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May 23, 1997
Securities and Exchange Commission
450 Fifth Street
Washington, DC 20549
Re: GTECH Holdings Corporation Annual Report on Form 10-K
Gentlemen:
On behalf of GTECH Holdings Corporation (the "Company"), I enclose for filing
via the EDGAR System, the Company's Annual Report on Form 10-K (including
Exhibits) for fiscal 1997, which ended on February 22, 1997.
The required filing fee of $250.00 has been paid by wire transfer in accordance
with the procedures set forth in Instructions for Filing Fees--Rule 3(a) of the
Commission's Informal and Other Procedures.
Please note that the financial statements contained in the Form 10-K do not
reflect a change from the preceding year in any accounting principles or
practices or the method of applying such principles or practices.
Sincerely,
s/Brendan J. Radigan
_______________________
Brendan J. Radigan
Assistant General Counsel
cc: New York Stock Exchange (w/enclosures)
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 22, 1997
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 14, 1997 was
$1,553,452,940 (Reference is made to Page 41 herein for a statement of the
assumptions upon which this calculation is based.)
On May 14, 1997, there were outstanding 42,022,920 shares of the registrant's
Common Stock.
Documents Incorporated By Reference: Certain portions of the registrant's 1997
definitive proxy statement relating to its scheduled July 1997 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.
PART I
ITEM 1. BUSINESS
General
GTECH Corporation ("GTECH") is the world's leading operator of
computerized on-line 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
on-line lottery systems for 29 of the 38 on-line lottery authorities in the
United States and has supplied or currently operates on-line lottery systems for
50 of the 77 international on-line lottery authorities. The Company, seeking to
develop growth opportunities outside of the on-line lottery industry, is
actively involved in the emerging electronic benefits delivery industry and the
pursuit of gaming opportunities other than on-line lottery such as destination
gaming and video lottery.
Since the establishment of the first on-line lottery in 1975, the
on-line lottery industry has experienced substantial growth, as governments have
increasingly relied on lotteries as a non-tax source of revenue. In 1996, ticket
sales in the on-line lottery industry were approximately $20.6 billion in the
United States. The Company believes the on-line lottery industry will continue
to grow, assuming, as anticipated, that additional international jurisdictions
implement on-line lotteries and international and United States jurisdictions
with existing on-line lotteries expand their lottery systems and introduce new
lottery products and games.
The Company's core business consists of providing on-line 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 on-line 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' on-line lottery
systems in return for a percentage of the gross lottery revenues. Many of the
Company's international lottery customers have purchased their on-line lottery
systems, although some, especially lottery authorities in Eastern Europe and
Latin America, have entered into long-term service contracts with the Company.
Although product sales increased in fiscal year 1997 over fiscal 1996 levels, in
recent years there has been an industry movement away from product sales in
favor of long-term service contracts. In fiscal 1993, approximately 70% of the
Company's lottery revenues were derived from its portfolio of long-term on-line
lottery service contracts with substantially all of the remainder being derived
from lottery product sales. In fiscal 1997, approximately 87% of the Company's
lottery revenues were derived from on-line lottery service contracts. The
Company believes that revenues attributable to product purchases by lotteries
during fiscal 1998 are likely to remain closer to the percentage level realized
in fiscal 1997 than to the fiscal 1993 level.
In recent years, lottery authorities have recognized that by offering
new games or products, lotteries 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 on-line products and services introduced in recent years
consist of keno, instant ticket support systems and services and
BingoVision(TM). Keno, an on-line 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 17 additional
jurisdictions on four continents. The Company currently provides instant ticket
support services, products and systems in 23 domestic jurisdictions and 11
jurisdictions outside of the United States. BingoVision(TM), a televised
bingo-based lottery game developed by the Company, has been implemented by the
Company in six jurisdictions. In fiscal 1997, the Company organized GameScape,
Inc. ("GameScape") as a vehicle to develop, test, package, and introduce new
games targeted to the marketing needs of its lottery customers. See "Products
and Services Introduced in Recent Years."
The Company also has broadened its product lines outside of its core
business of providing on-line lottery services and products. In August 1993, the
Company acquired a benefits delivery business as part of its acquisition of the
parimutuel wagering business of General Instrument Corporation which the Company
conducted through its AmTote International, Inc. subsidiary ("AmTote"). The
Company divested AmTote during fiscal 1996 but continues to build upon the
benefits delivery operations. The Company's benefits delivery systems provide
secure, high volume transaction processing of food stamps, Aid to Families with
Dependent Children and other benefits on behalf of governmental authorities. The
Company, principally through its wholly-owned subsidiary, Transactive
Corporation ("Transactive"), currently provides to the State of Texas and to the
State of Illinois Department of Public Aid benefits delivery systems and
services. The State of Texas, through Transactive, currently operates the
largest electronic benefits delivery system in the United States. See
"Significant Developments Since the Start of Fiscal 1997."
In November 1994, the Company announced the formation of its Gaming
Group, later incorporated as Dreamport, Inc. ("Dreamport"), to pursue gaming
opportunities other than on-line lottery, including video lottery and
destination gaming. In May 1995, the Company announced an agreement with Full
House Resorts, Inc. ("Full House") to finance and develop Native American and
casino gaming opportunities. One such opportunity, a casino on Native American
lands in Coos Bay, Oregon, became operational in May 1995. In addition, in
February 1996, the Company and Full House entered into agreements with Delaware
State Fair and Harrington Raceway, Inc. respecting the financing and
construction of a gaming facility at the Delaware State Fairground, Kent County,
Delaware, and other opportunities are being developed by the Company and Full
House. The Harrington Raceway facility opened under the name Midway Slots and
Racebook during fiscal 1997. See "Significant Developments Since the Start of
Fiscal 1997" below.
In fiscal 1996, the Company formed a subsidiary, GTECH Worldserv, Inc.
to provide network communications services to private sector clientele. This
business is still in its start-up phase. See "Significant Developments Since the
Start of Fiscal 1997" and "Products and Services Introduced in Recent Years"
below.
GTECH was founded in 1980. Holdings acquired GTECH in a leveraged
buy-out, in which members of senior management of GTECH participated, that was
completed on February 1, 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.
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, and (iv) the results and effects of legal proceedings and
investigations. Such forward looking statements reflect management's assessment
based on information currently available, but are not guarantees and are subject
to risks and uncertainties 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 filings with the Securities and Exchange
Commission.
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 generally conduct an intensive investigation of the Company and its
employees prior to and after the award of a lottery contract and may require
removal of any employees deemed to be unsuitable. To date, the Company has never
been disqualified 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. Transactive, which is engaged primarily in providing
computerized networks and services to governments for electronic benefits
transfers, is also subject to extensive state as well as federal regulatory
requirements.
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 a local company in seeking international lottery contracts.
Maintenance of Business Relationships and Certain Legal Matters
A significant portion of the Company's revenues and cash flow is
derived from its portfolio of long-term on-line lottery service contracts. The
Company's on-line 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 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. To date, no lottery
authority has ever exercised its option to terminate at will during the contract
term or has ever terminated a contract with the Company for failure to perform.
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 and prospects.
The Company regularly engages public affairs and governmental relations
advisors, including lobbyists, in various jurisdictions to advise legislators
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 and benefits delivery contract proposals. The Company also makes
contributions to various political parties and associations but does not make
contributions to individual candidates or their campaigns.
