member at his respective address on
file with the Secretary of the Company with a copy to the Company, or to such
other address as either party may have furnished to the others in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
(i) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
(j) Indulgences, Etc. Neither the failure nor any delay on the
part of either party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a
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<PAGE> 16
waiver thereof, nor shall any single or partial exercise of any right, remedy,
power or privilege preclude any other or further exercise of the same or of any
other right, remedy, power or privilege, nor shall any waiver of any right,
remedy, power or privilege with respect to any occurrence be construed as a
waiver of such right, remedy, power or privilege with respect to any other
occurrence.
(k) Headings. The headings of Sections and paragraphs herein
are included solely for convenience of reference and shall not control the
meaning or interpretation of any of the provisions of this Agreement.
(l) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Rhode Island, regardless
of the laws that might otherwise govern under applicable principles of conflicts
of laws thereof.
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<PAGE> 17
IN WITNESS WHEREOF, GTECH Holdings Corporation has caused this
Agreement to be executed by their duly authorized officers, and Executive has
signed this Agreement, all as of the day and year first above written.
GTECH HOLDINGS CORPORATION
Attest:______________________ By:_________________________________
Name: Name:
Title: Title:
Witness: EXECUTIVE
- ----------------------------- -----------------------------------
Steven P. Nowick
Address: 104 Circle Ridge Drive
Burr Ridge, IL 60521
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<PAGE> 18
APPENDIX A
SUMMARY OF TERMS OF STOCK OPTIONS
The stock options to be granted under Section 6(d) of the Agreement are
to be granted pursuant to the 1994 Plan, in the case of stock options granted on
the Effective Date, and the 1997 Plan, in the case of all other stock option
grants, and will be subject to the respective terms and conditions of the 1994
Plan and the 1997 Plan and the terms and conditions of the Option Agreement. The
following is a summary of the provisions of the stock options provided for in
Section 6(d) of this Agreement:
Nature of Options - Nonqualified unless otherwise determined by the
Committee.
Exercisability - Options shall become exercisable (i.e. vest) in
four equal annual installments commencing one
year from the dates of grant of the particular
option, subject to possible acceleration under
the terms of the 1994 Plan or the 1997 Plan, as
the case may be.
Option Price - Fair market value at the date of the grant of the
particular option.
Term - Ten years from the date of grant of the particular
option, subject to earlier termination in certain
circumstances under the terms of the 1994 Plan or
the 1997 Plan, as the case may be.
Termination of Employment - In the event Executive's employment is terminated:
(i) by reason of death or Retirement, his
outstanding options (i.e. options which have been
granted but have not been exercised or terminated
and have not expired), to the extent they are
vested at
<PAGE> 19
the date of such death or Retirement, shall remain
exercisable for a period of one year; and
(ii) by the Company for Disability or without
Cause (as defined in the 1994 Plan), by
Executive's resignation for Good Reason, or by the
Company in the circumstances set forth in Section
3(b) of the Agreement, his outstanding options,
whether or not they have vested on the date of
such termination of employment, shall accelerate
and become vested in full and shall remain
exercisable for a period of one year.
Notwithstanding the foregoing, (i) with respect to
Executive's options, if any, which may be
incentive stock options under the Code, the
exercisability period following termination of
employment shall not exceed that permitted by the
Code, (ii) the period of exercisability of options
following termination of employment specified
above is subject to possible reduction in certain
circumstances under the terms of the 1994 Plan,
and (iii) in no event shall any option be
exercisable after the expiration of its term.
Except as expressly provide above, upon
termination of Executive's employment, his
options, whether vested or unvested, shall
immediately terminate and be of no further force
and effect.
<PAGE> 20
APPENDIX B
SUMMARY OF CERTAIN BENEFITS AND ARRANGEMENTS
1. Relocation & Related Matters. Executive currently owns a home in the
Chicago, Illinois vicinity (the "Premises"). The Company will provide Executive
with a home buyout option, through HFS Mobility Services ("HFS"), with respect
to the Premises. This option, subject to the more detailed rules respecting the
HFS Program, involves: (i) the appraisal of the Premises by two appraisers
(chosen by Executive from a list of approved appraisers); (ii) the valuation of
the Premises on the basis of the average of the two appraisals (the "Average
Appraisal"); and (iii) the extension of an offer by HFS to Executive to purchase
the Premises at a price equal to the Average Appraisal. Executive has the option
of accepting the offer to purchase within sixty days, in which case HFS will
purchase the Premises at a price equal to the Average Appraisal subject to
normal closing conditions, or rejecting or not accepting the offer within sixty
days, in which case Executive shall be responsible for the sale of the Premises.
2. Vacation. During the Term, Executive shall be entitled to a paid
vacation of four weeks per year commencing to accrue on the date of Executive's
employment hereunder.
3. Automobile. During the Term, the Company shall make available to
Executive for his own use a passenger automobile in accordance with the
Company's automobile policy, as Executive may select.
4. Life Insurance. During the Term (and thereafter as and to the extent
expressly provided in the Agreement), Executive shall receive life insurance
coverage in accordance with the Company's policy.
