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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: February 24, 2001
Commission File No: 1-11250
GTECH HOLDINGS CORPORATION
Delaware 05-0450121
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(State or other jurisdiction (IRS Employer ID Number)
of incorporation or organization)
55 Technology Way, West Greenwich, Rhode Island 02817
(401) 392-1000
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(Address and telephone number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Common Stock $.01 par value
Name of Each Exchange on which Registered: New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock (its only voting
stock) held by non-affiliates of the registrant as of April 10, 2001 was
$863,287,810 (Reference is made to Page 35 herein for a statement of the
assumptions upon which this calculation is based.)
On April 10, 2001, there were 29,413,554 outstanding shares of the registrant's
Common Stock.
Documents Incorporated By Reference: Certain portions of the registrant's 2001
definitive proxy statement relating to its scheduled July 2001 Annual Meeting of
Shareholders (which proxy statement is expected to be filed with the Commission
not later than 120 days after the end of the registrant's last fiscal year) are
incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
GENERAL
GTECH Corporation ("GTECH") is the world's leading operator of computerized
online lottery systems and the wholly owned subsidiary of GTECH Holdings
Corporation ("Holdings"; collectively with its direct and indirect subsidiaries,
including GTECH, the "Company"). The Company currently operates, or supplies
equipment to, online lottery systems for 26 of the 38 online lottery authorities
in the United States and has supplied, currently operates or has entered into
contracts to operate in the future online lottery systems for 57 of the 104
international online lottery authorities.
Since the establishment of the first online lottery in 1975, the online lottery
industry has experienced substantial growth, as governments have increasingly
relied on lotteries as a non-tax source of revenue. However, in recent years the
Company has witnessed a downward trend in sales generated by certain of its
United States lottery customers. See "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations" below.
The Company's core business consists of providing online lottery services and
products to governmental lottery authorities and governmental licensees
worldwide. The Company offers its customers a full range of lottery services,
including the design, assembly, installation, operation, maintenance and
marketing of online lottery systems and instant ticket support systems and
services. The Company's lottery systems consist of numerous lottery terminals
located in retail outlets, central computer systems, systems software and game
software, and communications equipment which connects the terminals and the
central computer systems.
Historically, the majority of the Company's lottery customers in the United
States have entered into long-term service contracts pursuant to which the
Company provides, operates and maintains the customers' online lottery systems
in return for a percentage of the gross lottery revenues. Many of the Company's
international lottery customers have purchased their online lottery systems,
although some, especially lottery authorities in Eastern Europe and Latin
America, have entered into long-term service contracts with the Company. In
recent years there has been, in general, an industry movement away from product
sales in favor of long-term service contracts. In fiscal 1993, approximately 70%
of the Company's lottery revenues were derived from its portfolio of long-term
online lottery service contracts with substantially all of the remainder being
derived from lottery product sales. In fiscal 2001 (which ended on February 24,
2001) approximately 93% of the Company's lottery revenues were derived from
online lottery service contracts.
In recent years, lottery authorities have recognized that by offering new games
or products, they often are able to generate significant additional revenues. An
important part of the Company's strategy is to develop new products and services
for its customers in order to increase their lottery revenues. The Company's
principal online products and services introduced in recent years consist of
keno, instant ticket support systems and services and televised lottery programs
such as BingoVision(TM). Keno, an online lottery game which features drawings as
often as every five minutes, was first introduced by the Company and the
Lotteries Commission of South Australia in 1990 and currently is offered by 16
of the Company's customers. The Company currently provides instant ticket
support services, products and systems in 24 domestic
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jurisdictions and 22 jurisdictions outside of the United States. The Company
also offers customers television lottery games. BingoVision(TM), the Company's
best known television game, is a televised bingo-based lottery game which is
played in 10 jurisdictions. See "Certain Products and Services" below.
In recent years, the Company has taken steps to broaden its offerings of
high-volume transaction processing services outside of its core business of
providing online lottery services. For example, since the start of fiscal 2000,
the Company has entered into agreements which permit bill payments over its
Brazilian and Chilean lottery networks. In addition, the Company continues to
develop and, where permitted, to market, its UWin!(TM) internet based platform
through which international providers of government-sponsored lottery products
and services may offer interactive games. During fiscal 2001, the Company
announced that Dreamport, Inc., the Company's gaming and entertainment
subsidiary, would henceforth focus on assisting lotteries to expand their
offerings in the area of video-machine gaming and central systems and that
activities and assets of Dreamport which were peripheral to the Company's core
lottery business would be consolidated and/or divested. See "Certain Significant
Developments Since the Start of Fiscal 2001" and "Certain Products and Services"
below.
GTECH was founded in 1980. Holdings acquired GTECH in a leveraged buy-out in
February 1990, in which members of then-senior management of GTECH participated.
The Company's principal executive offices are located at 55 Technology Way, West
Greenwich, Rhode Island 02817, and its telephone number is (401) 392-1000.
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Certain statements contained in this Report are forward looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934. Such statements include, without limitation,
statements relating to (i) the future prospects for and stability of the lottery
industry and other businesses in which the Company is engaged or expects to be
engaged, (ii) the future operating and financial performance of the Company,
(iii) the ability of the Company to retain existing business and to obtain and
retain new business, and (iv) the results and effects of legal proceedings and
investigations. Such forward looking statements reflect management's assessment
based on information currently available, but are not guarantees and are subject
to risks and uncertainties that could cause actual results to differ materially
from those contemplated in the forward-looking statements. These risks and
uncertainties include but are not limited to those set forth below and elsewhere
in this report and in the Company's subsequent press releases and Form 10Qs, and
other reports and filings with the Securities and Exchange Commission.
CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The future performance of the Company's business is subject to the factors set
forth below, as well as the other considerations described elsewhere herein.
GOVERNMENTAL REGULATION
In the United States, lotteries are not permitted in a particular jurisdiction
unless expressly authorized by law in such jurisdiction. Once authorized, the
ongoing operation of a lottery is highly regulated. Lottery authorities, which
generally conduct an intensive investigation of the Company and its employees
prior to and after the award of a lottery contract, may require the removal of
any Company employees deemed to be unsuitable and are generally empowered to
disqualify the Company from receiving a lottery contract or operating a lottery
system as a result of any such investigation. Certain jurisdictions also require
extensive personal and financial disclosure and background checks from persons
and entities beneficially owning a specified percentage (typically 5% or more)
of the Company's securities. The failure of such beneficial owners to submit to
such background checks and provide such disclosure could jeopardize the award of
a lottery contract to the Company or provide grounds for termination of an
existing lottery contract.
The international jurisdictions in which the Company markets its lottery systems
also usually have legislation and regulations governing lottery operations. The
regulation of lotteries in these international jurisdictions typically varies
from the regulation of lotteries in the United States. In addition, restrictions
are often imposed on foreign corporations seeking to do business in such
jurisdictions. As a result, the Company has found it desirable in a number of
instances to ally itself as a subcontractor or joint venture partner with one or
more local companies in seeking international lottery contracts.
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MAINTENANCE OF BUSINESS RELATIONSHIPS AND CERTAIN LEGAL MATTERS
A significant portion of the Company's revenues and cash flow is derived from
its portfolio of long-term online lottery service contracts. The Company's
online lottery service contracts typically have an initial term of five years
and usually provide the customer with options to extend the contract under the
same terms and conditions for additional periods generally ranging from one to
five years. The Company's customers have generally exercised some or all of the
extension options under their contracts or have negotiated extensions on
different terms and conditions. Upon the expiration of a contract, lottery
authorities may award new contracts through a competitive procurement process.
There can be no assurance that, in the future, the Company's contracts will be
extended or that it will be awarded new contracts as a result of competitive
procurement processes. The Company's lottery contracts typically permit a
lottery authority to terminate the contract at any time for failure to perform
and other specified reasons, and many of such contracts permit the lottery
authority to terminate the contract at will and do not specify the compensation,
if any, to which the Company would be entitled were such termination to occur.
The termination of or failure to renew one or more lottery contracts could,
depending upon the circumstances, have a material adverse effect on the
Company's business, financial condition and results and prospects.
Further, there have been and may continue to be investigations of various types,
including grand jury investigations, conducted by governmental authorities into
possible improprieties and wrong-doing in connection with efforts to obtain
and/or the awarding of lottery contracts and related matters.
In light of the fact that such investigations frequently are conducted in
secret, the Company would not necessarily know of the existence of an
investigation which might involve the Company. Because the Company's reputation
for integrity is an important factor in its business dealings with lottery and
other governmental agencies, if government authorities were to make an
allegation, or if there were to be a finding, of improper conduct on the part of
or attributable to the Company in any matter, such an allegation or finding
could have a material adverse effect on the Company's business, including its
ability to retain existing contracts and to obtain new or renewal contracts. In
addition, continuing adverse publicity resulting from these investigations and
related matters could have such a material adverse effect.
See also Item 3 - "Legal Proceedings" below.
FLUCTUATION OF QUARTERLY OPERATING RESULTS
The Company has experienced and may continue to experience significant
fluctuations in operating results from quarter to quarter due to such factors as
the amount and timing of product sales, the occurrence of large jackpots in
lotteries (which increase the amount wagered and the Company's revenue) and
expenses incurred in connection with lottery start-ups.
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LIQUIDATED DAMAGES UNDER CONTRACTS
The Company's lottery contracts typically permit termination of the contract at
any time for failure of the Company to perform and for other specified reasons
and generally contain demanding implementation schedules and performance
schedules. Failure to perform under such contracts may result in substantial
monetary liquidated damages, as well as contract termination. Many of the
Company's lottery contracts also permit the lottery authority to terminate the
contract at will and do not specify the compensation, if any, to which the
Company would be entitled should such termination occur. Certain of the
Company's United States lottery contracts have contained provisions for up to
$700,000 a day in liquidated damages for late system start-up and provide for up
to $10,000 or more in penalties per minute for system downtime in excess of a
stipulated grace period, and certain of the Company's international customers
similarly reserve the right to assess substantial monetary damages in the event
of contract termination or breach. Although such liquidated damages provisions
are customary in the lottery industry and the actual liquidated damages imposed
are generally subject to negotiation, such provisions in the Company's lottery
contracts present an ongoing potential for substantial expense. Liquidated
damages are generally deducted directly from revenues the Company has otherwise
earned from the lottery authorities and are budgeted by the Company on an annual
basis. Lottery contracts generally require the vendor (i.e., the Company) to
post a performance bond, which in some cases may be substantial, securing the
vendor's performance under such contracts.
Liquidated damages paid or incurred by the Company with respect to its contracts
equaled 0.25%, 0.21%, 0.35%, 0.56% and 0.47% of annual revenues in each of the
five fiscal years ending February 1997 through 2001, respectively.