It has not been uncommon in the lottery industry for investigations of
various types, including grand jury investigations, to be conducted by federal
or state law enforcement and other officials into possible undue influence,
bribery or other improprieties or wrongdoing in connection with efforts to
obtain or the awarding of lottery contracts and related matters. Such
investigations often are called for by disappointed competitors or politicians
(who may include those opposed to gaming or the lottery business). Some
investigations in the past have involved the Company, or its consultants,
lobbyists or representatives, directly or indirectly, and the Company is aware
of federal grand jury investigations currently being conducted by the U.S.
Attorneys in New Jersey and Texas.
As previously publicly reported, in October 1994, the U.S. Attorney's
Offices for the Western District of Kentucky and for the District of New Jersey
announced that separate indictments had been returned by federal grand juries in
those jurisdictions against J. David Smith, the former sales manager of the
Company (who resigned in early 1994 for reasons unrelated to the indictments),
and several other individuals who served as consultants or suppliers to the
Company. The indictments alleged essentially that, unbeknownst to the Company,
Mr. Smith had received kickbacks from the consultants and suppliers for his own
benefit. The indictments did not charge the Company with any wrongdoing, and the
actions complained of did not affect the Company's Kentucky or New Jersey
lottery operations. In January 1995, at the conclusion of the Government's case,
the U.S. District Court for the Western District of Kentucky dismissed all
charges against Mr. Smith and the other defendant, a GTECH supplier. The New
Jersey trial of Mr. Smith and two consultants commenced in September 1996 in the
U.S. District Court for New Jersey, and in October 1996 Mr. Smith and one of the
two consultants were found guilty of all charges. The other consultant was found
not guilty. Mr. Smith has moved for a new trial. In the midst of these events,
the New Jersey Lottery Commission awarded GTECH a contract to continue operating
the state lottery.
Subsequent to the Smith trial, the New Jersey U.S. Attorney announced
in a press release that a grand jury investigation in that jurisdiction is
continuing but did not specify the scope of such investigation. Thereafter, the
New Jersey U.S. Attorney's Office issued subpoenas to GTECH, one of which is
being disputed by GTECH. The Texas U.S. Attorney's Office in the past has also
issued subpoenas to GTECH. GTECH is cooperating with these investigations.
As previously publicly reported, the United States Attorney's Office in
Georgia recently advised GTECH's counsel that its grand jury investigation,
which GTECH previously reported, has terminated. No charges were brought against
GTECH.
No charges of wrongdoing have ever been brought against GTECH or the
Company by any grand jury or other governmental authority. On two occasions in
the past, charges of wrongdoing were brought against non-employee lobbyists
retained by GTECH, but neither lobbyist was found guilty of any activities
relating to GTECH.
The Company does not believe that it has engaged in any wrongdoing in
connection with these matters. However, since the current investigations are
still underway and are conducted largely 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.
As widely reported in the Texas media, the Texas Lottery Commission is
inquiring of GTECH regarding its business relationships relating to the Texas
Lottery and GTECH has cooperated with that inquiry. The Texas Lottery is also
inquiring about several other matters which could have material negative
implications with respect to GTECH's business in Texas, including the following:
- GTECH's consulting contracts with Ben Barnes, former
Lieutenant Governor of Texas, which contracts were entered
into in 1991 and were bought out and terminated by the Company
in February 1997;
- GTECH's retention in October 1992 of Michael
Moeller, a friend of Nora Linares, the then Executive Director
of the Texas Lottery, as a consultant regarding New Mexico;
- Mr. Barnes' gift in December 1992 of a $100 paperweight to then Governor of
Texas, Ann Richards;
- Any other instances in which GTECH entertained or gave a gift
to a state official (without reimbursement).
In addition, the Texas State Auditor has issued to GTECH a Request for
Information, and GTECH is complying with that request.
In March 1997, the Texas Lottery Commission directed its staff to
prepare and circulate by June 30, 1997, a request for proposals with respect to
the entire Texas Lottery contract currently held by GTECH, as well as requests
for proposals for various portions of that contract. However, the Chairman of
the Commission has declared that this action is not and should not be deemed an
exercise by the Texas Lottery of the termination provision of GTECH's contract,
without cause, upon 30 days prior notice. The Texas Lottery Commission has
further asserted that it has no obligation to deal with GTECH in good faith with
respect to the termination of its contract with the Company, a position with
which GTECH strongly disagrees. Pursuant to the amendment to GTECH's contract
executed in April 1996 which extended the term of the contract for five years,
the Company is making major capital investments of more than $20 million and has
incurred significant related expenses. (See Note E to Consolidated Financial
Statements and Item 7--"Management's Discussion and Analysis of Financial
Condition and Results of Operations" herein.) The Texas Lottery contract is
GTECH's largest, accounting for approximately 16% of GTECH's total revenues in
fiscal 1997 and a significant percentage of operating income. GTECH is pursuing
all available options to ensure that its contract, amended to extend through
August 2002 and negotiated in good faith with the Texas Lottery, is honored.
In April 1997, Nora Linares, the former Executive Director of the Texas
Lottery Commission, filed suit against GTECH and James Hosker, the Company's
Texas Site Director (captioned Nora Alicia Linares v. GTECH Corporation and
James Hosker, et al.), in the District Court of Travis County, Texas (261st
Judicial District). Ms. Linares, who had been terminated as Executive Director
of the Texas Lottery Commission in January 1997, alleges that GTECH, in
violation of Texas State Law and its lottery contract with the State of Texas,
tortiously interfered with her employment relationship with her former employer
by, among other things, hiring Michael Moeller as a consultant, and
intentionally inflicted emotional distress upon her. Ms. Linares seeks both a
declaratory judgment setting forth the rights, duties and responsibilities which
GTECH owes to public officials such as Ms. Linares, as well as actual and
exemplary damages from GTECH. GTECH believes that this lawsuit is without merit
and is defending itself (and Mr. Hosker) vigorously. On May 2, 1997, GTECH filed
a notice of removal in the Austin Division of the United States District Court
for the Western District of Texas, seeking to have the case transferred from the
state court to the federal court.
As previously publicly reported, in December 1995, Richard Branson filed suit in
the United Kingdom's High Court of Justice (Queen's Bench Division) against
GTECH U.K. Corporation, a subsidiary of the Company, and Robert Rendine, its
press spokesman (captioned Richard Branson v. GTECH U.K. Corporation and Robert
Rendine), and in January 1996, Mr. Branson filed suit in this same court against
the Company's Chairman, Guy B. Snowden (captioned Richard Branson v. Guy
Snowden), alleging in both cases that the defendants had libeled Mr. Branson in
responding to certain allegations which had been made by Mr. Branson. Mr.
Branson, whose consortium in 1994 lost the bid to operate the United Kingdom
National Lottery, had alleged in a television program broadcast in the U.K.
in December 1995 that Mr. Snowden had offered him an inducement in September
1993 not to bid for the U.K. lottery contract. Mr. Snowden and the Company have
categorically denied Mr. Branson's allegations. In addition, Mr. Snowden filed
suit in January 1996 in the U.K. against Mr. Branson alleging that Mr. Branson's
televised allegations libeled Mr. Snowden. The Director General of the U.K.