5. Medical. During the Term (and thereafter as and to the extent
expressly provided in the Agreement) and subject to the payment by Executive of
employee contributions as provided in the plan, the Company shall bear the cost
of all medical expenses reasonably incurred by Executive and his family (family
eligibility to be determined in accordance with the Company's general policies
concerning medical coverage), including hospitalization (private room), dental,
optical and choice of physicians. Further, during the Term, the cost of
Executive's annual physical examination also shall be borne by the Company.
6. Tax Preparation. During the Term, the Company shall bear the expense
for annual tax preparation for Executive subject to such limits as are set forth
in the Company plan.
<PAGE> 21
7. Perquisites Plan. During the Term, Executive shall have the right to
participate in the Company's Executive Perquisites Plan, in accordance with its
terms provided that the amount available to Executive under the Plan for
calendar year 1997 shall be calculated on the assumption that Executive was
employed by the Company during all of calendar year 1997.
8. Income Deferral Plan. During the Term, Executive shall have the
right to participate in the Income Deferral Plan in accordance with, and subject
to, the terms and conditions of such plan.
<PAGE> 22
Exhibit A
[Omitted: See Exhibit 10.8]
<PAGE> 1
AGREEMENT
AGREEMENT, dated this _____ day of _________________, 1998, by and
between________________________, ("Executive") and GTECH HOLDINGS CORPORATION, a
Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company wishes to assure itself of continuity of
management in the event of any actual or threatened "Change in Control" (as
defined below) of the Company; and
WHEREAS, the Company and the Executive desire to embody in a written
agreement the terms and conditions under which the Executive shall be employed
by the Company in the event of any actual or threatened Change in Control of the
Company;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto hereby agree as follows:
Section 1. Definitions.
1.1 Act. "Act" means the Securities Exchange Act of 1934, as
amended to date.
1.2. Affiliate. "Affiliate" means any corporation which is a
subsidiary of the Company within the definition of "subsidiary corporation"
under Section 424(f) of the Code.
1.3. Board. "Board" means the Board of Directors of the Company.
1.4. Cause. "Cause" means (i) the Executive's engaging in serious
misconduct that is injurious to the Company, (ii) the Executive's having been
convicted of, or entered a plea of nolo contendere to a crime that constitutes a
felony, (iii) the breach by the Executive of any written covenant or agreement
with the Company not to disclose any information pertaining to the Company or
not to compete or interfere with the Company, or (iv) abuse of illegal drugs or
other controlled substances, or habitual intoxication.
1.5. Change In Control. "Change in Control" means the happening of
any of the following:
(i) the members of the Board at the beginning of any
consecutive twenty-four calendar month period (the
"Incumbent Directors") cease for any reason other
than due to death to constitute at least a majority
of the members of the Board, provided that any
director whose election, or nomination for election
by the Company's stockholders, was approved by a vote
of at least a majority of the members of the Board
then still in office who were members of the Board at
the beginning of such twenty-four calendar
<PAGE> 2
month period, shall be deemed an Incumbent Director;
(ii) any "person", including a "group" (as such terms are
used in Sections 13(d) and 14(d) of the Act, but
excluding the Company, any of its Affiliates, or any
employee benefit plan of the Company or any of its
Affiliates) is or becomes the "beneficial owner" (as
defined in Rule 13(d)(3) under the Act), directly or
indirectly, of securities of the Company representing
the greater of 30% or more of the combined voting
power of the Company's then outstanding securities;
(iii) the stockholders of the Company shall approve a
definitive agreement (1) for the merger or other
business combination of the Company with or into
another corporation if (A) a majority of the
directors of the surviving corporation were not
directors of the Company immediately prior to the
effective date of such merger or (B) the stockholders
of the Company immediately prior to the effective
date of such merger own less than 50% of the combined
voting power in the then outstanding securities in
such surviving corporation or (2) for the sale or
other disposition of all or substantially all of the
assets of the Company; or
(iv) the purchase of 30% or more of the Stock pursuant to
any tender or exchange offer made by any "person",
including a "group" (as such terms are used in
Sections 13(d) and 14(d) of the Act), other than the
Company, any of its Affiliates, or any employee
benefit plan of the Company or any of its Affiliates.
1.6. Code. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
1.7. Effective Date. "Effective Date" means the date on which a Change
in Control occurs. Anything in this Agreement to the contrary notwithstanding,
if a Change in Control occurs and if the Executive's employment with the Company
is terminated prior to the date on which the Change in Control occurs, and if it
is reasonably demonstrated by the Executive that such termination of employment
(i) was at the request of a third party who has taken steps reasonably
calculated to effect a Change in Control or (ii) otherwise arose in connection
with or in anticipation of a Change in Control, then for all purposes of this
Agreement, the "Effective Date" shall mean the date immediately prior to the
date of such termination of employment.
1.8 Executive Perquisite Program. "Executive Perquisite Program" means
the Company's Executive Perquisite Program in effect on the date hereof, as the
same may be amended from time to time.
1.9 Non-Qualified Plans. "Non-Qualified Plans" means the Company's
Supplemental Retirement Plan in existence as of the date hereof, and any other
unfunded, non-qualified, deferred compensation, incentive compensation or
retirement plan adopted by the Company
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subsequent to the date hereof, and/or any successor plan or plans.