GAMING OPPOSITION
While the Company believes that legalized gaming, especially lottery, generally
enjoys widespread public support, gaming opponents have continued to persist in
efforts to curtail the expansion of legalized gaming. For example, the National
Gaming Impact Study Commission, a commission created by the U.S. Congress in
1997 to study the economic and social effects of legalized gambling, narrowly
voted during fiscal 1999 to endorse a non-binding recommendation for a
moratorium on the spread of casinos, lotteries and slot machines in the United
States. In addition, during fiscal 2000, the voters of Alabama defeated a
referendum to authorize the introduction of state lottery in Alabama. Moreover,
online lottery sales in a number of US jurisdictions have leveled off or have
declined in recent years, a phenomenon which may reflect, in part, opposition to
gaming.
STRENGTHENING OF COMPETITION
The online lottery industry is increasingly competitive in the United States and
internationally, which increased competition could adversely affect the
Company's ability to win renewals of contracts from its existing customers and
to win contract awards from other lottery authorities. Such increased
competition also may have an adverse effect on the profitability of contracts
which the Company does obtain. Through fiscal 2003 (which ends in February
2003), several of
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the Company's larger contracts (including the National Lottery of Brazil and
Texas, its two largest in fiscal 2001) are expected to be the subject of
competitive procurement procedures to select contractors to supply lottery
goods and services upon the termination of the Company's current contracts. See
"Certain Significant Developments Since the Start of Fiscal 2001 - Other New
Online Contracts and Extensions," "Facilities Management Contracts" and
"Competition" below. See also Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below.
ATTRACTING AND RETAINING EMPLOYEES
As is the case with all technology companies, the Company's business prospects
and future success depend upon its ability to attract and to retain qualified
managerial, marketing and technical employees. Competition for such employees is
sometimes intense, especially during times of general economic prosperity. If
the Company is unable to continue to attract and retain the technical and
managerial personnel it requires, its business, financial condition and
operating results could be adversely affected.
FOREIGN CURRENCY EXCHANGE RATES
Foreign exchange exposures arise from current transactions and anticipated
transactions denominated in a currency other than an entity's functional
currency and from the translation of foreign currency balance sheet accounts
into U.S. dollar balance sheet accounts. The Company employs a variety of
strategies in its effort to manage its substantial foreign currency exchange
exposure. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operation" below.
CERTAIN SIGNIFICANT DEVELOPMENTS SINCE THE START OF FISCAL 2001
LOTTERY CONTRACT AWARDS AND RELATED SIGNIFICANT DEVELOPMENTS
Since the start of fiscal 2001 (which ended on February 24, 2001), the Company
has received a number of service contract awards and extensions from lottery
authorities.
NEW ONLINE CUSTOMERS. During fiscal 2001, the Company received awards to install
online systems from six new online customers. In April 2000, the Company
announced that it had been selected after a competitive procurement as the
preferred supplier to provide new online lottery equipment to Santa Casa da
Misericordia ("SCML"), the operator of the National Lottery of Portugal. Under
the terms of the product sale agreement entered into with SCML in October 2000,
GTECH agreed to replace SCML's offline system with a full turn-key online
lottery system. For a period of eight years, the Company also agreed to provide
ongoing services to SCML, including central system maintenance, terminal
maintenance and repairs, software and operations support, and field services.
Online sales with respect to the SCML lottery are expected to begin in June
2001. In June 2000, the Company entered into an agreement with the Virginia
lottery authority to provide 4,000 ISYS(TM) terminals offering advanced
marketing capabilities and implementation, software customisation and warranty
maintenance services. The Virginia lottery
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authority has the option to purchase additional terminals and other products
under its three-year contract with the Company. In August 2000, the Company
entered into a facilities management agreement to provide online lottery
equipment and services to the Ukranian National Lottery through 2010, subject to
the Lottery's option to discontinue certain services if a five-year revenue
forecast is not achieved. The Company has agreed to convert the Ukranian
National Lottery's existing online lottery system, expand the Lottery's existing
terminal base from approximately 1,000 terminals to approximately 5,000
Tiffany(TM) terminals, provide a variety of installation, maintenance and
marketing services, and install and maintain a secure, nationwide communications
network. Sales of online lottery tickets on the Ukranian National Lottery system
commenced in April 2001. In September 2000, the Company announced that it had
signed a new product sale agreement to provide a turn-key online lottery system,
including central system hardware and software, and 1,500 Altura(TM) terminals
to CMC Prospects Import and Export Company, a China-based corporation, which in
turn will supply the Company's equipment to the Beijing Welfare Lottery Center.
In addition, the Company entered into agreements to provide a variety of lottery
services to the Beijing lottery authority. Sales of online lottery tickets
commenced on the Beijing lottery authority's system in March 2001, after the
close of fiscal 2001. In January 2001, the Company entered into an agreement
with Supreme Ventures Limited ("Supreme Ventures") under which it is the
exclusive provider of a fully integrated and secure online lottery system and
supporting services to Supreme Venture, the holder of a ten-year license issued
by the Jamaica Betting, Gaming & Lotteries Commission to operate certain on-line
lottery games in Jamaica. Lottery sales on Supreme Venture's new
Company-provided system are expected to commence in June 2001, after the close
of fiscal 2001. In addition to these awards, in May 2000, the Company announced
that it had entered into an eight-year facilities management contract to provide
a fully integrated and secure online lottery system for the Ivory Coast National
Lottery. Implementation of the Ivory Coast National Lottery project has been
suspended indefinitely, however, pending the resolution of political
uncertainties in the Ivory Coast.
OTHER NEW ONLINE CONTRACTS AND EXTENSIONS. Since the start of fiscal 2001, the
Company also has been awarded online contracts by, or has received contract
extensions from, a number of its existing customers.
In June 2000, the Company announced that it had been selected by the Ohio
lottery authority, following a competitive procurement, to enter into a new
long-term facilities management contract to supply an integrated online and
instant ticket lottery system (including new central system hardware, software,
and terminals and a wide variety of services). The lottery system which is to be
installed under the Company's new agreement with the Ohio lottery authority is
expected to be operational in June 2001. In September 2000, the Company
announced that following a competitive procurement it had been awarded a
contract to supply an instant ticket lottery system, and related products and
services, to the Nebraska lottery authority. In December 2000, the Company
announced that Camelot Group plc ("Camelot") had been selected as the preferred
applicant for the next operating license for the United Kingdom's National
Lottery by the National Lottery Commission (the "NLC"). Since July 1994, the
United Kingdom National Lottery has been operated under a license held by
Camelot and the Company has been a supplier of lottery goods and services to
Camelot for the National Lottery. Camelot was selected by the NLC as the
preferred applicant for the next operating license following a competitive
procurement process. As part of Camelot's proposal for the new
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procurement process. As part of Camelot's proposal for the new license, the
Company entered into technology transfer and training arrangements with Camelot
to, among other things, transfer to Camelot the Company's National Lottery
equipment, facilities and U.K. technology employees (in a transaction which was
subsequently completed in February 2001), complete a technology transfer to
Camelot, and grant to Camelot exclusive rights to operate the Company's gaming
system software in the U.K. for the term of the new license, in consideration
for receiving certain license fees payable by Camelot over the term of the new
license. In February 2001, the Company entered into an agreement to supply
Camelot with more than 26,000 new ISYS(TM) terminals prior to the commencement
of Camelot's second operating license in January 2002. The Company is also
obligated to assist Camelot in converting the National Lottery's current online
gaming and instant ticket systems to the Company's AlphaGols(TM) system during
the term of the second operating license. See Item 3-"Legal Proceedings" and
Note F to "Notes to Consolidated Financial Statements" below.
In March 2000, the Company announced that it had signed a new agreement to
provide online lottery equipment, software and services to the Western Australia
Lotteries Commission. In connection with this product sale of central system
hardware, network communication equipment, and software the Company entered into
an agreement to provide software license and software support to the Western
Australia Lotteries Commission for a term of at least five years. In July 2000,
the Company announced that it had been selected, following a competitive
procurement, as the preferred supplier to provide lottery equipment to Sistemas
Tecnicos de Loterios del Estado ("STL"), provider of the online system for the
Spanish National Lottery. Under the terms of the product sale agreement the STL,
the Company will provide STL with Altura(TM) terminals and AccuTherm(TM)
printers, and a variety of services, including software development, technology
transfer and training.
In February 2001, after the close of fiscal 2001, the Company announced that
Totalizator Sportowy Sp. Zo.o., a government-sponsored lottery authority in
Poland ("TS"), had selected the Company after a competitive procurement as the
preferred applicant for award of a ten-year operating license for Poland's
National Lottery, such term to take effect upon the expiration of the Company's
current facilities management contract with TS in October 2001. However,
recently it has been reported in the Polish press that the contract may be
rebid.
Since the commencement of fiscal 2001, the lottery authorities of Barbados (T.L
Lotteries Ltd.), New Jersey and Missouri have extended the terms of their online
contracts with the Company. In addition, SAZKA, the Czech lottery authority,
entered into an agreement with the Company to extend the Company's online
contract as part of the resolution of certain matters which were the subject of
an arbitration between the parties. See Item 3, "Legal Proceedings" and Note F
to "Notes to Consolidated Financial Statements," below.
During fiscal 2001, the Company also reported that the Iowa lottery authority,
currently a customer of the Company, had selected another vendor to provide
equipment and services for a new online and instant ticket lottery system
following expiration of the Company's current contract in June 2001.
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NON-LOTTERY PRODUCTS AND SERVICES
Since the commencement of fiscal 2001, the Company has made several
announcements respecting its non-lottery products and services. During fiscal
2001, the Company continued to make progress in its efforts to broaden its
offerings of high-volume transaction processing services outside its core online
lottery application. In June 2000, the Company signed a new contract with Caixa
Economica Federal, operator of Brazil's National Lottery, to include additional
financial transaction services (including bill and tax payment, social security
contribution, credit card, and traditional banking transaction services) over
the Company's dedicated network infrastructure. Under the terms of the
agreement, the Company will install 7,300 terminals of which 4,800 will process
financial transactions exclusively, with the remaining 2,500 processing
financial and lottery transactions. In December 2000, the Company signed
agreements with more than 500 of its lottery retailers in Chile to provide
electronic bill payment services at lottery retailer outlets throughout Chile.
In May 2000, the Company announced that it had been selected by the Texas
Department of Human Services to provide call center support services for the
state's electronic benefit transfer system. In August 2000, in connection with
the Company's value assessment described below, the Company announced that
Dreamport, Inc. ("Dreamport"), the Company's gaming and entertainment
subsidiary, would henceforth focus on assisting lotteries to expand their
offerings in the area of video-machine gaming and central systems. Activities
and assets of Dreamport which were peripheral to the Company's core lottery
business, such as casino and slot operations, would be consolidated and/or
divested and Dreamport's operations would be relocated from Florida to Rhode
Island. In March 2001, after the close of fiscal 2001, the Company reported that
it had sold its 50% interest in three limited liability companies which were
pursuing non-lottery gaming opportunities in Michigan, Oregon and California,
respectively, to Full House Resorts, Inc., the owner of the remaining 50%
interest in these companies, for a cash purchase price of $1,800,000.