Lottery subsequently appointed Anne Rafferty Q.C. to conduct an inquiry into
Mr. Branson's allegations that Mr. Snowden had attempted to bribe him. In July,
1996 a report setting forth the results of Ms. Rafferty's inquiry was made
public. That report found no evidence supporting Mr. Branson's
allegations that Mr. Snowden had attempted to bribe him. The trial on these
matters currently is scheduled to commence in January 1998, and the Company
intends to defend its Chairman, subsidiary and press spokesman vigorously
against Mr. Branson's claims. Moreover, Mr. Snowden intends to pursue his claim
against Mr. Branson.
Investments in Racimec and Transactive
The Company has substantial investments in its subsidiaries,
Transactive and Racimec Informatica Brasileira S.A. ("Racimec") which were not
profitable in fiscal 1997. See Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein and Note E to Consolidated
Financial Statements for information concerning the Company's investments in
Transactive and Racimec.
The prospects for the Company's electronic benefits transfer ("EBT")
business may be adversely affected by recently enacted federal legislation which
endorses efforts of the U.S. Department of Treasury to permit only certain
large, federally-insured banks to participate in the procurement process for EBT
systems and services. In March 1995, the Department of Treasury issued an
Invitation to Express Interest ("IEI") by which it solicited a full range of EBT
services on behalf of a coalition of states known as the Southern Alliance of
States (the "SAS"). In March 1995, Transactive sued the United States and the
Department of Treasury in the U.S. District Court for the District of Columbia
in connection with this IEI because the only "financial agents" permitted to
respond to the IEI were certain large, federally-insured financial institutions.
Transactive appealed an adverse determination by the U.S. District Court to the
U.S. Court of Appeals for the District of Columbia Circuit which ruled in August
1996 that Treasury's use of the IEI process in which only federally-insured
banks may participate to select an EBT vendor for the SAS states was unlawful
under the federal Administrative Procedure Act. In September 1996, however, the
President signed into law an "omnibus appropriations bill" which appears to
nullify the U.S. Court of Appeals' August 1996 decision. The law purports to
authorize Treasury to continue with the existing EBT pilot for the SAS,
including its designation of a Transactive competitor as a financial agent of
the Government, and appears to insulate many aspects of the EBT pilot from
judicial review. More importantly, the bill authorizes Treasury prospectively to
procure EBT services, including the distribution of state administered benefits
subject to applicable state consents, by financial agents determined in
accordance with any process the Secretary of the Treasury deems appropriate. To
date, Treasury has not acted under this legislation to procure EBT services for
state-administered benefits.
In addition, the prospects for the Company's EBT business may be
adversely affected by federal welfare reform, and similar initiatives of states
to reduce the rolls of those eligible to receive government benefits. To the
extent such efforts are successful, compensation received by providers of EBT
systems and services, which is typically calculated on a per-recipient basis, is
likely to be reduced.
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 and EBT 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 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.
EBT contracts may also provide for significant liquidated damages and
termination penalties to be assessed against vendors in certain circumstances.
For example, Transactive's EBT contract with the Texas Department of Human
Services provides for liquidated damages of up to $250,000 per day in certain
circumstances.
Liquidated damages paid or incurred by the Company with respect to its
contracts equaled 0.42%, 0.53%, 0.50%, 0.23% and 0.25% of annual revenues in
each of the five fiscal years ending February 1993 through 1997, respectively.
Significant Developments Since the Start of Fiscal 1997
Lottery Awards and Contracts
Since the start of fiscal 1997 (which ended on February 22, 1997), the
Company has received a number of service contract awards and extensions from
lottery authorities.
New On-Line Customers. During fiscal 1997, the Company received awards
from two new on-line lottery customers. In January 1997, a contract to provide
on-line lottery services and technology to Caixa Economica Federal ("CEF"), the
financial institution which runs Brazil's National Lottery, was awarded to
Racimec Informatica Brasileira S.A. ("Racimec"), the Company's Brazil
subsidiary, following a competitive bid. It is expected that the National
Lottery, which is to be gradually converted from CEF's existing off-line
lottery, will upon full conversion be among the world's largest on-line lottery
systems with more than 10,000 terminals. The four-year facilities management
contract may be extended by CEF for up to four additional years. In June 1996,
the New Mexico lottery authority selected the Company to provide equipment and
services for the first on-line lottery system in New Mexico. The New Mexico
lottery represents the thirty-eighth government-authorized lottery in the United
States and the first new on-line lottery start-up in the United States since
1994. The New Mexico lottery commenced on-line lottery sales in October 1996 and
the Brazil National Lottery commenced on-line lottery sales in May 1997 with
approximately 400 terminals.
In addition, in July 1996, the Washington State lottery authority
commenced on-line sales under a lottery system provided under its September 1995
agreement with the Company. In June 1995, the Company had been selected to
provide on-line lottery equipment and services to the Washington State lottery
upon the expiration of the lottery authority's then-existing contract with a
competitor of the Company.
Other New On-Line Contracts and Extensions. Since the start of fiscal
1997, the Company was awarded new on-line service contracts by, or received
contract extensions from, a number of its existing customers. In June 1996, the
Company was selected by the New Jersey lottery authority to supply, operate and
maintain a new on-line lottery system for New Jersey and signed a one-year
agreement to provide equipment and services to the Arizona lottery authority.
The Arizona contract, which was signed on an emergency basis, became effective
upon early termination of the lottery authority's contract with its former
supplier, and may be extended for an unlimited number of ninety-day extensions
at the lottery authority's option. The New Jersey lottery commenced on-line
sales on the new system in November 1996, and the Arizona lottery commenced
on-line sales on the new system in July 1996.
In addition, during fiscal 1997, the lottery authorities of Oregon,
Wisconsin, Kansas and Rhode Island awarded new on-line lottery contracts to the
Company, and the lottery authorities of California and Illinois extended the
terms of their on-line lottery contracts with the Company. The Wisconsin lottery
commenced on-line sales in May 1997. The Oregon lottery is currently scheduled
to commence on-line sales in November 1997, and the Kansas and Rhode Island
lotteries are both currently scheduled to commence on-line sales in October
1997. In April 1996, the Texas lottery authority agreed to amend its lottery
contract with the Company so as to extend the term of the contract for five
additional years (i.e. through August 2002). Under the terms of the contract
amendment, the Company is required to replace the existing Texas lottery central
computer system, upgrade the lottery's software, construct a new satellite hub
and provide additional terminals. The amendment annually reduces over its
five-year term the percentage rate of the Texas Lottery's revenues which the
Company is to receive as compensation under its agreement with the Texas lottery
authority. The Texas Lottery Commission has subsequently voted to rebid the
Company's lottery contract and has announced its intention to circulate requests
for proposal by June 30, 1997. The Company is pursuing all available options to
insure that its contract extension is honored. See "Maintenance of Business
Relationships and Certain Legal Matters" herein.
After the close of fiscal 1997, the Kentucky lottery authority entered
into a new five-year contract with the Company under which the Company will
provide on-line services and equipment. The Company, which has been providing
on-line services and equipment for the Kentucky lottery authority continuously
since 1989, was invited to negotiate a new contract after the Kentucky lottery
authority accepted a competitor's withdrawal of its proposal.