1.10. Option. "Option" means any option to purchase shares of Stock
granted to Executive pursuant to the Company's 1994 Stock Option Plan, as
amended from time to time, the Company's 1997 Stock Option Plan, as amended from
time to time, or any other stock option plan adopted by the Company.
1.11 Retirement Plan. "Retirement Plan" means the Company's
profit-sharing and 401(k) retirement plan which is qualified under Section
401(a) and 501(a) of the Code in existence as of the date hereof and any other
such plan adopted by the Company subsequent to the date hereof and/or any
successor plan or plans.
1.12. Stock. "Stock" means the Common Stock $.01 par value per share of
the Company.
1.13. Term of Employment. "Term of Employment" means the period
commencing on the Effective Date and ending on the earliest of:
(a) Executive's death or "Total Disability" (as defined
below);
(b) Termination of the Term of Employment pursuant to
Section 4 below;
(c) Three (3) years from the Effective Date.
Neither the expiration of the Term of Employment nor the termination of this
Agreement will relieve the Company of the obligation to provide Executive, in
accordance with the terms hereof, the payments, benefits and coverage to which
he has become entitled under this Agreement.
1.14. Total Disability. "Total Disability" shall mean permanent and
total disability as determined under the Company's long term disability program.
Section 2. Employment.
----------------------
2.1. Capacity and Situs of Employment. The Company agrees to employ
Executive throughout the Term of Employment, during which (a) Executive's
position (including reporting relationships, status, offices and titles),
authority, duties and responsibilities shall be at least equal in all material
respects with the highest position, authority, duties and responsibilities held
by, exercised by and assigned to the Executive at any time during the six month
period immediately preceding the Change in Control, and (b) Executive's situs of
employment will be at the Company's executive headquarters in West Greenwich,
Rhode Island or such other situs (the "Other Situs") to which Executive may be
assigned prior to the Effective Date (the Company's executive headquarters or
the Other Situs, whichever is applicable to the Executive, is herein referred to
as the "Applicable Situs") or such other location within a fifty (50) mile
radius of the Applicable Situs (hereinafter referred to as the "Area") to which
the Applicable Situs be moved.
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2.2. Services of the Executive. Executive agrees, subject to Sections
4.3 and 4.4 below, to remain in the Company's employ during the Term of
Employment, on the terms described in Section 2.1.
Excluding periods of vacation and sick leave to which Executive is
entitled, Executive agrees to devote substantially all of his attention, energy
and time during normal business hours to the business and affairs of the Company
and, to the extent necessary, to discharge responsibilities assigned to
Executive hereunder, to use his best efforts to perform such responsibilities
faithfully and efficiently. Executive may (a) serve on corporate, civic and
charitable boards or committees, (b) deliver lectures and fulfill speaking
engagements and (c) manage personal investments, so long as such activities do
not interfere with the performance of Executive's responsibilities. To the
extent that any such activities have been conducted by Executive prior to the
Change in Control, such prior conduct, and any subsequent conduct similar in
nature and scope, shall not be deemed to interfere with the performance of
Executive's responsibilities.
Section 3. Compensation and Benefits During the Term of Employment.
--------------------------------------------------------------------
3.1. Compensation. The Company will pay as compensation to Executive
for his services as an employee during the Term of Employment:
(a) base annual salary at a rate equal to or greater than the rate
of base salary in effect for Executive immediately prior to the Effective
Date; plus
(b) for the year in which a Change in Control occurs, the greater
of (i) a bonus under the annual bonus plan(s) in effect as of the Change
in Control, calculated on the basis of the Company's performance up to
the Change in Control, and payable in accordance with such plan(s) or
(ii) an amount equal to the bonus paid to Executive under the annual
bonus plan(s) in effect for the year immediately preceding the year in
which the Change in Control occurs, payable in accordance with the terms
of such plan(s);
(c) in years subsequent to the year in which the Change in Control
occurs, an annual bonus which is equal to or greater than the annual
bonus paid in the year preceding the year in which the Change in Control
occurs, payable not later than provided for in the plan(s) in effect for
such preceding year.
3.2. Benefits. In addition, for his services as an employee during the
Term of Employment, Executive will receive all life, disability, accident and
group health insurance benefits, retirement, profit-sharing and deferred
compensation, and all other fringe benefits and payments under additional
benefit plans, including the Executive Perquisite Program, all in an amount or
with a value at least equal to those benefits being provided by the Company to
the Executive immediately prior to the Effective Date, including but not limited
to the following:
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<PAGE> 5
(a) Executive will participate fully in the Company's Retirement
Plan and Non-Qualified Plans with benefit accruals and Company
contributions for the benefit of Executive under all such plans, and all
other material provisions of such plans, being at least the same as
immediately prior to the Effective Date, or Company shall pay to
Executive annual cash payments in advance, each at least being equal to
the total value of such benefit accruals and Company contributions under
such plans for the last fiscal year of the Company ending prior to the
Effective Date;
(b) At no additional cost to Executive, Company shall continue to
provide coverage to Executive, together with his dependents and
beneficiaries, in all life insurance plans, accident and health plans,
Section 125 plans, and other welfare plans maintained or sponsored by the
Company, at a level and subject to terms which are at least as favorable
to Executive as the coverage provided immediately prior to the Effective
Date, or the Company shall pay to Executive the full value thereof in
cash annually in advance;
(c) Executive will participate fully in additional benefit plans
offered by the Company to executives immediately prior to or after the
Effective Date; and
(d) Executive will receive fringe benefits and job perquisites
(which shall not include any benefit referred to elsewhere in this
Section 3), including the Executive Perquisite Program, automobile in
accordance with the Company's Fleet Policy for Vice Presidents and
Corporate Officers as in effect as of the date hereof, paid vacation,
club memberships, applicable class travel, tax and financial statement
preparation assistance, paid financial assistance, executive physical
examinations, office, office furnishings and equipment and support staff,
at least equivalent to those provided to Executive immediately prior to
the Effective Date, as well as reimbursement, upon proper accounting, of
reasonable expenses and disbursements incurred by Executive in the course
of his duties.