VALUE ASSESSMENT
In July 2000, the Company announced that it would conduct, and in February 2001
the Company announced that it had completed, a comprehensive value assessment of
its operations. In the wake of this value assessment, the Company undertook a
number of measures to strengthen its focus on its business strategy. Such
measures included the strategic and operational decisions respecting Dreamport,
described above, as well as the decision by the Company to reduce its workforce
by approximately 255 employees. The Company recorded special charges of $42.3
million in fiscal 2001 in connection with this value assessment. See "Note P of
Notes to Consolidated Financial Statements" included in this report.
MANAGEMENT DEVELOPMENTS
Since the start of fiscal 2001, there have been a number of significant
managerial developments. In May 2000, the Company appointed Kathleen McKeough as
Senior Vice President of Human Resources. In July 2000, W. Bruce Turner was
appointed as non-executive Chairman of the Company's Board of Directors
following the resignations of William Y. O'Connor, the Company's Chairman of
the Board of Directors and Chief Executive Officer, and Steven P.
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Nowick, the Company's President and Chief Operating Officer. In September 2000,
the Company appointed Robert Vincent as Vice President of Corporate
Communications, and in February 2001, the Company appointed Antonio Carlos Rocha
as Senior Vice President of Marketing. In March 2001, after the close of fiscal
2001, the Company announced the appointment of Howard S. Cohen as Chief
Executive Officer, and Marc A. Crisafulli as Senior Vice President and General
Counsel of the Company.
LOTTERY INDUSTRY
Statements relating to the lottery industry contained in this report are based
on information compiled by the Company, or derived from independent public
sources which the Company believes to be reliable. No assurance can be given,
however, regarding the accuracy of such statements. In general, there is less
publicly-available information concerning the international lottery industry
than the lottery industry in the United States.
Lotteries are operated by state and foreign governmental authorities and their
licensees in approximately 190 jurisdictions worldwide. Governments have
authorized lotteries primarily as a means of generating non-tax revenues. In the
United States, lottery revenues are frequently designated for particular
purposes, such as education, economic development, conservation, transportation
and aid to the elderly. Many states have become increasingly dependent on their
lotteries as revenues from lottery ticket sales are often a significant source
of funding for these programs.
Although there are many types of lotteries in the world, it is possible to
categorize government authorized lotteries into two principal groups: online
lotteries and off-line lotteries. An online lottery is conducted through a
computerized lottery system in which lottery terminals are connected to a
central computer system, typically by dedicated telephone lines. An online
lottery system is generally utilized for conducting games such as lotto, sports
pools, keno and numbers, in which players make their own selections. Off-line
lotteries feature lottery games which are not computerized, including
traditional off-line lottery games and instant ticket games. Traditional
off-line lottery games, in which players purchase tickets which are manually
processed for a future drawing, generally are conducted only in international
jurisdictions. Instant ticket games, in which players scratch off a coating from
a pre-printed ticket to determine if it is a winning ticket, are conducted both
internationally and in the United States.
In general, online lotteries generate significantly greater revenues than both
traditional off-line lottery games and instant ticket games. In addition, there
are several other advantages to online lotteries as compared to traditional
off-line lotteries. Unlike traditional off-line lottery games, wagers can be
accepted and processed by an online lottery system until minutes before a
drawing, thereby significantly increasing the lottery's revenue in cases in
which a large prize has attracted substantial wagering interest. Online lottery
systems also provide greater reliability and security, allow a wider variety of
games to be offered and automate accounting and administrative procedures which
are otherwise manually performed.
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Typically, approximately 50% of the gross revenues of an online lottery in the
United States is returned to the public in the form of prizes. Approximately 35%
is used by the state to support specific public programs or as a contribution to
the state's general funds. The remaining 15% is generally used to fund the
operations of the lottery, including the cost of advertising, sales commissions
to point-of-purchase retailers and service fees to vendors such as GTECH.
From 1971 through 2000, total annual lottery ticket sales in the United States
grew from approximately $147.5 million to approximately $38.4 billion, although
the Company has witnessed, in recent years, a downward trend in sales generated
by certain of its United States lottery customers. See "General" above.
Historically, most of the growth in ticket sales has occurred in the online
portion of the lottery business which accounted for approximately 57.8% of total
lottery ticket sales in 2000.
There are currently 38 jurisdictions operating online lotteries in the United
States. Implementation of lotteries in other jurisdictions, including in South
Carolina (where in November 2000 voters approved an initiative to introduce an
online lottery), will depend upon successful completion of legislative,
regulatory and administrative processes.
Outside the United States, government operated or licensed lotteries, many of
which are off-line, have a long history. The international online lottery
industry has experienced significant growth. Since 1977, when there were no
online lotteries operating outside of the United States, 104 international
jurisdictions have implemented online lottery systems. A number of other
international jurisdictions, principally in Europe, Asia and Latin America, are
currently considering the implementation of online lotteries.
ONLINE LOTTERY CONTRACTS
The Company generally conducts business under one of three types of contractual
arrangements: Facilities Management Contracts, Operating Contracts and Product
Sales Contracts. Under a typical Facilities Management Contract, the Company
installs, operates and maintains a lottery system, while retaining ownership of
the lottery system. These contracts generally provide for service fees directly
from the lottery authority to the Company based on a percentage of online
lottery ticket sales. Under an Operating Contract, the Company generally
provides the same services as under a Facilities Management Contract, but sells
the lottery system and licenses the computer software to the lottery authority.
Ongoing service fees to the Company under an Operating Contract are usually
based on a percentage of lottery ticket sales. Under a Product Sales Contract,
the Company sells, delivers and installs a turnkey lottery system or lottery
equipment and licenses the computer software for a fixed price, and the lottery
authority subsequently operates and maintains the lottery system.
The collection of lottery monies, the selection of winners, the financial
responsibility for the payment of prizes and the qualification of retail sales
agents are usually the sole responsibility of the lottery authority in each
jurisdiction in which the Company operates a lottery. The United Kingdom's
National Lottery and the South African National Lottery provide important
exceptions
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to the general rule in that in each case a licensee operates all aspects of the
respective National Lottery with the exception of proceeds allocation.
FACILITIES MANAGEMENT CONTRACTS
The Company's Facilities Management Contracts generally require the Company to
install, operate and maintain an online lottery system for an initial term,
which is typically at least five years, and usually contain options permitting
the lottery authority to extend the contract under the same terms and conditions
for one or more additional periods, generally ranging from one to five years. In
addition, the Company's customers occasionally renegotiate extensions on
different terms and conditions. See also "Certain Factors That May Affect Future
Performance- Liquidated Damages Under Contracts" above.
The Company's revenues under Facilities Management Contracts are generally based
upon a percentage of gross online lottery ticket sales. The level of lottery
ticket sales within a given jurisdiction is determined by many factors,
including population density, the types of games played and the games' design,
the number of terminals, the size and frequency of prizes, the nature of the
lottery's marketing efforts and the length of time the online lottery system has
been in operation.
Under its Facilities Management Contracts, the Company retains title to the
lottery system and typically provides its customers with the services necessary
to operate and manage the lottery system. The Company installs and commences
operations of a lottery system after being awarded a Facilities Management
Contract and, following the start-up of the lottery system, is responsible for
all aspects of the system's operations. The Company typically operates lottery
systems in each jurisdiction on a stand-alone basis through the installation of
two or more dedicated central computer systems, although in a few instances
several jurisdictions share the same central system. In addition, the Company
employs a dedicated work force in each jurisdiction, consisting of a site
director, marketing personnel, computer and hotline operators, communications
specialists and customer service representatives who service and maintain the
system.
Under certain of the Company's Facilities Management Contracts the lottery
authority has the right to purchase the Company's lottery system during the
contract term at a predetermined price, which is calculated so that it exceeds
the Company's net book value of the system at the time the right is exercisable.
The Company's role with respect to the continued operation of a lottery system
in the event of the exercise of such a purchase option generally is not
specified in such contracts and thus would be subject to negotiation. Under many
of the Company's Facilities Management Contracts, the lottery authority also has
the option to require the Company to install additional terminals and/or add new
lottery games. Such installations may require significant expenditures by the
Company. However, since the Company's revenues under such contracts generally
depend on the level of lottery ticket sales, such expenditures have generally
been recovered through the revenues generated by the additional equipment or
games and revenues from existing equipment.
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Under a number of the Company's lottery contracts, in addition to providing,
operating and maintaining the online lottery system in these jurisdictions, the
company is providing a wide range of support services and equipment for the
lottery's instant ticket games, such as marketing, distribution and automation
of validation, inventory and accounting systems, for which it receives fees
based upon a percentage of the revenues of the instant ticket games.
Revenues from Facilities Management Contracts are accounted for as service
revenues in the Company's Income Statements.
Unless otherwise indicated, the table below sets forth the lottery authorities
with which the Company had Facilities Management Contracts and fully installed,
operational lottery systems as of March 30, 2001, and as to which the Company is
the sole supplier of central computers and terminals and material services. The
table also sets forth information regarding the term of each contract and, as of
March 30, 2001, the approximate number of terminals installed in each
jurisdiction.