Product Sales Contracts. During fiscal 1997, the Company also entered into
several new product sales contracts.
In June 1996, the Company announced that it had been awarded a product
sales contract to replace the entire on-line lottery terminal network for the
Lotteries Commission of Western Australia, and that it had signed a contract to
sell lottery equipment, including terminals, to Software de Juegos, which
supplies on-line lottery products and services to the provincial lottery of
Buenos Aires, Argentina. In December 1996, the Massachusetts lottery authority,
which has been operating its own on-line system since 1981, entered into an
agreement with Digital Equipment Corporation, with the Company as its primary
subcontractor, under which the Company provides on-line products and services to
the Massachusetts lottery authority. In December 1996, the Company also
announced that it had entered into a product sales agreement with AB Tipstjanst,
its lottery customer in Sweden, under which it will sell an on-line central
system and related software. The contract also requires the Company to provide
software development and maintenance services to the Swedish lottery authority.
After the close of fiscal 1997, the Company entered into a new product
sales contract to provide on-line lottery equipment and services for the New
Zealand Lottery Commission. The contract also includes a five-year services
agreement under which GTECH will provide system and terminal maintenance.
Benefits Delivery Systems Awards and Contracts
The Company in recent years has sought to build upon its expertise in
providing secure, high volume transaction processing systems and services for
governmental authorities through its involvement in the emerging government
benefits delivery industry. Through Transactive, the Company is active in the
business of providing government benefits delivery systems and services.
In November 1996, the Company announced that Transactive had been
selected to negotiate a contract to supply equipment and services for an
electronic benefit transfer ("EBT") system to the Mississippi Department of
Human Services. When final, the contract is expected to have a five-year term,
subject to extension by Mississippi for up to two additional years. Upon
statewide implementation, it is presently expected that the EBT system will
serve approximately 175,000 households through more than 3,800 retailer
locations. The selection of Transactive has been protested by a competing bidder
for the contract award, and the protest was heard in April 1997, but no decision
has been rendered to date. As a result of the protest proceedings, Transactive
and the Mississippi Department of Human Services have not yet begun negotiating
the EBT contract. Transactive believes that its selection was proper and that
the protest will be rejected.
In December 1996, the Company announced that Transactive had been
selected to negotiate a contract to supply equipment and services for an EBT
system to the Indiana Family and Social Services Administration. Negotiation of
that contract is ongoing. When final, the contract is expected to have a
five-year term, subject to extension by the State for up to two additional
years.
The Company acquired a contract to provide an on-line system and
services for the distribution of public assistance funds and food stamps for the
Human Resources Administration of the City of New York ("HRA") in August 1993.
Transactive continues to provide this system and services to HRA pursuant to an
extension of its contract which was originally to expire on December 31, 1996.
Transactive and HRA are negotiating a new contract pursuant to which it shall
continue to provide such system and services at least through June 30, 1998,
subject to extension by HRA through December 1999. The State of New York (the
lead state of the Northeast Coalition of States), through its Department of
Social Services ("DSS") entered into an EBT contract with a competitor of
Transactive in April 1996 (the "DSS EBT Contract"). As previously publicly
reported, if this award becomes final, HRA's program of delivering public
assistance funds and food stamps will likely be subsumed within the New York
State program and Transactive's contract, which is profitable, will likely
terminate as a result. In June 1996, Transactive filed a petition in the New
York State Supreme Court against DSS, the competitor and others, seeking to
overturn award of the DSS EBT Contract. In April 1997, the Court annulled and
declared void the DSS EBT Contract (as well as all other contracts that resulted
from the RFP issued by DSS on behalf of the Northeast Coalition of States) and
in May 1997, both DSS and the contracting EBT system vendor appealed the Supreme
Court's decision to the New York State Court of Appeals. Transactive will
vigorously defend the appeal of the Supreme Court's judgment.
Dreamport
During fiscal 1997, Dreamport, the Company's non-lottery gaming
subsidiary, announced that it had entered into two strategic relationships to
develop and exploit markets for video lottery products and services. In
September 1996, International Game Technology ("IGT") and Dreamport announced
the launch of IGDreamport, a joint venture that will pursue opportunities in the
emerging public video lottery gaming market. IGDreamport will develop, improve
and market video lottery technology, games and services designed to expand the
product offerings available to government sponsored lotteries worldwide. In
addition, in January 1997, Dreamport announced the formation of a joint venture
with IGT and Sodak Gaming, Inc. for the purposes of facilitating the
development, support, supply and operation of video gaming operations in Brazil.
Under the joint venture agreement, the three companies will conduct business
through a Brazilian entity and will share equally in the expenses, profits and
investment funding of the joint venture.
In August 1996, Dreamport and Full House Resorts, Inc. announced the
opening of Midway Slots and Racebook, a gaming and entertainment facility at
Harrington Raceway, Dover, Delaware, jointly developed by the two companies.
Worldserv
In October 1996, Worldserv, the Company's network communications
subsidiary, announced that it had signed a network installation and maintenance
services contract with VeriFone, Inc., the world's leading provider of credit
and debit card point of sale systems. Under the terms of the agreement,
Worldserv is to provide a variety of network communications management services
supporting a new digital point-of-sale product developed by VeriFone.
Other Developments
The Company strengthened its management team with the appointment,
announced in February 1997, of Paul Daly as Vice President, Compliance. Mr.
Daly, who joined the Company after a distinguished 30-year career with the
Federal Bureau of Investigation, is responsible for management of the Company's
worldwide compliance relationships, overseeing all compliance policies and
programs and insuring that the Company's legal and contractual security
requirements are met.
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 170 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: on-line
lotteries and off-line lotteries. An on-line 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 on-line
lottery system is generally utilized for conducting games such as lotto, sports
pools, keno and numbers, in which players make their own selections. Off-line
lotteries feature lottery games which are not computerized including traditional
off-line lottery games and instant ticket games. Traditional off-line lottery
games, in which players purchase tickets which are manually processed for a
future drawing, generally are conducted only in international jurisdictions.
Instant ticket games, in which players scratch off a coating from a pre-printed
ticket to determine if it is a winning ticket, are conducted both
internationally and in the United States.
In general, on-line lotteries generate significantly greater revenues
than both traditional off-line lottery games and instant ticket games. In
addition, there are several other advantages to on-line lotteries as compared to
traditional off-line lotteries. Unlike traditional off-line lottery games,
wagers can be accepted and processed by an on-line 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.
On-line 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 on-line
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 1996, total annual lottery ticket sales in the United
States grew from approximately $147.5 million to approximately $34.6 billion,
although the level of ticket sales in certain jurisdictions has tended to level
off or decrease slightly in the last few years. Most of the growth in ticket
sales has occurred in the on-line portion of the lottery business which
accounted for approximately 60% of total lottery ticket sales in 1996.
There are currently 38 jurisdictions operating on-line 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
have a long history, and many of the major countries in the world have some type
of lottery, most of which are off-line. The international on-line lottery
industry has experienced significant growth. Since 1977, when there were no
on-line lotteries operating outside of the United States, 77 international
jurisdictions have implemented on-line lottery systems. A number of other
international jurisdictions, principally in Europe, Asia and Latin America are
currently considering the implementation of on-line lotteries.