3.3. Funding of Deferred Compensation Benefits. Contemporaneous with
the Change in Control, all benefits accrued by Executive under the terms of any
of the Company's Non-Qualified Plans shall become fully vested and the Company
shall immediately contribute to a rabbi trust for the benefit of the Executive
the full amount of all such accrued benefits. Not less frequently than
quarterly, the Company shall make additional contributions to the rabbi trust
equal to the full amount of any additional benefits accrued by Executive
pursuant to Section 3.2(a) hereof.
3.4. Acceleration of Vesting of Options. The Company hereby agrees that
on or prior to the date of a Change in Control any and all options awarded to
the Executive not previously exercisable and vested shall become fully vested
and exercisable. In addition, in the event the Company decides to terminate any
Options previously awarded to the Executive pursuant to the applicable
provisions of any stock option plan adopted by the Company in connection with a
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corporate transaction (as that term is described in Section 424(a) of the Code),
the Company will give the Executive not less than fourteen days' notice prior to
any such termination and such notice shall not be given until any and all
Options previously awarded to Executive shall have become fully vested and
exercisable.
Section 4. Termination of Employment
------------------------------------
4.1. Compensation Prior To Termination. During the year in which either
(i) the Executive's employment is terminated during the Term of Employment for
any reason, or (ii) the Executive resigns during the Term of Employment in
accordance with Section 4.3(b) below, notwithstanding any other provision of
this Agreement, the Company and the Executive hereby agree that the Executive
shall have the right to receive base salary, annual bonuses, contributions to
Retirement Plans and Non-Qualified Plans, gross-up payments made to cover tax
liabilities (to the extent provided in such plans), and all other compensation,
benefits and payments earned or paid with respect to the period prior to the
date of termination of employment, all such payments or contributions to be made
at the times provided for in such plans or in accordance with Company policy as
in effect immediately prior to the Effective Date, except as expressly provided
below. For purposes of this Section 4.1, the amount of the annual bonuses earned
and the amount of the contributions to the Retirement Plans and Non-Qualified
Plans earned (i) shall be at least equal to the amounts paid to, or contributed
on behalf of, the Executive for the year immediately preceding the year in which
the termination of the Executive's employment occurs which amounts shall be
prorated based on the number of days in the year in which the termination of the
Executive's employment occurs which have passed prior to the date of the
termination of the Executive's employment, and (ii) shall be paid or contributed
on behalf of the Executive not later than 10 days after the date of termination
of employment. Nothing in this Section 4.1 shall in any way alter the
Executive's right to receive all the payments and rights and benefits described
in Sections 4.2 and 4.3(a).
4.2. (a) Termination other than for Cause. In the event Executive's
employment is terminated by the Company during the Term of Employment for any
reason other than Cause, the Company will pay Executive, as liquidated damages,
a lump sum cash payment, payable within ten (10) days of his termination, equal
to two and ninety-nine hundredths (2.99) times the sum of (i) Executive's
current annual base salary in effect at the date of termination (including in
base salary for this purpose any elective salary reductions made by the
Executive and contributed by the Company on his behalf to the Company's
Retirement Plan, any Non-Qualified Plan, or a plan meeting the requirements of
Section 125 of the Code), plus (ii) the total cash bonus received by the
Executive from the Company during the most recent full fiscal year of the
Company pursuant to the Company's annual bonus plan(s), plus (iii) the maximum
amount allowable under the Executive Perquisite Program during the most recent
calendar year of the Company.
(b) Participation in Benefit Plans. In the event of a termination
described in Section 4.2(a) above, Executive, together with his dependents and
beneficiaries, will become fully vested in and continue following his
termination to participate fully in, at no additional cost to Executive, all
life insurance plans, accident and health plans and other welfare plans,
maintained or sponsored by the Company immediately prior to the termination, at
the same level and subject
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<PAGE> 7
to terms at least as favorable to Executive as in effect immediately prior to
termination (or the full value thereof in cash) from the Company, until the
earlier of (a) the Executive's eligibility for comparable benefit plans with
another employer and (b) the third anniversary of termination. Executive will
also become fully vested in the Retirement Plan, and all Non-Qualified Plans,
and within thirty (30) days of Executive's termination of employment, Company
shall pay to Executive the sum of (i) all benefits accrued under the
Non-Qualified Plans and (ii) an amount equal to 2.99 times the average benefit
accrued and/or Company contributions made to the Retirement Plan and the
Non-Qualified Plans over the last three fiscal years. In addition, the Company
shall provide Executive with out-placement service through a bona fide
out-placement organization acceptable to Executive that, at a minimum, agrees to
supply Executive with out-placement counseling, a private office and
administrative support including telephone service until such time that
Executive secures suitable employment, not to be limited by Section 1.13 hereof.
