Brazil has a politically intense business environment in which GTECH found itself in the midst of major public controversies related to procurement procedures and contract compliance in the spring of 2004. Since that time, GTECH continued to provide services and support to Caixa Economica Federal, the administrator of the National Lottery in Brazil.
On May 16, 2006, GTECH's subsidiary in Brazil, GTECH Brazil Ltda., signed a 90-day extension of a one-year contract that the Company had with Caixa. This contract extension expired on August 12, 2006, at which time Caixa expressed no interest in further extending its contract with GTECH Brazil. As such, GTECH Brazil deactivated all of its terminals on Caixa’s lottery networks, effective August 12, 2006.
Throughout this process, GTECH has expressed confidence that the Company acted appropriately and GTECH's compliance program worked as it is intended. We are committed to completely satisfying customers, regulators, and shareholders that the actions of all parties and individuals involved were appropriate. The information provided on this website is presented in support of that goal.
Background
GTECH Brazil has provided technology and services in Brazil since 1994. It has invested more than U.S.$246 million in support of contracts, which have been negotiated with complete transparency, and approved by authorized representatives of the government, in accordance with appropriate procurement procedures.
In January 2005, Caixa issued four separate bids to procure lottery products and service for logistics, terminals, consumables, and network services. The bids were conducted as a commodity auction in which prices are proposed in a public meeting and revised downward based on competition among the bidders. At the end of January, GTECH Brazil chose not to participate in Caixa's auction for lottery products and services. GTECH provides value-added solutions to its customers that are not adequately evaluated or appropriately valued in a commodity auction as was being conducted by Caixa.
On May 15, 2005, GTECH signed a one-year contract with Caixa to continue operating the existing lottery and financial transaction processing systems for Caixa until its new system was installed and operational. On May 16, 2006, GTECH Brazil signed a 90-day extension of this one-year contract and continued to service Caixa for contracted services during the transition and conversion to Caixa's system.
On August 12, 2006, the 90-day contract extension expired and Caixa indicated no interest in extending its May 2006 contract with GTECH Brazil. As such, GTECH Brazil deactivated all of its terminals on Caixa’s lottery networks and does not anticipate receiving any compensation from Caixa with respect to periods after August 12, 2006.
Developments Related to Various Investigations
GTECH has maintained from the outset of the controversies in Brazil that the Company was the target of an extortion attempt and has acted appropriately in response to the incident.
GTECH Corporation and GTECH Brazil Ltda. were not, nor can they be under Brazilian law, the target of a criminal complaint.
In 2003, GTECH was the focus of what now appears to be several, well-orchestrated subgroups in government and ruling political party organizations that were planning extortion attempts related to exercising of an available extension of its contract with Caixa.
On June 21, 2006, a Brazilian Congressional panel organized and known as a CPI issued a report calling for the indictment of 84 individuals. Some of those individuals were former GTECH Brazil staff members. One is a current employee.
By and large, the circumstances that resulted in the CPI recommendation that charges be brought against the GTECH Brazil affiliated individuals have been reviewed by previous Federal Police investigations. The Federal Police investigations did not result in charges being leveled against any GTECH Brazil individuals.
The CPI report was directed by members of the opposition party to the current government. The year-long hearings and investigation have been highly politicized and reflective of the intense nature of Brazilian election-year politics.
The Securities Exchange Commission (SEC) investigation, which was undertaken in response to published reports about these matters, is ongoing. GTECH is cooperating fully with the investigation.
A comprehensive internal investigation of GTECH Brazil is also ongoing and the Company is convinced that it acted appropriately and its compliance programs worked and continue to work effectively.
Civil Suit Update
A far-reaching, politically motivated civil suit, filed by a federal prosecutor, seeks to retrieve payments made to GTECH. The payments sought are for monies described as beyond reasonable expenses and investments, for a period from 1994 until 2003 when the current federal administration took over Caixa.
The suit sought an injunction to freeze the assets of GTECH Brazil, among others, in order to protect assets from being transferred out of the country. An injunction was granted that froze GTECH Brazil's assets and withheld 30 percent of Caixa's regular payments to GTECH Brazil.
The initial proceeding to grant the injunction was confidential and GTECH was not given an opportunity to participate or provide defenses.
In April 2005, the Company received written confirmation that the Brazil Federal Appeals Court ruled, in part, in GTECH Brazil's favor on its appeal of the injunction (including the 30 percent withholding) that was granted at the trial level in the civil suit. The Federal Appeals Court is the second level court in the Brazil Federal System above the trial courts and below the Supreme Judicial Court (equivalent to the U.S. Federal Circuit Court).
As to the underlying suit, the Company believes it has good and adequate defenses, which it intends to vigorously pursue. In that the services were provided pursuant to legally valid and enforceable contracts, it is not anticipated that GTECH Brazil will face any material liabilities resulting from the civil suit.
Civil cases in Brazil traditionally are lengthy and can take five plus years to resolve.
Vice President
Corporate Communications
GTECH Corporation
10 Memorial Boulevard
Providence , RI 02903
U.S.A.
Media Line: 401-392-7452