On-Line Lottery Contracts
The Company generally conducts business under one of three types of
contractual arrangements: Facilities Management Contracts, Operating Contracts
and Product Sales Contracts. Under a typical Facilities Management Contract, the
Company installs, operates and maintains a lottery system, while retaining
ownership of the lottery system. These contracts generally provide for service
fees directly from the lottery authority to the Company based on a percentage of
on-line 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 of which the Company is a member, was
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 on-line 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 in the aggregate
from two to six years. In addition, the Company's customers occasionally
renegotiate extensions on different terms and conditions. See "Liquidated
Damages Under Contracts" above.
The Company's revenues under Facilities Management Contracts are
generally based upon a percentage of gross on-line 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 on-line 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 generally within six months after being
awarded a Facilities Management Contract and, following the start-up of the
lottery system, is responsible for all aspects of the system's operations. The
Company typically operates lottery systems in each jurisdiction on a stand-alone
basis through the installation of two or more dedicated central computer
systems, although in a few instances several jurisdictions share the same
central system. In addition, the Company employs a dedicated work force in each
jurisdiction, consisting of a site director, marketing personnel, computer and
hotline operators, communications specialists and customer service
representatives who service and maintain the system.
Under certain of the Company's Facilities Management Contracts the
lottery authority has the right to purchase the Company's lottery system during
the contract term at a predetermined price, which is calculated so that it
exceeds the Company's net book value of the system at the time the right is
exercisable. The Company's role with respect to the continued operation of a
lottery system in the event of the exercise of such a purchase option 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 on-line 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.
The table below sets forth the lottery authorities with which the
Company had Facilities Management Contracts as of May 5, 1997. 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 May 5,
1997, the approximate number of terminals installed in each jurisdiction.
Facilities Management Contracts
Current
Approximate No. of Lottery Date of Commencement of Date of Expiration of Current Extension
Jurisdiction Terminals Installed(1) Current Contract Contract Term Options*
United States:
Arizona (2) 2,355 5/96 7/97 --
California (3) 7,057 10/93 10/03 --
Colorado 2,335 3/95 10/00 2 two-year
D.C. (4) 585 5/95 11/99 --
Georgia 5,739 4/93 9/98 5 years
Illinois 6,521 2/89 10/99 1 one-year
Indiana 3,875 3/90 6/98 1 one-year
Iowa 1,489 4/91 6/01 1 two-year
Kansas (5) 1,665 1/88 6/97
Louisiana 2,672 11/91 1/98 4 years
Maine(6) 1,089 7/90 6/00 --
Michigan 6,037 4/88 1/99 --
Missouri 2,486 7/96 7/01 1 two-year
Nebraska 781 4/94 6/00 1 four-year
New Hampshire(6) 954 7/90 6/00 --
New Jersey 5,108 6/96 6/01 5 years
New Mexico 1,001 6/96 11/03 5 one-year
New York 11,924 2/93 2/99 3 one-year
Ohio 3,105 10/93 6/99 1 two-year
Oregon 2,861 12/96 10/04 3 one-year
Rhode Island 897 1/97 7/02 5 one-year
Texas(6) 14,282 3/92 8/02(6) --
Vermont(7) 460 7/90 6/00 --
Current
Approximate No. of Lottery Date of Commencement of Date of Expiration of Extension
Jurisdiction Terminals Installed(1) Current Contract Current Contract Term Options*
- ------------ ---------------------- ---------------- --------------------- --------
Washington State 2,188 9/95 6/01 3 years
West Virginia 1,360 2/92 6/00 2 one-year
Wisconsin (8) 3,095 5/89 5/97 --
-----
Subtotal 91,921
International:
Barbados
- -T.L. Lotteries 194 10/94 1/00 2 one-year
Brazil (9)
- -National
Lottery (9) (9) (9) (9) (9)
- -Minas Gerais 436 10/94 10/00 (9)
- -Parana 518 8/94 8/98 (9)
- -Santa Caterina 177 5/95 5/00 (9)
- -FGFS Sports Club 42 11/94 11/99 (9)
Chile
- -Polla Chilena de 1,684 12/93 8/99 --
Beneficencia S.A.
Czech Republic
- -SAZKA 2,190 10/92 (10) (10)
Estonia
- -Ras Eesti Loto 450 1/94 1/06 (11)
Ireland
- -An Post Nat'l 2,016 3/93 3/00 (12)
Lottery Company
Lithuania
- -OLIFEJA 467 12/94 12/09 (13)
Poland
- -Totalizator 3,591 3/91 3/98 (14)
Sportowy
Puerto Rico
- -Loteria 1,831 4/90 11/98 --
Electronica de
Puerto Rico
Slovakia
- -TIPOS, a.s. 901 (15) (15) --
Current
Approximate No. of Lottery Date of Commencement of Date of Expiration of Current Extension
Terminals Installed(1) Current Contract Contract Term Options*
Jurisdiction
Spain
- -Loto Catalunya 1,501 10/87 10/97 (12)
Trinidad & Tobago
- -National Lotteries 564 12/93 7/99 5 one-year
Control Board
United Kingdom
- -The National 23,750 7/94 9/01 --
Lottery (16)
Venezuela (17)
- -Loteria de Caracas 494 4/93 4/98 1 five-year
- -Loteria de Oriente 6/89 6/99 (12)
- -Loteria de Zulia 12/90 12/00 (12)
--------
Subtotal 40,806
Total Terminals
Installed 132,727
-------------------------------
* 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 Arizona lottery authority may renew its contract with the Company for
ninety (90) day intervals
(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 6,000 terminals using
HISI's proprietary dial-up technology for on-line 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 Company has entered into a new contract with the Kansas lottery
authority that commences in July 1997 and expires in June 2002.
There are two different extension options of three-years and
two-years.
(6) The Texas lottery authority, which in April 1996 agreed to amend
its lottery contract with the Company so as to extend the term of
the contract through August 2002, has subsequently voted to rebid
the Company's contract. See "Significant Developments Since the
Start of Fiscal 1997" and "Maintenance of Business Relationships
and Certain Legal Matters" above.
(7) The Maine, New Hampshire and Vermont lottery authorities share a central
computer system.
(8) The Wisconsin Lottery Authority has awarded a new contract to the
Company effective May 1997 for five (5) years with options to extend
for two (2) one-year periods. The contract is in negotiation.
(9) Operated by Racimec, a Brazilian company in which the Company owns
all voting stock. In January 1997, Racimec signed a contract to
provide on-line lottery services and products to Caixa Economica
Federal ("CEF") Latin America's largest financial institution which
runs Brazil's National Lottery. It is anticipated that the National
Lottery will eventually become one of the world's largest on-line
systems with more than 10,000 terminals nationwide. On-line lottery
sales commenced in May 1997 with approximately 400 terminals. The
Company's contract with CEF has a four-year base term. 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.
(10) The contract with the Czech Republic lottery authority runs until
seven years after the installation of the 2,500th terminal or three
years after the installation of any terminals after the 3,000th
terminal, whichever is later.
(11) The Company's contract with Ras Eesti Loto provides for an automatic
three-year extension, in certain circumstances, and an indefinite
number of one-year extension options.
(12) The contracts with the lottery authorities of Ireland, Spain (Loto
Catalunya) and Venezuela (Loteria de Oriente and Loteria de Zulia)
may either be extended for any period mutually acceptable to the
Company and the respective lottery authority or continue
indefinitely until termination by the respective lottery authority.