4.3. Resignation By Executive - Constructive Termination.
-------------------------------------------------------------
(a) If Executive resigns during the Term of Employment in accordance
with Section 4.3(b) below, his employment will be deemed to have been terminated
by the Company for reasons other than Cause (and he will be deemed to have
offered to continue to provide services to the Company), and, notwithstanding
any provision herein to the contrary, he will be entitled to all the payments
and rights and benefits described in Sections 4.1 and 4.2, at the time provided
for therein.
(b) Executive may resign in accordance with this Section 4.3 upon the
occurrence of any of the following events (in each case, "Good Reason"):
(i) any reduction of, or failure to pay, Executive's base
annual salary or annual bonus in breach of Section 3.1 above;
(ii) any failure by the Company to provide the benefits
required by Section 3.2 above or to make any contribution to a rabbi
trust which might be due in accordance with Section 3.3 above;
(iii) assignment to Executive of any duties inconsistent in
any respect with his position (including the office to which he
reports, status, offices, and titles), authority, duties or
responsibilities as contemplated by Section 2.1 above or any other
action by the Company which results in a diminution of such position,
authority, duties or responsibilities;
(iv) as a result of the Change in Control and a change in
circumstances thereafter significantly affecting Executive's position,
including, without limitation, a change in scope of the business or
other activities for which he was responsible immediately prior to the
Change in Control, he has been rendered substantially unable to carry
out, or has been substantially hindered in the performance of, any of
the authority, duties or responsibilities contemplated by
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<PAGE> 8
Section 2.1 above;
(v) the failure of the Company after a Change in Control to
comply with and satisfy Section 7.1 or 7.2 below;
(vi) relocation by the Company of its principal executive
offices, or any event that causes Executive to have his principal
location of work changed, to any location outside the Area;
(vii) any requirement by the Company that Executive travel
away from his office in the course of his duties significantly more
than the number of consecutive days or aggregate days in any calendar
year than was required of him prior to the Change in Control; or
(viii) without limiting the generality or effect of the
foregoing any material breach of this Agreement by the Company or any
successor thereto or transferee of substantially all of the assets
thereof.
For purposes of this Agreement, any good faith determination of "Good Reason"
made by the Executive shall be presumptively correct.
(c) If Executive resigns during the Term of Employment in accordance
with Section 4.3(b) above, the Company shall have the right to request that the
Executive agree to remain as an employee of the Company during a transition
period of up to three months (the "Transition Period") and the Executive hereby
agrees that, if requested by the Company, he will remain as an employee of the
Company during the Transition Period. During the Transition Period, the Company
will continue to pay the Executive the Executive's base salary, annual bonus and
all other compensation and benefits on the same basis as such items were paid to
the Executive prior to his resignation.
4.4. Resignation by Executive. If Executive resigns during the Term of
Employment without Good Reason, the Executive shall have the right to receive
base salary, annual bonuses, contributions to Retirement Plans and all other
compensation and benefits earned during the calendar year of his resignation up
to the date of his resignation. For purposes of this Section 4.4, the amount of
the annual bonuses and the amount of the contributions to the Retirement Plan
shall be at least equal to the amounts paid to, or contributed on behalf of, the
Executive for the year immediately preceding the year in which the resignation
of the Executive occurs which amounts shall be prorated based on the number of
days in the year in which such resignation occurs which have passed prior to the
date of such resignation. In addition all vested Non-Qualified Plan benefits
shall be paid within thirty (30) days of resignation.
4.5. Termination for Cause. If Executive is dismissed by the Company
for Cause, he will not be entitled to the payments or benefits provided under
Section 4.2 hereof.
4.6. Dispute Resolution. All disputes between the parties to this
Agreement
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concerning the matters set forth herein shall be resolved exclusively pursuant
to the dispute resolution procedures of this Section 4.6. In furtherance
thereof, Executive or the Company, as the case may be, shall initiate binding
arbitration in Rhode Island before the American Arbitration Association ("AAA")
and under its rules by serving a notice to arbitrate upon the other party hereto
and AAA within 90 days of the occurrence of any dispute hereunder that is unable
to be resolved by negotiation between the parties. The parties shall bear their
respective costs in any such dispute resolution, except that with respect to any
such action initiated by the Executive, provided the Executive initiates such
action in good faith, the Company agrees (i) to pay the costs and expenses
(including fees of counsel to the Executive) of any such arbitration or judicial
proceeding, and (ii) to pay interest to Executive on any amounts found to be due
to Executive hereunder during any period of time that such amounts are withheld
pending arbitration and/or judicial proceedings. Such interest will be at the
base or prime rate most recently announced by Rhode Island Hospital Trust
National Bank (or its successor) prior to the commencement of the arbitration or
litigation. The Company and Executive agree that any arbitration award shall be
binding and may be enforced by any court of competent jurisdiction.
