Updated from 12:02 p.m. EDT

Shares of

Gtech Holdings

(GTK)

tumbled 13% on news that its chief executive and president had resigned at the same time that the world's largest operator of lottery systems warned that its second-quarter earnings would be lower than Wall Street expected.

William O'Connor, 55, chief executive and chairman, resigned because of a combination of factors, including the board's "growing dissatisfaction with Gtech's stock performance and how a software issue was handled in the United Kingdom in 1998," the company said in a statement.

The company's president and chief operating officer, Steven Nowick, 46, also resigned.

The company, based in West Greenwich, R.I., said it would report weaker-than-expected financial results for both the second quarter of fiscal 2001, which ends on Aug. 26, and the full year because of "material financial impacts from recent unfavorable developments" on its Rhode Island and Colombian lottery contracts, as well as cost over-runs on two software projects that were compounded by delays in product shipments.

Gtech will also take a charge against second-quarter earnings to cover severance packages for O'Connor and Nowick, as well as the write-off of non-strategic business initiatives.

Shares of Gtech fell 2 15/16, or 13%, to close at 19 13/16. The stock was down 35% over the past two years as of Wednesday's close and has shown little change over the last year.

"Part of the activity in the stock price stems from uncertainty, about who the new executives will be and what the earnings are going to be," Thomas Graves, an analyst at

Standard & Poor's Equity

, said. "And there's the fear that another shoe will drop, that other problem areas might emerge."

Thursday's news surprised many investors, "particularly in light of the conference call with investors that the company held two weeks ago for first-quarter results," Graves said. "The impression they gave then was that the company was on track to meet full-year estimates."

He rates Gtech an avoid, and his firm does not participate in underwriting.

Gtech said it would provide more detailed projections for its financial results in the next 10 business days. The current consensus earnings estimate for the second quarter is 58 cents a share and for the fiscal year 2001 is $2.70 a share, according to

First Call/Thomson Financial

.

"The lack of strategic focus of the firm" was a factor in the resignations, wrote David Anders, an analyst at

Merrill Lynch

, in a report published Thursday. He rates Gtech an accumulate and his firm has done underwriting for the company.

W. Bruce Turner, 40, a member of Gtech's board since last year, has been appointed non-executive chairman of the board, effective immediately.

Turner was a gaming and leisure analyst at

Salomon Smith Barney

from 1994 to 1999 and at

Raymond James

from 1989 to 1994.

The British software issue cited by Gtech in announcing O'Connor's resignation involved a malfunction in June 1998 that was corrected a month later -- without notifying

Camelot Group

, the operator of the British national lottery. "The Board is disappointed with the manner in which this entire matter, of which it only recently became aware, was dealt with and believes the problem should have been disclosed," Turner said.

In a conference call Thursday with analysts and investors, Turner "set a good tone in terms of wanting the company to take a close look at operational and strategic issues," Graves said. "He should have credibility with the investment community."

It was not immediately known whether O'Connor and Nowick were forced out by the board or resigned voluntarily. However, "the bottom line is that the act of resigning was an act of accepting responsibility" for the British problem, the stock price and the negative earnings news, Graves said.

And Anders wrote, "Given our frustration with Gtech's stock price, we understand that drastic measures need to be taken."

"Accordingly, we are encouraged by the management shake-up," he continued. "However, we now need to better understand the following before becoming more positive on the stock: (1) the new strategic direction and cost savings associated with it, (2) who ultimately will compose the executive team, (3) the potential effect on pending lottery contracts (most importantly the UK lottery contract) of the recent executive departures, (4) the timing before these changes translate into financial results and (5) the magnitude of the earnings shortfall this year."

Earnings warnings were also

announced Thursday by software maker

Visual Networks

(VNWK)

and networker

CapRock Communications

(CPRK)

.