(13) The Company's contract with the Lithuanian lottery authority
automatically extends from year-to-year unless either party gives
timely notice of non-renewal.
(14) The term of the Company's contract with the Polish lottery authority
automatically renews for an indefinite number of one-year extension
periods thereafter unless either party gives timely notice of
non-renewal.
(15) The Company's agreement with SPORTNIKE a.s. expired in July 1995
upon termination of SPORTNIKE'S license to conduct a lottery in
Slovakia. Since then, the Company has been operating the system
for, and in March 1996 entered into a definitive agreement with,
TIPOS a.s., the current license holder. The Company's contract with
TIPOS expires seven years after the installation of the 1,000th
terminal on the system.
(16) Operated by Camelot Group plc, a consortium in which the Company
holds a 22.5% equity interest, on a facilities management basis.
The Company also sells equipment to Camelot Group plc for use by
The National Lottery.
(17) The Venezuela lottery authorities share the same central computer system.
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 on the Company's
Income Statements.
The table below sets forth the lottery authorities with which the
Company had Operating Contracts as of May 5, 1997. 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 May 5, 1997, the approximate
number of terminals installed in each jurisdiction.
Operating Contracts
Approximate No. of Date of Commencement Date of Expiration of Current Extension
Lottery Terminals of Current Contract Current Contract Term Options*
Jurisdiction Installed(1)
United States:
Idaho 691 3/90 2/99 1 one-year
Kentucky(2) 2,774 10/89(2) (2) --
-----
Subtotal 3,465
International:
Argentina
- -Loteria National Sociedad del Estado 786 11/93 4/01 1 two-year
Denmark 2,816 9/95 1/00 --
- -Dansk Tipstjanst(3)
The Netherlands
- -Stichting de Nationale 3,113 12/91 12/98 (5)
Sporttotalisator(4)
Turkey
- -Turkish National Lottery 1,330 2/96 11/01 (6)
-----
Subtotal 8,045
=====
Total Terminals Installed 11,510
* Reflects extensions available to the lottery authority under the same
terms as the current contract. Lottery authorities occasionally negotiate
extensions on different terms and conditions.
(1) Total does not include instant ticket validation terminals.
(2) In April 1997, the Company entered into a facilities management contract
to provide a new lottery system to the Kentucky lottery authority. The
new contract has an initial term of five years.
(3) The Denmark lottery authority has exercised an option to assume
responsibility for the operation and maintenance of the lottery system.
(4) The Company has entered into a Memorandum of Understanding with CGK
Computer Gesellschaft Konstanz mbH which has the contract with the
Netherlands lottery authority. The Netherlands lottery authority
operates the system and maintains all terminals. The Company performs
all software maintenance, except terminal application maintenance. The
Company also provides spare and repair parts.
(5) The contract may either be extended for any period mutually acceptable
to the Company and the lottery authority or continues indefinitely until
termination by the lottery authority.
(6) The term of the contract with the Turkish lottery authority shall
automatically renew for successive one-year extension terms unless
either party gives timely notice of non-renewal. In addition, the
Turkish 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 on-line 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 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 on-line 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 Conditions
and Results of Operations."
The table below lists certain of the Company's direct and indirect
customers that have purchased lottery terminals and other on-line 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 South Australia
Australia --Lotteries Commission of Western 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 --Western Canada Lottery Corporation
Canada --Saskatchewan Gaming Commission
Finland --Oy Veikkaus AB
Germany --Sachsiche Lotto-GmbH
Germany --Lotterie Treuhandgesellschaft Mbh Thuringen
Iceland --Islensk Getspa
Iceland --Islenskar Getraunir
Malaysia --Pan Malaysian Pools
Malaysia --Lotteries Corporation (Sabah) Sdn. Bhd.
Malaysia --Sports Toto Malaysia Bhd.
Massachusetts -- Massachusetts State Lottery Commission
New Zealand --New Zealand Lotteries Commission
Singapore --Singapore Pools (Pte) Ltd.
Spain --Sistemas Tecnicos de Loterias del Estado
Sweden --AB Tipstjanst
Switzerland --Sport-Toto Gesellschaft
Switzerland --Loterie de la Suisse Romande
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.
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 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 on-line lottery system.
Pursuant to a 1990 Distributorship and License Agreement (the "D&L
Agreement") between the Company and CGK Computer Gesellschaft Konstanz mbH
("CGK"), a subsidiary of Siemens AG, the Company granted to CGK the exclusive
right to distribute, service, sell and market the Company's on-line lottery
systems and components in Austria, Belgium, Germany, the Netherlands, and
Switzerland. Under this Agreement, the parties entered into a separate
Memorandum of Understanding ("MOU") for each lottery to which CGK submitted a
proposal, setting forth each party's rights and obligations under such proposal.
As of the start of fiscal 1996, CGK and the Company had entered into MOU's with
respect to lotteries in Austria, Belgium, the Netherlands, Switzerland and the
German State of Saxony. The Company's role under such MOUs range from providing
terminals and terminal application software (Austria and Switzerland), to
providing the entire lottery central system and terminals (Belgium), to selling
the entire lottery system and terminal repair parts to CGK (the Netherlands and
Saxony).
After the close of fiscal 1995, the Company conducted a strategic
reassessment of its marketing plans for Europe. In light of this, and to provide
the Company with greater latitude in dealing with lottery authorities, the
Company entered into discussions with CGK to amend the D&L Agreement. As a
result of these discussions, CGK and the Company entered into an amendment
providing that the D&L Agreement would terminate effective August 1, 1995 with
respect to all regions except Germany, the Netherlands and certain regions in
Switzerland, and, effective December 31, 1995, the D&L Agreement terminated as
to all remaining regions. However, the amendment required CGK and the Company to
fulfill their respective obligations under certain existing MOUs and related
agreements, and with respect to certain proposals submitted in accordance with
the D&L Agreement and outstanding at the time of its termination. Accordingly,
in January, 1996, the Company and CGK entered into an MOU, and CGK and
Lotterie-Treuhandgesellschaft mbH Thuringen entered into a contract to provide
equipment and services for an on-line lottery system in the German State of
Thuringen.
The Company generally has a number of bids outstanding for various
contracts in the United States and internationally.
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 on-line lottery systems control and perform the following
functions: entry of wagers using a terminal's keyboard or a fully-integrated
optical mark recognition reader; automatic editing of each wager for correctness
by the originating terminal; encryption and transmission of the wager and
related data to the central computer installation(s); processing of each wager
by the central computers, including entry of the wager into redundant data
bases; transmission of authorization for the originating terminal to accept the
wager and print a receipt or ticket, winning ticket identification and
validation; and administrative functions, including determination of prize pools
and generation of management information reports.
The Company's systems are capable of handling in excess of 100,000
transactions per minute, which rate is in excess of the requirements of any of
its customers. The basic functions listed above, as well as various optional or
custom-designed functions, are performed under internal controls designed for
maximum security and minimum processing time. Security is provided through an
integrated system of techniques, procedures and controls supported by hardware,
software and human resources. Individual systems generally have redundant
capacity at multiple levels and sophisticated software to ensure continuous
service to the customer.