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APPROXIMATE CURRENT
NUMBER OF LOTTERY DATE OF COMMENCEMENT DATE OF EXPIRATION OF EXTENSION
JURISDICTION TERMINALS INSTALLED(1) OF CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS*
- ------------ ---------------------- ------------------- --------------------- --------
UNITED STATES:
Arizona 2,500 9/99 9/04 2 one-year
California (2) 20,310 10/93 10/03 --
Colorado 4,000 3/95 10/04 --
D.C. (3) 575 6/99 11/09 --
Georgia 6,930 4/93 9/03 --
Illinois 6,660 4/00 10/07 1 one-year
Iowa (4) 1,485 4/91 6/01 1 two-year
1 three-year
Kansas 1,830 7/97 6/02 1 two-year
Kentucky 3,000 4/97 6/03 5 one-year
Louisiana 2,775 6/97 6/05 5 one- year
Maine (4) 970 4/89 6/01 --
Michigan 9,500 1/98 1/06 3 one-year
Missouri 2,800 7/96 6/03 --
Nebraska 900 4/94 6/04 --
New Jersey 6,000 6/96 11/06 --
New Mexico 1,235 6/96 11/03 5 one-year
New York 13,700 11/00 3/07 3 one-year
Ohio 7,500 10/93 6/03 (5) 3 two-year
Oregon 2,760 12/96 6/05 3 one-year
Rhode Island 1,100 1/97 7/02 5 one-year
Texas 17,050 3/92 8/02 --
Washington 3,640 9/95 6/04 --
Wisconsin 3,137 6/97 6/02 2 one-year
INTERNATIONAL:
Barbados 200 10/94 11/04 --
- -T.L. Lotteries
Brazil (6)
- -National
Lottery (6) 22,000 1/97 1/03 --
- -Minas Gerais 770 10/94 11/06 --
- -Parana 720 9/99 9/03 one 1-year
- -Goias 120 7/97 7/01 one 1-year
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APPROXIMATE CURRENT
NUMBER OF LOTTERY DATE OF COMMENCEMENT DATE OF EXPIRATION OF EXTENSION
JURISDICTION TERMINALS INSTALLED(1) OF CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS*
- ------------ ---------------------- ---------------- --------------------- --------
Chile
- -Polla Chilena de
Beneficencia S.A. 1,650 12/93 8/02 --
Czech Republic
- -SAZKA 5,700 10/92 12/05 (7) --
Ireland (8)
- -An Post Nat'l
Lottery Company 2,050 3/93 3/01 (8)
Ivory Coast
- -Ivory Coast
National Lottery (9) (9) (9) (9)
Jamaica
- -Supreme
Ventures Limited (10) 11/00 01/11 --
Lithuania (11)
- -OLIFEJA 800 12/94 12/09 (11)
Morocco
- -La Societe de
Gestion de la
Loterie Nationale
- -La Marocaine des
Jeux et Les Sports 800 8/99 8/08 --
Poland (12)
- -Totalizator
Sportowy 6,400 3/91 10/01 (12)
Puerto Rico
- -Loteria
Electronica de
Puerto Rico 1,860 3/99 3/05 1 three-year
Slovak Republic
- - TIPOS a.s. 1,140 3/96 10/04 --
South Africa (13)
- -National Lottery 4,900 7/99 7/09 --
Spain
- -L'Entitat
Autonoma de Jocs
I Apostes de la
Generalitat de
Catalunya 2,510 10/97 10/03 1 six-month
Trinidad & Tobago
- -National
Lotteries
Control Board 665 12/93 7/06 1 three
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APPROXIMATE CURRENT
NUMBER OF LOTTERY DATE OF COMMENCEMENT DATE OF EXPIRATION OF EXTENSION
JURISDICTION TERMINALS INSTALLED(1) OF CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS*
- ------------ ---------------------- ------------------- --------------------- --------
United Kingdom
- -The National
Lottery (14) 24,865 7/94 9/01 --
Ukraine
- -Ukrainian
National Lottery (15) 8/00 (15) --
* Reflects extensions available to the lottery authority under the same terms as
the current contract. Lottery authorities occasionally negotiate extensions on
different terms and conditions.
(1) Total does not include instant ticket validation terminals.
(2) In addition, the Company is a subcontractor to High Integrity Systems,
Inc. ("HISI"), which has a contract with the California lottery
authority to install and maintain 6,309 terminals using HISI's
proprietary dial-up technology for online and instant ticket sales and
validation.
(3) Operated by Lottery Technology Enterprises, a joint venture in which the
Company has a 1% interest, and to which the Company supplies lottery
goods and services.
(4) During fiscal 2001, the Iowa Lottery authority, and during fiscal 2000,
the Maine lottery authority, selected another vendor to provide lottery
goods and services, respectively, at the expiration of the Company's
current contract term.
(5) During fiscal 2001, the Company entered into a new facilities management
agreement to install a system which is expected to be operational in
June 2001.
(6) Operated by GTECH Brasil Holdings, S.A., a Brazilian company in which
the Company owns all voting stock. During fiscal 2001, CAIXA, the
lottery authority operating the Brazilian National Lottery, commenced a
competitive procurement process to determine the provider of lottery
goods and services upon the termination of the Company's contract in
January 2003. The terms of this competitive procurement provide for more
than one vendor to supply the lottery goods and services which are
provided exclusively by the Company under the present contract.
(7) In March 2001, the Company and SAZKA resolved certain business and
contractual issues that had been the subject of an arbitration by, among
other things, agreeing to extend the current contract through December
2005.
(8) The contracts with the Ireland licensee may either be extended for any
period mutually acceptable to the Company and the lottery authority or
continue indefinitely until termination by the licensee.
(9) In May 2000, the Company entered into an eight-year facilities
management contract to provide an integrated lottery system to the Ivory
Coast National Lottery. Implementation of this project has been
suspended for the indefinite future pending resolution of political
uncertainties in the Ivory Coast.
(10) Lottery sales are scheduled to commence in June 2001. The Company plans
to have installed 700 terminals by the end of fiscal second quarter of
2002.
(11) The Company's contract with the Lithuania lottery authority
automatically extends from year-to-year unless either party gives timely
notice of non-renewal.
(12) In February 2001, after the close of fiscal 2001, the Company announced
that the Poland Lottery authority had selected the Company after a
competitive procurement as the preferred applicant for award of a
ten-year operating license upon expiration of the Company's current
facilities management contract in October 2001. Subsequent to this, the
Company has received indications that it is possible that requisite
governmental approvals will not be granted with respect to this
contract.
(13) Operated by Uthingo consortium, in which GTECH is a 10 percent equity
owner.
(14) Operated by Camelot Group plc, a consortium, on a facilities management
basis. During fiscal 2001, Camelot was granted an interim license to
operate the National Lottery through January 2002, and a second running
license commencing upon the expiration of its current license to operate
the National Lottery through January 2009. During fiscal 2001, the
Company and Camelot entered into agreements under which the Company
agrees to provide to Camelot technology transfer and training, software
licensing and lottery terminals with respect to Camelot's second running
license. See "Certain Significant Developments Since the Start of Fiscal
2001."
(15) Operated by the Company under an agreement entered into in August 2000
which expires December 2010, subject to earlier termination by the
Ukrainian National Lottery if, among other things, certain revenue
targets are not achieved. The lottery commenced on-line lottery sales in
April 2001 with an initial installation of 1800 terminals.
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OPERATING CONTRACTS
Under an Operating Contract, the Company generally operates and maintains the
lottery system and provides on-going software support services in the same
manner as under a Facilities Management Contract, except that the Company sells
the lottery system and licenses the software to the lottery authority at the
beginning of the contract rather than retaining ownership of the system. Ongoing
service fees to the Company under its Operating Contracts are usually based on a
percentage of lottery ticket sales. The initial contract term, extensions,
rebidding processes and termination rights for Operating Contracts are generally
substantially the same as those under Facilities Management Contracts.
Revenues from sales of lottery systems and equipment under Operating Contracts
are accounted for as product sales revenue, and services provided under such
contracts are accounted for as service revenues in the Company's Income
Statements.
The table below sets forth the lottery authorities with which the Company had
Operating Contracts as of March 30, 2001. Unless otherwise indicated, the
Company is the sole supplier of lottery equipment and services to each of the
lottery authorities listed below. The table also sets forth information
regarding the term of each contract and, as of March 30, 2001, the approximate
number of terminals installed in each jurisdiction.
OPERATING CONTRACTS
APPROXIMATE
NUMBER OF LOTTERY DATE OF EXPIRATION CURRENT
TERMINALS DATE OF COMMENCEMENT OF CURRENT EXTENSION
JURISDICTION INSTALLED(1) OF CURRENT CONTRACT CONTRACT TERM OPTIONS*
- ------------ ------------ ------------------- ------------- --------
UNITED STATES:
Idaho 975 2/99 2/03 4 one-year
INTERNATIONAL:
Argentina
- -Loteria National 790 11/93 4/03 --
Sociedad del Estado
Turkey
- -Turkish National Lottery 4,000 2/96 11/01 (2)
================================================================================
* Reflects extensions available to the lottery authority under the same
terms as the current contract. Lottery authorities occasionally negotiate
extensions on different terms and conditions.
(1) Total does not include instant ticket validation terminals.
(2) The term of the contract with the Turkey lottery authority automatically
renews for successive one-year extension terms unless either party gives
timely notice of non-renewal. In addition, the Turkey lottery authority
has the option to assume responsibility for the provision of certain
lottery services at any time after the second anniversary of system
start-up.
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PRODUCT SALES CONTRACTS
The Company sells, delivers and installs online lottery systems for a fixed
price under Product Sales Contracts. The Company also sells additional terminals
and central computers to expand existing systems and/or replace existing
equipment under Product Sales Contracts.
In connection with its Product Sales Contracts, the Company generally designs
the lottery system, trains the lottery authority's personnel and provides other
services required to make and keep the system operational. The Company also
generally licenses its software to its customers for a fixed additional fee.
Historically, product sales revenues have been derived from the installation of
new online lottery systems and the sales of lottery terminals and equipment in
connection with the expansion of existing lottery systems. The size and timing
of these transactions at times has resulted in variability in product sales
revenues from quarter to quarter. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The table below lists certain of the Company's direct and indirect customers
that since March 1, 1998 have purchased (or have agreed to purchase) from the
Company new online lottery systems, software and/or lottery terminals and
equipment in connection with the expansion of existing lottery systems.
Argentina --National Lottery of Argentina
Australia --Lotteries Commission of New South Wales
Australia --Lotteries Commission of South Australia
Australia --Western Australia Lotteries Commission
Belgium --Loterie Nationale de Belgique
China --Beijing Welfare Lottery Center
Denmark --Dansk Tipstjanst
France --La Francaise des Jeux
Israel --Mifal Hapayis
Italy --Teseo S.r.l
Massachusetts --Massachusetts State Lottery Commission
Netherlands --Stichting de Nationale Sport Totalisator
Portugal --Santa Casa de Misericordia de Lisboa
Singapore --Singapore Pools (Pte) Ltd.
South Africa --Uthingo
Spain --Sistemas Tecnicos de Loterias del Estado
Sweden --AB Svenska Spel
Switzerland --Loterie de la Suisse Romande
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United Kingdom --The National Lottery
Virginia --Virginia Lottery
CONTRACT AWARD PROCESS
In the United States, lottery authorities generally commence the contract award
process by issuing a request for proposals inviting proposals from various
lottery vendors. The request for proposals usually indicates certain
requirements specific to the jurisdiction, such as particular games which will
be required, particular pricing mechanisms, the experience required of the
vendor and the amount of any performance bonds that must be furnished. After the
bids have been evaluated and a particular vendor's bid has been accepted, the
lottery authority and the vendor generally negotiate a contract in more detailed
terms. Once the contract has been finalized, the vendor begins to install the
lottery system.
After the expiration of the initial or extended contract term, a lottery
authority in the United States generally may either seek to negotiate further
extensions or commence a new competitive bidding process. Internationally,
lottery authorities do not typically utilize as formal a bidding process, but
rather negotiate proposals with one or more potential vendors.