4.7. Death or Total Disability of the Executive.
(a) If Executive dies or suffers a Total Disability during the Term of
Employment, then this Agreement shall terminate and the Company, its successors
and assigns shall be relieved and discharged of any and all obligations
whatsoever to make further payment to Executive pursuant to the terms of this
Agreement after the date of death or Total Disability of Executive, except as to
base salary earned for services actually rendered and vacation pay accrued prior
to the date of death or Total Disability of Executive.
(b) If Executive dies or suffers a Total Disability following a
termination of employment which entitled him to payments and benefits under this
Section 4 but prior to receipt of all such payments and benefits, his
beneficiary (as designated to the Company in writing) or, if none, his estate,
will be entitled to receive all unpaid amounts and benefits due under this
Agreement.
4.8. Enforcement of Rights. Termination of Executive's employment,
whether or not giving rise to payments or benefits under this Section 4, will
not in any way prevent Executive from enforcing rights to payments or benefits
under Section 3 relating to periods during which he was employed.
Section 5. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional payments
required under this Section 5) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and
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penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed on the Payments.
(b) Subject to the provisions of Section 5(c), all determinations
required to be made under this Section 5, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other nationally recognized certified public accounting firm as may
be designated by the Executive (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and the Executive within 15
business days of the receipt of notice from the Executive that there has been a
Payment, or such earlier time as is requested by the Company. In the event that
the Accounting Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change in Control, the Executive shall appoint
another nationally recognized accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to
this Section 5, shall be paid by the Company to the Executive within five days
of the receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 280G and Section 4999 of the
Code at the time of the initial determination by the Accounting Firm hereunder,
it is possible that Gross-Up Payments which will not have been made by the
Company should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts its
remedies pursuant to Section 5(c) and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
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(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 5(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 5(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determinative then such advance shall be forgiven and shall not
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be required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.
Section 6. Payment of Fees, Costs and Expenses.
------------------------------------------------
It is the intent of the Company that the Executive not be required to
incur the expenses associated with the enforcement of his rights under this
Agreement by litigation or other legal action or arbitration proceeding because
the cost and expense thereof would substantially detract from the benefits
intended to be extended to the Executive hereunder. Accordingly, if Executive
determines in good faith that the Company has failed to comply with any of its
obligations under this Agreement or if the Company or any other person takes any
action to declare this Agreement void or unenforceable, or institutes any
litigation or arbitration proceeding designed to deny, or to recover from, the
Executive the benefits intended to be provided to the Executive under Section 6
hereof, the Company will promptly, upon request of the Executive in the event of
the likelihood of a Change in Control or upon a Change in Control, use its best
efforts to secure an irrevocable standby letter of credit (the "Letter of
Credit"), issued by Rhode Island Hospital Trust National Bank or another bank of
comparable or greater size (the "Bank") for the benefit of the Executive
providing that the fees and expenses of counsel selected from time to time by
the Executive pursuant to this Section 6 or in proceedings contemplated by
Section 4.6 shall be paid, or reimbursed to the Executive if paid by the
Executive, on a regular, periodic basis upon presentation by the Executive to
the Bank of a statement or statements prepared by such counsel in accordance
with its customary practices. The Company shall pay all amounts and take all
action necessary to maintain the Letter of Credit during the Term of Employment
and for one (1) year thereafter and if, notwithstanding the Company's complete
discharge of such obligations, such Letter of Credit shall be terminated or not
renewed, the Company shall use its best efforts to obtain a replacement
irrevocable letter of credit drawn upon a commercial bank selected by the
Company and reasonably acceptable to the Executive, upon substantially the same
terms and conditions as contained in the Letter of Credit, or any similar
arrangement which, in any case, assures the Executive the benefits of this
Agreement without incurring any cost or expense for enforcement against the
Company or the defense thereof.
Section 7. Merger or Acquisition.
----------------------------------
7.1. Assumption of Obligations. If the Company is at any time before or
after a Change in Control merged, consolidated or reorganized into or with any
other corporation or other entity (whether or not the Company is the surviving
entity), or if substantially all of the assets of the Company are transferred to
another corporation or other entity, the entity arising from such merger,
consolidation or reorganization, or the acquirer of such assets, shall (by
agreement in form and substance satisfactory to Executive) expressly assume the
obligations of Company under this Agreement.
7.2. Executive's Rights to Benefits. In the event of any merger,
consolidation, reorganization or sale of assets described above, nothing
contained in this Agreement will detract from or otherwise limit Executive's
right to or privilege of participation in any stock option or purchase plan or
restricted stock plan or any bonus, profit sharing, savings, pension, group
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insurance, hospitalization or other incentive or benefit plan or arrangement
which may be or become applicable to executives of the corporation resulting
from such merger or consolidation or the corporation, acquiring such assets of
the Company.
7.3. References. In the event of any merger, consolidation,
reorganization or transfer of assets described above, references to the Company
in this Agreement shall, unless the context suggests otherwise, be deemed to
include the entity resulting from such merger or consolidation or the acquirer
of such assets of the Company.
Section 8. Change in Control Following Certain Circumstances.