Terminals
The Company designs, manufactures and provides the point-of-sale
terminals used in its on-line lottery systems. Currently, approximately 137,000
of its model GT-101/FX terminals, introduced in 1983, its model GT-101/TF
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 on-line 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/OM) 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 22, 1997, a total of
approximately 67,000 Spectra(TM) terminals had been installed in numerous
international jurisdictions.
The Company's newest terminal series, ISYS(TM), (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 22, 1997, approximately 14,000 ISYS(TM) terminals
had been installed. 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 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 Digital Equipment Corporation,
Concurrent Computer 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 on-line system.
Communications
The Company's lottery terminals are typically connected to the central
computer installations by dedicated telephone lines owned or leased by the
jurisdiction in which the system is located. Due to the varying nature of
telecommunications services available in lottery jurisdictions, the Company has
developed the capability to interface with a wide range of communications
technologies, including UHF Radio capability (narrow-band and Spread Spectrum),
GSAT/VSAT, Microwave, Integrated Services Digital Networking (ISDN), Data Over
Voice (DOV), fiber optic and cellular telephone. In Argentina, Barbados, Brazil,
the Spanish province of Catalunya, Chile, The Czech Republic, Estonia,
Lithuania, Mexico, 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 New
Mexico, Texas, Washington, Argentina, 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.
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. 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.
Marketing
In United States jurisdictions in which the Company has been awarded a
lottery contract, the Company is frequently asked to assist the lottery
authority in the marketing of lottery games to the public. Such assistance
generally includes advice with respect to game design, and promotion and
development and distribution of terminals and advertising programs. As part of
such assistance, the Company developed "GMark," a computerized marketing
analysis system used to determine favorable locations for new lottery terminals.
The lottery authorities of California, Georgia, Illinois, Indiana, Kentucky, New
York, Ohio and Texas have installed GMark systems, and most other customers
contact the Market Research Group at GameScape(TM) from time to time to obtain
GMark services.
Warranty
Because the Company retains title to the system under a Facilities
Management Contract, no warranty is provided on the Company's products supplied
under such contracts. The Company does repair or replace such products as
necessary to fulfill its obligations under such contract. There is no standard
warranty on products manufactured by the Company. A typical warranty provides
that the Company will repair or replace defective products for a period of time
(usually one year) from the date a product is delivered and tested. Product
warranty expenses for the fiscal years 1997, 1996 and 1995 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
On-Line Lottery
In recent years, lottery authorities have recognized that by offering
new games or products, the lotteries 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 on-line lottery products and services introduced in recent
years are keno, instant ticket support services and BingoVision(TM). In
addition, the Company has recently introduced its ISYS(TM) series terminal and
PRO:SYS(TM) software system to enhance the functionality and appeal of its
existing software and terminal lines.
Keno. While new on-line 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 on-line lottery revenues. Keno is more
interactive than typical on-line 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 on-line keno
game for the Lotteries Commission of South Australia through the end of fiscal
1997, the Company assisted lottery authorities in Belgium, Brazil (Parana, Minas
Gerais, Santa Caterina and Goias), California, Kansas, Lithuania, Massachusetts,
Oregon, Rhode Island, Catalunya (Spain), Switzerland (La Societe de la Loterie
de la Suisse Romande), West Virginia and Venezuela (Loteria de Caracas) in
implementing on-line keno games. In fiscal 1996, the Company assisted the New
York and Georgia lottery authorities in implementing keno games. Based on the
success of keno in these jurisdictions, the Company believes keno will be
adopted in other jurisdictions in the next few years.
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 $1.7 billion and accounting
for more than 9% of total United States on-line lottery revenues in 1996. The
popularity of keno has led the Company to explore the development of new games
based upon keno. Most notably, the Company has developed 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 challenge in California and New York
in recent years. In June 1996, the California Supreme Court 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 announced the launch of 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. In August 1995, Donald J. Trump
filed suit in New York seeking declaratory and injunctive relief to prohibit the
New York lottery authority's Quick-Draw Game. To date, Mr. Trump's efforts to
obtain such relief have been unsuccessful. See Item 3--"Legal Proceedings" and
Item 7--"Management's Discussion and Analysis of Financial Condition and Results
of Operations." 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.
Instant Ticket Support Services. The Company provides certain products,
systems and services to the instant ticket lottery industry. The Company's
on-line 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 on-line instant ticket support systems for instant
ticket agents who are not part of a lottery's on-line lottery system. The
Company also offers add-on validation terminals which attach to its on-line
lottery terminals and provide the same functionality as the GVT, while using the
existing communications network.
The Company is providing marketing, distribution, on-line 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 California, Colorado, District of Columbia, Georgia,
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Missouri,
New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island,
Texas, Washington and Wisconsin. Internationally, the Company currently supplies
lottery authorities in Australia, Belgium, Chile, Denmark, Finland, Ireland,
Netherlands, New Zealand, Spain and the United Kingdom with instant ticket
support services.
BingoVision(TM). The Company has recently developed BingoVision(TM), a
product line of televised bingo-based lottery games. Players buy tickets from
on-line 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)
in Estonia, Lithuania, the Czech Republic, New Zealand, Slovakia and Belgium and
is actively marketing the game 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
on-line, 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 Washington, D.C.; Colorado; Idaho; Ontario, Canada;
Sachsische Lotto-GmbH in Leipzig, Germany; Washington State; Missouri; Denmark;
New Mexico; Massachusetts; New Jersey and Thuringen, Germany and is in the
process of installing PRO:SYS(TM) in eight additional jurisdictions. In
addition, PRO:SYS(TM) was used as the base architecture for the EBT system
installed by the Company under its February 1994 contract with the Texas
Department of Human Services. See "Products and Services--Software" above and
"Benefits Delivery Systems and Services" below.
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 the lottery authorities of Brazil, Massachusetts, Missouri, New
Jersey, New Mexico, Turkey, Washington State, District of Columbia, Wisconsin
and W. Australia. See "Products and Services--Terminals" above.
Benefits Delivery Systems and Services
The Company in recent years has sought to build upon its expertise in
providing secure, high volume transaction processing systems and services for
governmental authorities through its involvement in the emerging EBT industry.
Through Transactive, the Company is active in the business of providing systems
and services for the delivery of government benefits such as food stamps and Aid
to Families with Dependent Children benefits. See "Significant Developments
Since the Start of Fiscal 1997--Benefits Delivery Systems and Services" and
"Factors That May Affect Future Performance" earlier in this Report.
Non-Lottery Gaming Products and Services
In November 1994, the Company announced the formation of its Gaming
Group, later incorporated under the name Dreamport, to pursue gaming
opportunities other than on-line lottery including video lottery and destination
gaming. During fiscal 1996, the Company entered into agreements with Full House
to share in the financing and development of Native American and casino gaming
ventures. Operations with respect to one such venture, a casino in Coos Bay,
Oregon, on Native American lands, featuring approximately 850 video lottery
terminals, assorted table games, bingo and keno, commenced in May 1995. In
addition, the Company and Full House entered into agreements with Delaware State
Fair, Inc. and Harrington Raceway, Inc. in February 1996 to finance and
construct a gaming facility at the Delaware State Fairgrounds, Kent County,
Delaware. The Harrington Raceway facility, which houses 500 video lottery
terminals, opened under the name Midway Slots and Racebook during fiscal 1997.