The Company's marketing efforts for its lottery products and services frequently
involve top management in addition to the Company's professional marketing
staff. These efforts consist primarily of marketing presentations to the lottery
authorities of jurisdictions in which requests for proposals have been issued.
Marketing of the Company's lottery products and services to lottery authorities
outside of the United States is often performed in conjunction with licensees
and consultants with whom the Company contracts for representation in specific
market areas. Although generally neither a condition of their contracts with the
Company nor a condition of their contracts with lottery authorities, such
licensees and consultants often agree with the Company to provide on-site
services after installation of the online lottery system.
From time to time, there are challenges or other proceedings relating to the
awarding of lottery contracts.
PRODUCTS AND SERVICES
The Company's lottery systems consist of lottery terminals, central computer
systems, systems and communications software and game software, and
communications equipment which connects the terminals and the central computer
systems. The systems' terminals are typically located in high-traffic retail
outlets, such as newsstands, convenience stores, food stores, tobacco shops and
liquor stores.
The Company's online lottery systems control and perform the following
functions: entry of wagers using a terminal's keyboard or a fully-integrated
optical mark recognition reader; automatic editing of each wager for correctness
by the originating terminal; encryption and
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transmission of the wager and related data to the central computer
installation(s); processing of each wager by the central computers, including
entry of the wager into redundant data bases; transmission of authorization for
the originating terminal to accept the wager and print a receipt or ticket,
winning ticket identification and validation; and administrative functions,
including determination of prize pools and generation of management information
reports.
The basic functions of the Company's systems, which are listed above, as well as
various optional or custom-designed functions, are performed under internal
controls designed for maximum security and minimum processing time. Security is
provided through an integrated system of techniques, procedures and controls
supported by hardware, software and human resources. Individual systems
generally have redundant capacity at multiple levels and sophisticated software
to ensure continuous service to the customer.
TERMINALS
The Company designs, manufactures and provides the point-of-sale terminals used
in its online lottery systems. The Company's model GT-101 FX terminals,
introduced in 1983, its model GT-101TF terminals, introduced in 1985, and its
model GT-401/OI terminals, introduced in 1989, are installed in numerous
jurisdictions. The Company's Spectra(R) terminal series (GT-401/0M, 402/0M and
403/OM), first introduced in 1989, is distinguished by its modular internal and
external architecture.
The Company's ISYS terminal series, (GT-501, 502 and 503), introduced during
fiscal 1996, is an integral, single-unit terminal which features modular
subassemblies, high performance ticket printer and playslip reader
subassemblies, an easy-to-use design, and a host of new features and
technologies.
During fiscal 1999, the Company announced its agreement to provide to the
Colorado lottery its new terminal, Player's Express(TM), which was designed
specifically for large retail environments, such as grocery stores, with
numerous checkout lanes. The Company has subsequently entered into agreements
with the Nebraska, Ohio, Washington, California, New Jersey, New York, Rhode
Island, Israel, Ireland, , Loto-Quebec, The Netherlands and New Zealand lottery
authorities to supply PlayerExpress(TM) terminals.
During fiscal 1999, the Company also announced the launch of its Altura(TM)
family of terminals. See "Certain Products and Services" below.
SOFTWARE
The Company designs and provides all applications solutions for its lottery
systems. The Company's highly sophisticated and specialized software is designed
to provide the following system characteristics: rapid processing, storage and
retrieval of transaction data in high volumes and in multiple applications; the
ability to down-line load (i.e., to reprogram the lottery terminals from the
central computer installation via the communications system to add new games); a
high degree of security and redundancy to guard against unauthorized access and
tampering and to
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ensure continued operations without data loss; and a comprehensive management
information and control system. In addition to featuring the aforementioned
characteristics, the Company's latest generation software system, ProSys(R), is
based on client server architecture and provides open interfaces which allow for
the integration and support of third-party and commercial modules and
applications. See "Certain Products and Services" below.
CENTRAL COMPUTERS
Each of the Company's lottery systems contains one or more central computer
sites to which the lottery terminals are connected. The Company's central
computer systems are manufactured by Compaq Computer Corporation (formerly
Digital Equipment Corporation) and Stratus Computer, Inc. The specifications for
the configuration of the Company's central computer installations are designed
to provide continuous availability, a high throughput rate and maximum security.
Central computer installations typically include: redundant mainframe computers,
various peripheral devices (such as magnetic storage devices, management
terminals and hard copy printers), and various safety, environmental control and
security subsystems (including a back-up power supply), which are all
manufactured by third parties, and a microcomputer-based communication and
switching subsystem. In addition, the Company supplies management information
systems that provide lottery personnel access to important financial and
operational data without compromising the security of the online system.
COMMUNICATIONS
The Company's lottery terminals are typically connected to the central computer
installations by dedicated telephone lines owned or leased by the jurisdiction
in which the system is located. Due to the varying nature of telecommunications
services available in lottery jurisdictions, the Company has developed the
capability to interface with a wide range of communications technologies,
including UHF Radio capability (narrow-band and Spread Spectrum), GSAT/VSAT,
Microwave, Integrated Services Digital Networking (ISDN), Data Over Voice (DOV),
fiber optic and cellular telephone. In Argentina, Barbados, Brazil, the Spanish
province of Catalunya, Chile, the Czech Republic, Estonia, Jamaica, Lithuania,
Mexico, Morocco, New Mexico, Poland, Puerto Rico, Slovakia, South Africa,
Trinidad and Tobago, and Ukraine, the Company utilizes UHF Radio Data-Link
Communications system in lieu of telephone lines to provide a data
communications pathway between the lottery terminals and the central computers.
The Company also uses this technology in the United States to supplement the
existing telephone networks in Rhode Island, Texas, Washington and the District
of Columbia. The Company's GSAT satellite technology makes it feasible to serve
large market areas where telephone lines are either unavailable, unreliable or
too costly. GSAT currently operates in the United States in remote areas of
Colorado, Nebraska, New Mexico, Texas and Washington, and internationally in
Argentina, the Czech Republic, Brazil, Chile, Israel, South Africa and the
United Kingdom. The Company has also implemented UHF radio in conjunction with
GSAT to further enhance reliability and cost savings in remote areas.
GAMES
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An important factor in maintaining and increasing public interest in lottery
games is innovation in game design. The Company's GameScape(TM) group, in
conjunction with lottery authorities, utilizes principles of demographics,
sociology, psychology, mathematics and computer technology to design customized
lottery games which are intended to appeal to the populations served by its
lottery systems. The principal characteristics of game design include: frequency
of drawing, size of pool, cost per play and setting of appropriate odds. The
Company believes that its expertise in game design has enhanced the marketing of
its lottery systems and has contributed to increases in the revenues of the
Company's customers.
The Company's GameScape(TM) group currently has a substantial number of
variations of lottery games in its software library and several promising new
games under development. The Company believes that this game library and the
"know how" and experience accumulated by its professionals since the Company's
inception make it possible for the Company to meet the requirements of its
customers for specifically tailored games on a timely and comprehensive basis.
During fiscal 1999, the Company augmented its game design expertise by acquiring
Europrint Holdings Limited (which is among the world's largest providers of
media promotional games) and its wholly-owned subsidiaries including Interactive
Games International, Inc. (which has pioneered the development of interactive,
televised lottery games including BingoVision(TM), SplitLevel(TM) and
DoubleChance(TM)).
MARKETING
In United States jurisdictions in which the Company has been awarded a lottery
contract, the Company is frequently asked to assist the lottery authority in the
marketing of lottery games to the public. Such assistance generally includes
advice with respect to game design, and promotion and development and
distribution of terminals and advertising programs. As part of such assistance,
the Company developed "GMark," a computerized marketing analysis system used to
determine favorable locations for new lottery terminals. The lottery authorities
of California, Georgia, Illinois, Louisiana, Massachusetts, Missouri, New
Jersey, New York, Ohio, Rhode Island, Texas and Washington currently utilize
GMark systems, and many customers contact the Market Research Group at
GameScape(TM) from time to time to obtain GMark services.
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WARRANTY
Because the Company retains title to the system under a Facilities Management
Contract, no warranty is provided on the Company's products supplied under such
contracts. The Company does repair or replace such products as necessary to
fulfill its obligations under such contract. There is no standard warranty on
products manufactured by the Company. A typical warranty provides that the
Company will repair or replace defective products for a period of time (usually
one year) from the date a product is delivered and tested. Product warranty
expenses for the fiscal years 2001, 2000 and 1999 were not material. The Company
typically does not provide a warranty on products it sells that are manufactured
by third parties, but attempts to pass the manufacturer's warranty, if any, on
to the customer. With respect to computer software, the Company typically
modifies its software as necessary so that the software conforms to the
specifications of the contract with the customer.
CERTAIN PRODUCTS AND SERVICES
ONLINE LOTTERY
Lottery authorities for years have recognized that by offering new games or
products, the lotteries are often able to generate significant additional
revenues. An important part of the Company's strategy is to develop new products
and services for its customers in order to increase their lottery revenues. The
Company's principal online lottery products and services introduced in recent
years are keno, instant ticket support services and televised lottery games,
such as BingoVision(TM). In addition, the Company has also launched in recent
years its Altura(TM) series terminals, Players Express(TM) terminal and
ProSys(R) software system to enhance the functionality and appeal of its
existing software and terminal lines.
KENO. While new online jurisdictions offer growth by providing access to new
players, more mature markets, such as the United States, rely principally upon
the introduction of new games to provide growth. One such game introduced by the
Company is keno. In keno, players typically choose up to 10 numbers from a field
of 80 and attempt to match their numbers against any 20 numbers which are
randomly selected by a central computer system. Alternatively, the player may
choose up to 10 numbers and wager that none of such numbers will match the 20
numbers randomly selected. This game combines the multiple prize payouts of a
lotto-type game with the immediacy of an instant scratch-off lottery game. It is
also unique in its play-style and distribution, which decreases the risk that
the game will cannibalize existing online lottery revenues. Keno is more
interactive than typical online lottery games and is designed to be played in
the company of others. While most lotto and numbers games are found in
convenience stores and supermarkets, places visited frequently and often
individually, keno outlets are often located in restaurants, taverns and bowling
alleys and other social settings which tend to be visited by groups of people.
The Company introduced in April 1990 the first online keno game for the
Lotteries Commission of South Australia and currently assists lottery
authorities in Australia (Lotteries Commission of South Australia), Brazil
(Parana, Minas Gerais, and Goias), California, Georgia, Kansas,
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Lithuania, Massachusetts, New York, Oregon, Rhode Island, Catalunya (Spain),
Switzerland (La Societe de la Loterie de la Suisse Romande), Trinidad and
Tobago, and West Virginia in implementing and operating online keno games.