-------------------------------------------------------------
Notwithstanding any provision herein to the contrary, should a Change
in Control occur subsequent to Executive's death, Total Disability or retirement
from the Company, the remainder of any benefits owed under the terms of any
stock plans or other non-qualified deferred compensation plan, including
interest, shall be paid in full on the date of the Change in Control.
Section 9. Termination of this Agreement.
------------------------------------------
Either the Company or Executive may, by giving 60 days written notice
to the other party, terminate this Agreement as of the third or any subsequent
annual anniversary of the occurrence of a Change in Control.
Section 10. Withholding of Taxes.
----------------------------------
All payments required to be made by the Company hereunder to Executive or
his dependents, beneficiaries or estate will be subject to the withholding on
such amounts relating to tax and/or other payroll deductions as may be required
by law.
Section 11. Amendment.
-----------------------
No amendment, change or modification of this Agreement may be made except
in a writing, signed by or on behalf of both parties.
Section 12. Miscellaneous.
---------------------------
12.1. Binding Effect. The provisions of this Agreement shall be binding
upon and shall inure to the benefit of Executive, his executors, administrators,
legal representatives and assigns, and the Company and its successors and
assigns.
12.2. Governing Law. The validity, interpretation and effect of this
Agreement shall be governed by and construed in accordance with the laws of the
State of Rhode Island.
12.3. Severability. The invalidity or enforceability of any provision of
this Agreement shall not affect the validity of any other provision.
-13-
<PAGE> 14
12.4. No Set-Off. There shall be no right of setoff or counterclaim, in
respect of any claim, debt or obligation, against any payments to Executive, his
dependents, beneficiaries or estate provided for in this Agreement, and nothing
in this Agreement shall relieve the Company of its obligations to Executive
under any other agreement, plan, contract or arrangement. Subject to Section
12.6 hereof, no right, benefit or interest hereunder shall be subject to
anticipation, alienation, sale, assignment, encumbrance, charge, pledge,
hypothecation or set-off in respect of any claim, debt or obligation, or to
execution, attachment, levy or similar process or assignment by operation of
law. Any attempt, voluntary or involuntary, to effect any action specified in
the immediately preceding sentence shall, to the full extent permitted by law,
be null, void and of no effect. In no event shall the Executive be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Executive under any of the provisions of this Agreement
and, except as otherwise provided in Section 4.2(b) hereof, such amounts shall
not be reduced whether or not the Executive obtains other employment.
Notwithstanding anything to the contrary in this Agreement, Executive shall
forfeit all future payments and benefits hereunder in the event that Executive
is determined, pursuant to procedures established in Section 4.6 hereof, to have
materially breached any written covenant or agreement between the Executive and
the Company prohibiting the disclosure of confidential information pertaining to
the Company or respecting competition or interference with the Company, provided
that the Company shall have given the Executive at least thirty (30) days prior
written notice of such breach and such breach shall not have been cured by the
end of such notice period.
12.5. Remedies. The Company and Executive agree that, because of the
unique nature of this Agreement, failure of either party to carry out or abide
by the obligations under this Agreement could cause irreparable injury;
accordingly, the parties agree that, in addition to any other remedies available
to either party, any such failure by either party to perform or abide by this
Agreement shall be subject to appropriate equitable remedies, including specific
performance and injunctive relief.
12.6. Assignability. No right or interest to or in any payments shall be
assignable by the Executive; provided, however, that this provision shall not
preclude him from designating one or more beneficiaries to receive any amount
that may be payable after his death and shall not preclude the legal
representative of his estate from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to his
estate. The term "beneficiaries" as used in this Agreement shall mean a
beneficiary or beneficiaries so designated to receive any such amount, or if no
beneficiary has been so designated, the legal representative of the Executive's
estate.
12.7. Counterparts; Headings; References. This Change in Control
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument. The headings of the sections of this Agreement are inserted for
convenience only and shall not constitute a part hereof. References to the
masculine or feminine gender (or to the singular or plural number) herein shall
mean the other such gender (or number), as appropriate.
-14-
<PAGE> 15
12.8. Entire Agreement. This instrument contains the entire agreement of
the parties pertaining to the subject matter contained herein and supersedes and
is in lieu of any and all other arrangements pertaining to the subject matter
contained herein having effect as of the effective date. Nothing herein shall be
deemed to modify any existing obligations Executive may have with respect to
confidentiality, non-competition and similar obligations.
12.9. Notices. All notices given hereunder shall be in writing and shall
be delivered personally or sent by prepaid registered or certified mail, return
receipt requested, addressed as follows or to such other address as may be
provided by any party hereto to the other party:
If to the Company: GTECH Holdings Corporation
55 Technology Way
West Greenwich, RI 02817
Attention:
If to the Executive:
All notices shall be deemed to be given on the date received at the
address of the addressee, or if delivered personally, on the date delivered.
IN WITNESS WHEREOF, the Company and Executive have each caused this
Agreement to be duly executed and delivered as of the date set forth above.
ATTEST: GTECH HOLDINGS CORPORATION
_______________________________ By:_____________________________
Joseph A. Anesta Stephen Davidson
Assistant Secretary Senior Vice President
WITNESS:
______________________________ _____________________________
-15-
<PAGE> 16
Michael Chambrello* July 15, 1997
Stephen A. Davidson July 15, 1997
Laurance Gay* July 15, 1997
Stephen P. Nowick January 15, 1999
Thomas J. Sauser July 15, 1997
Donald Stanford July 29, 1997
Donald Sweitzer October 13, 1998
Former officer of GTECH Holdings Corporation who was an Executive Officer for a
portion of fiscal 1999.