During fiscal 1997, Dreamport also entered into two strategic relationships to
develop and exploit markets for video lottery products and services. See
"Significant Developments Since the Start of Fiscal 1997--Dreamport."
The Company's video lottery systems combine the security and integrity
of the Company's traditional on-line lottery systems with entertainment-based
video games. The Company's video lottery systems include a controlling central
computer system, multiple video lottery terminals (which the Company acquires
from third-party manufacturers), the Company's ticket validation terminals, and
a self-diagnostic communications network. Games offered by the Company's video
lottery systems include poker, blackjack, keno and bingo and other games. The
Company entered the video lottery business during fiscal 1991 and currently
provides video lottery products to lottery jurisdictions in Alberta and
Saskatchewan, Canada, Oregon and Rhode Island. Currently, video lotteries are
operated or are being implemented or tested in six jurisdictions in the United
States and ten international jurisdictions. There can be no assurance as to how
many jurisdictions will eventually legalize video lottery systems.
Communications Network Services
During fiscal 1996, the Company formed its wholly-owned subsidiary,
GTECH Worldserv, Inc., to offer network communications services principally to
private sector customers. This venture, which is in its start-up phase, offers
wide area network design, installation, operation and maintenance services and
full local area network administration services, among other services. See
"Significant Developments Since the Start of Fiscal 1997--Worldserv" above.
Product Development
The Company devotes substantial resources in order to enhance its
present products and systems and develop new products. Products recently
developed by GTECH include BingoVision(TM), the ISYS(TM) Terminal Series and the
PRO:SYS(TM) Software System.
In fiscal 1997, the Company spent approximately $31.0 million on
research and development, as compared to $29.5 million in fiscal 1996 and $28.0
million in fiscal 1995. As of February 22, 1997, the Company (including
subsidiaries) had approximately 400 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 and Transactive purchase most of the parts, components and
subassemblies (some of which are designed by the Company) necessary for their
terminals and other products from outside sources and assembles them into
finished products. The Company offers central systems manufactured by Digital
Equipment Corporation, Concurrent Computer 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 $266.1 million as of February 22, 1997, as
compared to a backlog of approximately $213.2 million as of February 24, 1996.
Approximately $138.1 million, or 51.9% of the backlog at February 22, 1997, is
not expected to be filled during fiscal 1998. Not included in such backlog are
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 revenues related to the
Company's Transactive and Dreamport subsidiaries, which revenues are variable in
nature.
Competition
The on-line lottery business is highly competitive in both the United
States and internationally. Both in the United States and internationally, price
is an important, but usually not the sole criterion for selection. Other
significant factors that influence the award of lottery contracts are: the
ability to optimize lottery revenues through technical capability and
applications knowledge; the quality, dependability and upgrade capability of the
system; the marketing and gaming experience, financial condition and reputation
of the vendor; and the satisfaction of other requirements and qualifications
that the lottery authority may impose.
During fiscal 1997, the Company's principal competitors in the on-line
lottery business (and the number of on-line lottery jurisdictions currently
serviced or under contract worldwide by such competitors) are as follows:
Automated Wagering International, Inc. ("AWI"), a subsidiary of Video Lotteries
Technologies, Inc. ("VLT") (8); Autotote Corporation (8) ("Autotote") (5 of
these on-line jurisdictions are jointly serviced by Autotote and International
des Jeux); International Totalizator Systems, Inc. (6); International des Jeux
(Lotto France) (6) (5 of these on-line jurisdictions are jointly serviced by
Autotote and International des Jeux); and Essnet/Alcatel (12).
Two additional competitors for European on-line 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 on-line
lottery systems and components in specified European jurisdictions. Subsequent
to August 1995, the effect date of this termination, CGK has been a direct
competitor of the Company in Europe. Further, in April 1997 (after the close of
fiscal 1997) Scientific Games Holdings Corporation ("Scientific Games")
completed the purchase of TeleControl, the European lottery business of
Autotote. Under the terms of the agreement, Scientific Games will have the right
to license and purchase Autotote's wagering terminals for use in lottery
applications.
The emerging government benefits delivery industry is also highly
competitive. Among the Company's competitors are banking institutions with
access to larger capital resources than the Company to invest in benefits
delivery projects and, in some cases, with existing automated teller machine
infrastructures that can be utilized to deliver government benefits. The primary
competitors of the electronic benefit transfer operations of the Company's
Transactive subsidiary are Citibank EBT Services, Deluxe Data Systems, Inc., EDS
and First Security Processing Services, Inc.
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., Video Lottery Technologies,
Inc., WMS Gaming, Inc. and Bally Manufacturing, Inc. some of which have supplied
substantially more systems and terminals than the Company.
Personnel
As of May 2, 1997 the Company had approximately 5,100 full-time
employees worldwide, including approximately 300 employees which are employed by
Transactive and approximately 480 employees employed by Racimec. 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,
respectively, its Latin American marketing efforts and its Transactive
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, its
electronic benefits transfer subsidiary, the Company leases, or is supplied by
the relevant state authorities with, its data center facilities in the various
jurisdictions. The Company also leases office, depot maintenance and warehouse
space in various other locations.
The Company leases facilities in Watford and London, England from which
it bases its European sales efforts. The Company also maintains an office in
Brussels, Belgium which provides a base of additional support for its European
operations.
The Company's facilities are in good condition and are adequate for its
present needs.
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
alleges, 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 seeks
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. The Company has responded with a
vigorous defense. In February 1997 the Court granted the Company summary
judgment but granted the plaintiffs limited leave to amend their complaint
alleging alternative theories of recovery. The plaintiffs filed an amended
complaint in March 1997. The Company believes that these claims are without
merit and intends to continue to defend itself vigorously in these proceedings.
For information respecting certain other legal proceedings, refer to
Item 1, "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 H of Notes to Consolidated Financial Statements included in this
Report. The Company also is subject to certain legal proceedings and claims
which management believes, on the basis of information presently available to
it, will not materially adversely affect the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Holding's security holders
during the last quarter of fiscal 1997.
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 the Company as of May 16, 1997 and during all
of fiscal 1997 are:
Name Age Position
Guy B. Snowden 51 Chairman of the Board and Chief Executive Officer. Mr. Snowden was a co-founder
of GTECH Corporation (the Company's chief operating subsidiary) and has been its
Chief Executive Officer since its inception in 1980. He served as Chairman from
1987 to 1990 and was President from 1981 to 1987 and from 1989 through December
1994.
Victor Markowicz 52 Vice Chairman of the Board. Mr. Markowicz was a co-founder of GTECH Corporation
and served as Co-Chairman from 1992 to 1996, Vice Chairman from 1987 to 1990,
Senior Vice President from 1988 to 1989 and Executive Vice President and
Secretary from 1981 to 1988.
William Y. O'Connor 52 President and Chief Operating Officer since December 1994, Member of the
Executive Operating Committee of the Company and, since July 1995, Director. Mr.
O'Connor was the President and Chief Executive Officer of Ascom Timeplex, a
telecommunications company, from 1992 to 1994 and prior to this was Corporate
Senior Vice President and President of the Broadband Communications Group of
Scientific-Atlanta, Inc. from 1987 to 1992.
Thomas J. Sauser 53 Senior Vice President, Treasurer and Chief Financial Officer since February 1,
1996. Mr.