Keno illustrates the impact that new games can have on lottery revenues. Since
the United States introduction of keno in 1991, United States keno revenues have
grown significantly, exceeding $1.9 billion and accounting for more than 8.7%
of total United States online lottery revenues in calendar year 2000. The
popularity of keno has led the Company to explore the development of new games
based upon keno. Most notably, the Company developed in recent years Keno
Plus(TM), a new product that combines expanded keno game characteristics with
new hardware and enhanced product support.
Keno has been the subject of legal challenges in recent years. Most notably, in
June 1996, the California Supreme Court in Western Telecon, Inc. et al v.
California State Lottery unexpectedly reversed trial and appellate court
decisions and found the California keno game to be a banked game rather than a
lottery because it provides for a fixed prize that is not dependent upon the
size of the prize pool. Accordingly, the Court concluded that the keno game was
not authorized by the California lottery law, and the California State Lottery
suspended operation of the keno game in June 1996. In September 1996, the
Company launched a parimutuel monitor game designed by the Company and the
California State Lottery as a replacement for the suspended game. Although the
new game, like keno, features frequent drawings, its payouts are based upon a
prize pool determined by sales rather than by predetermined or fixed amounts.
Keno was also the subject of an unsuccessful legal challenge in New York which
began in August 1995. There can be no assurances that legal challenges to keno
will not be brought in the future in these or other jurisdictions, nor can there
be any assurances respecting the results of such legal challenges, if any, upon
the operations of keno in jurisdictions serviced by the Company.
In March 1999, the Company announced that Quick Draw, the keno-style lottery
game operated in New York State provided by the Company, would terminate
effective April 1, 1999, and the game did terminate as announced, due to the
failure by the New York State legislature to extend the legislation authorizing
the game. In August 1999, the New York legislature extended the legislation
authorizing the game through March 2001 and sales of Quick Draw resumed. The New
York legislature subsequently extended authorization for Quick-Draw through June
2001. It is uncertain at present whether Quick-Draw will be authorized in New
York beyond June 2001.
INSTANT TICKET SUPPORT SERVICES. The Company provides certain products, systems
and services to the instant ticket lottery industry. The Company's online
support systems for the instant ticket lottery business provide comprehensive
functionality, including: instant ticket validation; retailer accounting;
inventory control and tracking; ticket stock distribution; electronic funds
transfer; finance and sales tracking reports; and marketing support.
In order to automate and increase the security of instant ticket lotteries, the
Company developed the GTECH Validation Terminal ("GVT"), a point-of-sale device
that facilitates instant ticket validation and provides access to the Company's
online instant ticket support systems for instant ticket agents who are not part
of a lottery's online lottery system. The Company also offers add-on
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validation terminals which attach to its online lottery terminals and provide
the same functionality as the GVT, while using the existing communications
network.
The Company is providing or has contracted to provide marketing, distribution,
online validation, inventory control and accounting support services and
equipment (but not the printing of the instant tickets) for the Texas lottery's
instant ticket games. In addition, the Company currently provides instant ticket
support services to lottery authorities in Arizona, California, Colorado,
District of Columbia, Georgia, Idaho, Illinois, Kansas, Kentucky, Louisiana,
Massachusetts, Michigan, Missouri, Nebraska, New Jersey, New Mexico, New York,
Ohio, Oregon, Rhode Island, Texas, Washington and Wisconsin. Internationally,
the Company currently supplies lottery authorities in Australia, Belgium,
Brazil, Chile, Denmark, Finland, Ireland, Israel, Mexico, Morocco, Netherlands,
New Zealand, Portugal, The Slovak Republic, South Africa, Spain (Catalunya),
Sweden and the United Kingdom with instant ticket support services.
TELEVISION LOTTERY GAMES. The Company in recent years has offered a product line
of televised lottery games. Players buy tickets from online lottery retailers
and mark them while following a live, televised game show which includes a draw
of numbers.
Through the use of proprietary game-tracking software, the Company is able to
display, live, how many at-home players are winners or about to become winners,
with each new numbers draw. The Company has implemented BingoVision(TM), a
television lottery game featuring a bingo draw, in Estonia, Lithuania, New
Zealand, The Slovak Republic, Belgium, and five German states; has implemented
SplitLevel(TM), a televised game featuring displayed boards of numbers with
winners determined by the number of matches from these boards in Lithuania; and
is actively marketing these and other games to other lottery authorities.
THE PROSYS(R) SOFTWARE SYSTEM. ProSys(R) is the Company's latest software
system. Employing a user friendly interface, lotteries can use ProSys(R) to
manage all aspects of their gaming environment, including online, instant ticket
sales and accounting and video games. Features such as promotions management and
information analysis allow lottery authorities to tailor the system to their
individual needs. ProSys(R) was first installed in September 1994 for Societe de
la Loterie de la Suisse Romande, Switzerland. Since that time, the Company has
installed ProSys(R) in systems used by the lottery authorities of Arizona,
Washington, D.C.; Colorado; Idaho; Ontario, Canada; Leipzig, Germany; Washington
State; Missouri; Denmark; New Mexico; Massachusetts; New Jersey; Thuringen,
Germany; Kansas; Kentucky; Ohio; Oregon; Rhode Island; Wisconsin; New Zealand;
Belgium; Sweden; Switzerland; Michigan; Texas; Mexico; Netherlands; Israel;
South Africa; South Australia; New South Wales, Western Australia and Illinois
and is in the process of installing ProSys(R) in three additional jurisdictions.
THE ISYS(TM) TERMINAL SERIES. During fiscal 1996, the Company introduced its
ISYS(TM) terminal series. ISYS(TM) is an integral, single-unit terminal which
features modular subassemblies, high performance ticket printer and playslip
reader subassemblies, an easy-to-use design, and a host of new features and
technologies. The Company believes that ISYS(TM) improves upon previous terminal
designs by featuring simplified wager entry via intuitive keyboard and screen
formats, improved system status monitoring and the latest instant ticket
validator technology. The
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Company has installed ISYS(TM) in systems used by lottery authorities in Brazil,
Massachusetts, Missouri, New Jersey, New Mexico, Turkey, Washington State,
District of Columbia, Wisconsin and W. Australia, Kansas, and Rhode Island. See
"Products and Services--Terminals" above.
THE PLAYER EXPRESS(TM) TERMINAL. During fiscal 1999, the Company announced the
introduction of its new terminal, the Player Express(TM). Player Express(TM),
which had its inaugural installation under the Company's contract with the
Colorado lottery authority, was designed as part of the Company's attempt to
provide a total solution for selling lottery tickets in large retail
environments with numerous checkout lanes. Player Express(TM) allows consumers
to conveniently play lottery at the checkout area of retail stores as part of
their regular shopping.
THE ALTURA(TM) TERMINAL. During fiscal 1999, the Company announced the launch of
its Altura(TM) family of terminals. Altura(TM), which represents the initial
offering of the Company's ninth generation of online lottery terminals, permits
applications to be written in the Java programming language enabling the rapid
development of a wide variety of games that are compatible with numerous
software environments.
VIDEOSITE(TM). During fiscal 1998, the Company acquired VideoSite, Inc., a
leading provider of multimedia broadcasting software. Since its acquisition by
the Company, VideoSite has been in the process of developing lottery and retail
advertising and promotional products which will use its broadcasting software to
complement the Company's video-based gaming software products. During fiscal
2000, VideoSite launched NextVision(TM), which brings new lottery-animation,
high quality graphics and full-motion video to monitor games and began selling
advertising over Rhode Island's keno network.
NON-LOTTERY GAMING PRODUCTS AND SERVICES
In September 1995, the Company incorporated Dreamport, Inc. to pursue gaming
opportunities other than online lottery including video lottery and venue-based
gaming.
The Company entered the video lottery machine gaming business during fiscal 1991
and currently provides machine gaming video lottery products and services to
lottery jurisdictions in Minas Gerais, Santa Catarina and Parana, Brazil;
Switzerland; Alberta, British Columbia, Saskatchewan, Canada; Oregon; and Rhode
Island. Dreamport's video lottery machine gaming systems combine the security
and integrity of the Company's traditional online lottery systems with
entertainment-based video games. These video lottery machine gaming systems
include a controlling central computer system, video lottery terminal gaming
machines (which the Company acquires through an exclusive OEM manufacturing
relationship with Bally Gaming Systems, Inc.), the Company's ticket validation
terminals, and a self-diagnostic communications network. Games offered by these
video lottery machine gaming systems include poker, blackjack, keno, bingo, reel
games and electronic instant lottery games.
During fiscal 2001, the Company announced that Dreamport would focus upon
assisting lotteries to expand their offerings in the area of video machine
gaming systems and would consolidate
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and/or divest gaming activities and assets which were peripheral to the
Company's core lottery business. See "Certain Significant Developments Since the
Start of Fiscal 2001."
UWIN!
During fiscal 1999, the Company established UWin!(TM) to provide Internet-based
interactive games to international providers of government-sponsored lottery
products and services. The Company continues to actively market its UWin!(TM)
offering, where permitted, to international lottery authorities.
PRODUCT DEVELOPMENT
The Company devotes substantial resources in order to enhance its present
products and systems and develop new products. In fiscal 2001, the Company spent
approximately $49.3 million on research and development, as compared to $46.1
million in fiscal 2000 and $40.2 million in fiscal 1999.
INTELLECTUAL PROPERTY
Although the Company occasionally seeks patent protection on certain
technological developments, the Company generally has not sought to obtain
patents on its products, and it is doubtful whether patents could be obtained in
many instances. The Company believes that its technical "know-how," trade
secrets and the creative skills of its personnel are of substantially more
importance to the success of the Company than the benefit which patent
protection ordinarily would afford. The Company typically requires customers,
employees, licensees, subcontractors and joint venture partners who have access
to proprietary information concerning the Company's products to sign
non-disclosure agreements, and the Company relies on such agreements, other
security measures and trade secret law to protect such proprietary information.
PRODUCTION, ASSEMBLY AND COMPONENTS
The Company purchases most of the parts, components and subassemblies (some of
which are designed by the Company) necessary for its terminals and other
products from outside sources and assembles them into finished products. The
Company offers central systems manufactured by Compaq Computer Corporation
(formerly Digital Equipment Corporation) and Stratus Computer, Inc. for its
lottery systems.
BACKLOG
The backlog of the Company's orders for sales of its products believed by the
Company to be firm amounted to approximately $199.9 million as of February 24,
2001, as compared to a backlog of approximately $101.8 million as of February
26, 2000. Approximately $30.2 million, or 15.1% of the backlog at February 24,
2001, is not expected to be filled during fiscal 2002.
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COMPETITION
The online lottery business is highly competitive in the United States and
internationally. Both in the United States and internationally, price is an
increasingly important, but usually not the sole criterion for selection. Other
significant factors that influence the award of lottery contracts are: the
ability to optimize lottery revenues through technical capability and
applications knowledge; the quality, dependability and upgrade capability of the
system; the marketing and gaming experience, financial condition and reputation
of the vendor; and the satisfaction of other requirements and qualifications
that the lottery authority may impose.