<PAGE> 1
Exhibit 21.1
GTECH HOLDINGS CORPORATION'S SOLE SUBSIDIARY:
GTECH Corporation
GTECH CORPORATION'S SUBSIDIARIES:
Concorde Acquisition Corp. (Delaware)
Dreamport, Inc. (Delaware) (formerly GTECH Gaming sub. 1)
Dreamport do Brasil Ltda.
Environmental Paper Products, Inc. (RI)
Europrint Holdings Ltd. (UK)
GameScape, Inc. (RI)
Gaming Systems Corporation (Delaware)
Gana de Mexico S.A. de C.V.
GTECH GmbH (German)
GRYTEK Co. Ltd. (Poland)
GTECH Asia Corporation (Delaware)
GTECH Australasia Corporation (Delaware)
GTECH do Brasil Holdings Ltda. (Brazil)
GTECH Canada Computer Systems Corporation (Canada)
GTECH Child Care Center (Rhode Island)
GTECH Computer Systems Sdn Bhd (Malaysia)
GTECH Corporation (Delaware)
GTECH Corporation (Utah)
GTECH Czechoslovakia Corporation (Delaware)
GTECH De Mexico S.A. de C.V. (Mexico)
GTECH Eesti A.S. (Estonia)
GTECH Espana Corporation (Delaware)
GTECH Europe S.A. (Belgium)
GTECH Far East Pte Ltd (Singapore)
<PAGE> 2
GTECH Foreign Holdings Corporation (Delaware)
GTECH Gaming Subsidiary 2 Corporation (Delaware)
GTECH Ireland Corporation (Delaware)
GTECH Italia Srl (Italy)
GTECH Italy Corporation (Delaware)
GTECH Latin America Corporation (Delaware)
GTECH LIT Corporation (Lithuania)
GTECH Lithuania Corporation (Delaware)
GTECH Management P.I. Corporation (Delaware)
GTECH Nevada Corporation (Delaware)
GTECH Northern Europe Corporation (Delaware)
GTECH Offshore Services Limited (Jersey, Channel Islands)
GTECH Rhode Island Corporation (Rhode Island)
GTECH South Africa Corporation (Delaware)
GTECH Suffolk Corporation (Delaware)
GTECH Sweden Corporation (Delaware)
GTECH Taiwan Corporation (Delaware)
GTECH Texas Corporation (Delaware)
GTECH U.K. Limited (U.K.)
GTECH U.K. Corporation (Delaware)
GTECH Worldserv, Inc. (Delaware)
GTECH Worldserv International, Inc. (Delaware)
GTECH Worldwide Services Corporation (Delaware)
Innovative Environmental Technologies, Inc. (Delaware)
LAC Corporation (Rhode Island)
Oy GTECH Finland Ab. (Finland)
<PAGE> 3
SB Industria E Comercio Ltd. (Brazil)
Technology Risk Management Services, Inc.
Technology Travel Corporation (Delaware)
Transactive Corporation (Delaware)
(formerly GTECH Administrative Services Corp.)
Via Video Corporation (Delaware)
VideoSite, Inc. (Delaware)
Watson Land Company (Rhode Island)
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-64167) pertaining to the 1998 Employee Stock Purchase Plan, in the
Registration Statement (Form S-8 No. 333-57781) pertaining to the 1997 Stock
Option Plan and the 1998 Non-Employee Directors' Stock Election Plan, in the
Registration Statement (Form S-8 No. 33-88426 and No. 333-27835) pertaining to
the 1994 Stock Option Plan and in the Registration Statement (Form S-8 No.
333-27831) pertaining to the 1996 Non-Employee Directors' Stock Option Plan and
the 1992 Outside Directors' Director Stock Unit Plan, of GTECH Holdings
Corporation of our report dated March 29, 1999, with respect to the consolidated
financial statements of GTECH Holdings Corporation included in the Annual Report
(Form 10-K) for the fiscal year ended February 27, 1999.
ERNST & YOUNG LLP
Boston, Massachusetts
May 11, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-64167) pertaining to the 1998 Employee Stock Purchase Plan and in
the Registration Statement (From S-8 No. 333-57781) pertaining to the 1997 Stock
Option Plan and the 1998 Non-Employee Directors' Stock Election Plan and in the
Registration Statement (Form S-8 No. 33-88426 and No. 333-27835) pertaining to
the 1994 Stock Option Plan and in the Registration Statement (Form No.
333-27831) pertaining to the 1996 Non-Employee Directors' Stock Option Plan and
the 1992 Outside Directors' Director Stock Unit Plan, of GTECH Holdings
Corporation of our report dated March 23, 1998, with respect to the financial
statements of Camelot Group plc as of January 31, 1998, and February 1, 1997,
and for the years ended January 31, 1998, and February 1, 1997, which is
included in the Annual Report (Form 10-K) of GTECH Holdings Corporation for the
fiscal year ended February 27, 1999.
Price Waterhouse
London, England
May 10, 1999
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