During fiscal 2001, the Company's principal competitors in the online lottery
business (and the number of online lottery jurisdictions currently serviced or
under contract worldwide by such competitors) were as follows: Automated
Wagering International, Inc. ("AWI"), a subsidiary of Anchor Gaming (by virtue
of its merger, described below, with Powerhouse Technologies, Inc., the prior
corporate parent of AWI) (14); Autotote Corporation ("Autotote") (18);
International Totalizator Systems, Inc. (5); and Essnet/Alcatel (15).
During fiscal 2000, Anchor Gaming, an operator and developer of gaming machines
and casinos, and Powerhouse Technologies, Inc., merged. The merger of these two
companies is likely to provide Automated Wagering International, Inc., the
Company's leading competitor in the U.S. and a subsidiary of Powerhouse
Technologies, Inc., with enhanced financial resources.
In addition, during fiscal 2001, Scientific Games Holdings Corporation, a
leading provider of instant ticket lottery technology as well as of online
lottery systems and services, was acquired by Autotote, and the lottery
divisions of these two companies were integrated. This merger provides the
combined entity with a broader range of product offerings than the entities had
previously offered individually.
PERSONNEL
As of April 2, 2001, the Company had approximately 4,650 full-time employees
worldwide. The Company's employees are not represented by any labor union. The
Company believes that its relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters and research and development and main
production facility are located in its approximately 260,000 square foot
building on approximately 26 acres in West Greenwich, Rhode Island, which the
Company leases from West Greenwich Technology Associates Limited Partnership.
The Company is a limited partner in, and owns 50% of, this partnership. The
Company's lease term runs until August 26, 2013 with two five-year options to
extend the term and the Company has an option to purchase the property.
The Company owns approximately 24 acres adjoining its headquarters in West
Greenwich, Rhode Island.
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The Company also owns an approximately 140,000 square foot manufacturing and
central storage facility in Coventry, Rhode Island. In addition, the Company
leases approximately 22,650 square feet of an office building in Warwick, Rhode
Island which it uses to house its finance and external training departments.
In addition, except in New York State, where the Company owns its back-up data
center facility, and in Austin, Texas, where the Company owns an approximately
39,000 square foot facility which is used by Transactive Corporation, the
Company's benefits delivery subsidiary, the Company leases, or is supplied by
the relevant state authorities with, its data center facilities in the various
jurisdictions. The Company also leases office, depot maintenance and warehouse
space in a number of other locations.
The Company's facilities are in good condition and are adequate for its present
needs.
ITEM 3. LEGAL PROCEEDINGS
As publicly reported, in February 1999, a witness appearing before the Moriarty
Tribunal, an investigative body convened by the Irish Parliament and chaired by
Mr. Justice Moriarty to investigate the business affairs generally of the former
Taoiseach (Prime Minister) of Ireland, Charles Haughey, testified that in
February 1993 Guy B. Snowden, then Chief Executive Officer of the Company, had
invested pounds sterling 67,000 (approximately $100,000) of his personal funds
in a company owned by Mr. Haughey's son. Mr. Haughey had resigned as Taoiseach
in February 1992. In July 1992, the An Post Irish National Lottery Company, the
Irish lottery authority (the "Irish NLC"), issued a Request for Proposals
respecting online and instant ticket lottery goods and services, and in
September 1992 the Company, which was then the incumbent provider of lottery
goods and services to the Irish NLC under an agreement awarded to the Company in
1987, submitted a Proposal to the Irish NLC in response to the Irish NLC's
Request for Proposals. In November 1992, the Irish NLC selected the Company to
provide online and instant ticket goods and services to the Irish NLC under the
terms of the competitive procurement and, following negotiations, a definitive
agreement was entered into between the Irish NLC and the Company in March 1993.
In calendar 1999, the Tribunal requested that the Company provide various
documents regarding the Company's business in Ireland, which the Company has
done, and the Company has been cooperating with the Tribunal. In addition, the
Company has made its own inquiry into the facts surrounding Mr. Snowden's
investment and the extent, if any, of the Company's involvement in or knowledge
of that investment. The Company's investigation has determined that no Company
funds were used to make Mr. Snowden's investment, and there is no information to
suggest that Mr. Snowden ever sought reimbursement for the investment from the
Company. Further, there is no information to suggest that Mr. Snowden informed
anyone else at the Company of his investment at the time or that his investment
was related in any way to the renewal of the Company's contract to supply
systems and support to the Irish NLC. Mr. Snowden has advised the Company
through his counsel that (i) his investment was a strictly personal one, (ii)
the investment was made from his personal funds, (iii) he never sought
reimbursement for any portion of his investment from the Company or any other
entity, and (iv) his investment was not related to the Irish NLC and was not
intended to and did not influence the Irish NLC's decision to renew the
Company's contract.
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No charges of wrongdoing have been brought against the Company in connection
with the Moriarty investigation, and the Company does not believe that it has
engaged in any wrongdoing in connection with this matter. However, since this
investigation is or may still be underway and, investigations of this type
customarily are conducted in whole or in part in secret, the Company lacks
sufficient information to determine with certainty its ultimate scope and
whether the government authorities will assert claims resulting from this
investigation that could implicate or reflect adversely upon the Company.
Because the Company's reputation for integrity is an important factor in its
business dealings with lottery and other governmental agencies, if a government
authority were to make an allegation, or if there were to be a finding, of
improper conduct on the part of or attributable to the Company in any matter,
including in respect of the Moriarty investigation, such an allegation or
finding could have a material adverse effect on the Company's business,
including its ability to retain existing contracts and to obtain new or renewal
contracts. In addition, continuing adverse publicity resulting from this
investigation and related matters could have such a material adverse effect.
Since July 1994, the United Kingdom National Lottery has been operated under a
license held by Camelot Group plc ("Camelot"), and the Company has been a
supplier of lottery goods and services to Camelot for the lottery. As publicly
reported, in or around April or May 2000, the United Kingdom National Lottery
Commission (the "NLC"), the regulator of the United Kingdom National Lottery,
commenced an investigation into a lottery terminal software malfunction in the
United Kingdom in which, under certain rare circumstances, a duplicate
transaction was recorded on the Company's central system while only one ticket
was presented to the retailer. The software malfunction resulted in a relatively
small amount of overcharges to lottery retailers with respect to the duplicate
transactions and a relatively small amount of overpayments or underpayments to
certain prizewinners. The Company first identified this software malfunction in
the United Kingdom in June 1998 and corrected the malfunction in July 1998, but
without notifying Camelot or the NLC, as it should have done. The Company fully
cooperated with the NLC's investigation and undertook to implement a number of
measures respecting its corporate compliance and governance functions and
software development processes in the wake of the investigation. The Company has
also agreed to reimburse United Kingdom lottery players and retailers for any
financial losses incurred by virtue of the software malfunction.
As has also been publicly reported, the developments described above took place
in the context of a competitive procurement respecting the award by the NLC of a
new license to operate the National Lottery with effect from October 1, 2001. In
1999, the NLC established a competitive procedure for the award of the new
license, and two bidders, Camelot and The People's Lottery ("TPL"), subsequently
submitted bids for the new license. Camelot's bid was supported by agreements
with the Company pursuant to which the Company had contracted to continue to
supply lottery goods and services to Camelot during the term of the new license
in the event that Camelot was awarded the new license.
In August 2000, the NLC announced that it had decided that the NLC would proceed
on the basis of a new procedure under which it would negotiate exclusively with
TPL for one month.
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Promptly after the NLC's announcement, Camelot initiated legal proceedings in
the United Kingdom challenging the legality of the NLC's decision to initiate a
new procedure of negotiation with TPL to the exclusion of Camelot. In September
2000, the High Court of Justice (Queen's Bench Division) overturned the NLC's
August 2000 decision to negotiate exclusively with TPL and directed that the NLC
enter into an exclusive negotiation period with Camelot so as to afford Camelot
the same opportunity granted to TPL to improve its bid to address the NLC's
concerns.
As part of the improved Camelot proposal for the new license, the Company
entered into technology transfer and training arrangements with Camelot
providing for the transfer to Camelot of the Company's National Lottery
equipment, facilities and U.K. technology employees, a technology transfer to
Camelot (after a period of training), and a grant to Camelot of exclusive rights
to operate the Company's gaming system software in the U.K. for the term of the
new license. Under these new arrangements, the Company will license its software
and provide a range of support services to Camelot for which the Company expects
to receive compensation during the term of the new license in the range of
between $40 to $45 million per year commencing in fiscal year 2003. The Company
also anticipates receiving revenues of approximately $65 million with respect to
the sale to Camelot of new terminals prior to the commencement of the new
license term. The Company further agreed to negotiate a technology transfer and
a related software license for the exclusive use by Camelot under the new
license of the internet gaming applications of the Company's UWin! subsidiary.
In December 2000, the NLC announced its decision to award a new seven-year
license to operate the National Lottery to Camelot and that it will grant
Camelot an interim license to cover the period from October 1, 2001 through
January 30, 2002 in order to provide a twelve-month conversion period prior to
the beginning of the new license. TPL has not protested the NLC's decision to
award the new license to Camelot and the period in which a protest must be made
has since lapsed.
In April 2001, the NLC issued a report of its investigation into the above
described lottery software terminal malfunction. The NLC report states that its
investigation of the lottery software incident had established breaches of
Camelot's license, including in respect of the failure of the Company to give
proper notification before rectifying the software fault. The report further
states that Camelot has agreed to pay pounds sterling 115,000 (approximately
$175,000) into the National Lottery prize fund as compensation for underpayments
to players resulting from the software malfunction, and that Camelot has
undertaken to identify the amounts by which individual retailers have been
overcharged. The NLC has declined, however, to fine Camelot with respect to
breaches of its license resulting from (or revealed by the NLC investigation of)
the software incident. The NLC report summarizes the steps taken and to be
undertaken by the Company in the wake of investigation of the lottery software
malfunction (including the measures implemented by the Company with respect to
its corporate compliance and governance functions and software development
processes and the technology transfer arrangements, as described above) and
concludes, in light of these steps, that the Company sufficiently addressed the
NLC's ongoing concerns about whether it is a "fit and proper" body for purposes
of involvement in the operation of the National Lottery. Payment by the Company
of amounts: (i) to reimburse Camelot for payments with respect to underpayments
to United Kingdom players and overcharges of retailers,
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as described above, (ii) to reimburse Camelot with respect to any other
out-of-pocket costs incurred by Camelot with respect to the lottery terminal
software malfunction, and (iii) to reimburse other customers of the Company with
respect to effects of the lottery terminal software malfunction outside the
United Kingdom, which amounts have been accrued in the accompanying financial
statements, are not expected to have a material adverse effect on the Company's
consolidated financial position or results of operation.
As publicly reported, in August 2000, a shareholder class action lawsuit on
behalf of all persons who purchased Company stock during the period from April
11, 2000 to July 25, 2000, was brought against the Company, the Company's former
Chairman and Chief Executive Officer, William Y. O'Connor, and the Company's
current Chairman, W. Bruce Turner, in the U.S. District Court of Rhode Island
relating to various Company announcements made between April 11, 2000 and July
25, 2000. The complaint filed in the case, Sandra Kafenbaum, individually and on
behalf of all others similarly situated, v. GTECH Holdings Corporation, William
Y. O'Connor and W. Bruce Turner, generally alleges that the defendants violated
federal securities laws (including Section 10(b) of the Securities Exchange Act
of 1934) by making allegedly false and misleading statements (including
statements alleged to be overly optimistic respecting certain lottery contract
awards to the Company and respecting the Company's prospects in certain
non-lottery business lines and investments), while failing to disclose in a
timely manner certain allegedly material adverse information that it purportedly
had a duty to disclose (including an alleged inability to close certain contract
awards and as to certain alleged cost overruns). The complaint seeks to recover
monetary damages from the Company and the individual defendants. In February
2001, the plaintiffs filed an amended complaint which added Steven P. Nowick,
the Company's former President and Chief Operating Officer, as an individual
defendant. In addition, the amended complaint expands the purported class of
plaintiffs to include all persons who purchased common stock of the Company
during the period from July 13, 1998 through August 29, 2000. The type of relief
sought in the amended complaint is similar to that sought in the original
action. The Company believes that it has good defenses to the claims made in
this lawsuit and intends to file a motion to dismiss the amended complaint as to
all of the defendants. At the present time, however, the Company is unable to
predict the outcome, or the financial statement impact, if any, of this lawsuit.
As publicly reported, in May 2000, Sazka, a.s., a lottery customer of the
Company in the Czech Republic ("Sazka"), filed a Request for Arbitration with
the International Arbitral Centre of the Austrian Federal Economic Chamber of
Commerce in Vienna, Austria, seeking to arbitrate certain business and
contractual issues under the Company's online lottery contract with Sazka. Sazka
sought damages valued at approximately $2.6 million in connection with alleged
delays in the recent extensive expansion of the lottery sales network. Sazka
also sought a determination that its online contract with the Company would
expire approximately two years earlier than the date on which the Company
maintained its contract would terminate. The Company, believing the claims made
by Sazka to be without merit, filed a Memorandum in Reply and Counterclaim
disputing such claims and raising counterclaims for breach of contract by Sazka.
In March 2001, the Company entered into an agreement with Sazka which, among
other things, resolved the arbitration. Under the agreed settlement, Sazka
dropped its demand for liquidated damages, paid to the Company certain disputed
amounts which it had previously withheld and agreed to extend the term of the
contract. The Company in turn agreed to reduce its fee and to provide certain
additional equipment and services under its contract with Sazka.
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In February 1999, the Company was sued by a Florida corporation called EIG
Gaming International, Inc. ("EIG"), in the Circuit Court of the Eleventh
Judicial Circuit of Florida. The Company removed the case to the U.S. District
Court for the Southern District of Florida, where it is captioned EIG Gaming
International, Inc. v. GTECH Corporation, Case No. 99-1808-Civ-Jordan. In its
complaint EIG alleges that it entered into a Letter of Intent with the Company
pursuant to which it would assist the Company to obtain the lottery contract for
Peru in return for a percentage of the lottery's receipts. EIG further contends
that it secured the Peruvian contract for the Company but that the Company
thereupon declined to pursue it. Plaintiff claims damages exceeding $80 million.
The Company vigorously denies plaintiff's allegations, to which it believes it
has good defenses, and, in November 2000, moved for summary judgment. That
motion is pending. In April 2001, the court entered an order tentatively
scheduling a trial in the case during July 2001. At the present time, the
Company is unable to predict the outcome, or the financial statement impact, if
any, of this lawsuit.
For further information respecting legal proceedings, see Item 1, "Certain
Factors Affecting Future Performance - Maintenance of Business Relationships and
Certain Legal Matters" and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of this report, and Note F of
Notes to Consolidated Financial Statements included in this report. The Company
also is subject to certain other legal proceedings and claims which management
believes, on the basis of information presently available to it, will not
materially adversely affect the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Holding's security holders during the
last quarter of fiscal 2001.
ADDITIONAL INFORMATION
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
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EXECUTIVE OFFICERS OF THE COMPANY
The Executive Officers of Holdings as of April 1, 2001 are:
Name Age Position
- ---- --- --------
Howard S. Cohen 54 Chief Executive Officer (since March 2001).
Previously, Mr. Cohen was President and Chief
Executive Officer of Bell & Howell, a leading
information solutions and services provider, from
January 2000 to January 2001; President, Chief
Executive Officer and Chairman of Sidus Systems,
Inc., a Toronto Canada based systems integrator,
contract manufacturer and distributor, from 1998
to 2000; and President, Chief Executive Officer,
and Chief Operating Officer of Peak Technologies
Group, a systems integrator of data capture,
printing, service solutions and software products,
from 1996 to 1998. Prior to this, Mr. Cohen was
President of OCE Systems, Inc., a U.S. subsidiary
of the Netherlands-based OCE Corporation, which
specializes in printing systems and
reprographic equipment, from 1992 to 1996.
David J. Calabro 51 Senior Vice President, with responsibility for the
Company's worldwide facilities management
business, since March 1999. Previously, Mr.
Calabro was employed by Unisys Corporation, a
leading provider of information technology, from
May 1995 through February 1999 as its Vice
President and General Manager of the United States
and Canada Public Sector Market Group, and prior
to that, was Director of Business Operations
(Government Systems Group) from August 1987
through April 1995 for Digital Equipment
Corporation, a leading supplier of computer goods
and services.
Marc A. Crisafulli 32 Senior Vice President and General Counsel (since
March 2001). Previously, Mr. Crisafulli was an
associate (from September 1994 through June 2000)
and a partner (from July 2000 through March 2001)
of the Providence-based law firm of Edwards &
Angell, LLP where he practiced as a commercial
trial lawyer.
Jean-Pierre Desbiens 50 Senior Vice President, with responsibility for
product sales and business development, since
August 1998. Previously, Mr. Desbiens was employed
by BABN Technologies Inc., one of the world's
largest printers of lottery tickets, in a series
of increasingly responsible positions over the
course of 16 years including, from September 1990
until January 1998, as its President and Chief
Executive Officer.
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Kathleen E. McKeough 50 Senior Vice President of Human Resources (since
May 2000). Previously, Ms. McKeough was Senior
Vice President of Human Resources of Allied Domecq
Retailing U.S., a subsidiary of Allied Domecq, a
leading producer and distributor of wines and
spirits and owner of quick-service restaurants,
from 1996 to 1999, and prior to that was Chief
Financial Officer and Treasurer of Allied Domecq
Retailing U.S. from 1994 to 1996.
Jaymin B. Patel 33 Senior Vice President and Chief Financial Officer
since January 2000. Previously, beginning in 1994
Mr. Patel was employed by the Company in a series
of increasingly responsible positions including,
from April 1998 until January 2000, as GTECH's
Vice President, Financial Planning and Business
Evaluation.
Antonio Carlos Rocha 52 Senior Vice President of Marketing (since February
2001). Previously, Mr. Rocha served as President
of GTECH Brasil Lda, the Company's Brazilian
subsidiary, from January, 1996 during which time
the Company obtained the contract to provide
online lottery services to Caixa Economica
Federale, which operates Brazil's National
Lottery. Prior to this, Mr. Rocha was Chairman of
the Executive Committee of AT&T Brazil from July
1993 until late 1995, and President of NCR Brazil
from April 1991 to July 1993.
Donald L. Stanford 50 Senior Vice President, with responsibility for
technology, for more than five years.
Donald R. Sweitzer 53 Senior Vice President - Public Affairs since July
1998. Previously, Mr. Sweitzer was President of
the Dorset Resource and Strategy Group, a
government affairs consultancy, from November 1996
through June 1998, and President and Managing
Partner of Politics Inc., a political consulting
firm, from January 1995 through August 1996. Mr.
Sweitzer also served as the Political Director of
the Democratic National Committee from April 1993
through January 1995, and served as the Finance
Director of this same body from April 1985 through
January 1989.
Executive officers and other officers are elected or appointed by, and serve at
the pleasure of, the Board of Directors. Some are party to employment contracts
with the Company. The information set forth above reflects positions held with
Holdings except as expressly provided to the contrary.
------------------------
For the purposes of calculating the aggregate market value of the shares of
Common Stock of Holdings held by nonaffiliates, as shown on the cover page of
this report, it has been assumed that all the outstanding shares were held by
nonaffiliates except for the shares beneficially owned by: directors, officers,
and employees of and consultants to Holdings and GTECH. However, this should not
be deemed to constitute an admission that all such persons or entities are, in
fact, affiliates of Holdings, or that there are not other persons who may be
deemed to be affiliates of Holdings. Further information concerning
shareholdings of officers, directors and principal
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shareholders of Holdings will be included in Holdings' definitive proxy
statement relating to its scheduled July 2001 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The principal United States market on which Holdings' Common Stock is traded is
the New York Stock Exchange where it is traded under the symbol "GTK."
The following table sets forth on a per share basis the high and low sale prices
of Common Stock for the fiscal quarters indicated, as reported on the New York
Stock Exchange Composite Tape.
FISCAL 2000 HIGH LOW
- ----------- ---- ---
First Quarter (February 28 - May 29, 1999) $28 3/16 $22 1/8
Second Quarter (May 30 - August 28, 1999) $25 11/16 $22 1/2
Third Quarter (August 29 - November 27, 1999) $26 $19 3/8
Fourth Quarter (November 28, 1999 - February 26, 2000) $23 1/8 $19 3/8
FISCAL 2001 HIGH LOW
- ----------- ---- ---
First Quarter (February 27 - May 27, 2000) $23 $17 7/8
Second Quarter (May 28 - August 26, 2000) $23 1/2 $17 5/8
Third Quarter (August 27 - November 25, 2000) $19 1/4 $15 3/8
Fourth Quarter (November 26, 2000 - February 24, 2001) $27 3/4 $18 1/4
The closing price of the Common Stock on the New York Stock Exchange on April
10, 2001 was $29.26. As of April 10, 2001, there were approximately 900 holders
of record of the Common Stock.
Holdings has never paid cash dividends on its Common Stock and has no current
plan to do so. The current policy of Holdings' Board of Directors is to reinvest
earnings in the operation and expansion of the Company's business and, from time
to time, to execute repurchases of shares of Holdings' Common Stock under the
Company's open market share repurchase program. Further, Holdings is a holding
company and its operations are conducted through the Company and