FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 29, 1997
Commission file number 1-11250
GTECH Holdings Corporation
(Exact name of registrant as specified in its charter)
Delaware 05-0450121
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
55 Technology Way, West Greenwich, Rhode Island 02817
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 392-1000
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 12 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.
Yes X No
At January 3, 1998 there were 41,565,171 shares of the registrant's Common Stock
outstanding.
<PAGE>
INDEX
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statement of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBITS
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
November 29, February 22,
1997 1997
------------ ------------
(In thousands,
except share amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................... $ 8,181 $ 11,985
Trade accounts receivable ................................................... 114,483 110,707
Sales-type lease receivables ................................................ 9,997 15,231
Inventories ................................................................. 29,116 35,326
Deferred income taxes ....................................................... 20,237 20,237
Other current assets ........................................................ 14,412 9,743
------------ ------------
TOTAL CURRENT ASSETS ................................................. 196,426 203,229
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS ........................ 1,267,847 1,063,651
Less: Accumulated Depreciation ................................................... (668,604) (561,350)
------------ ------------
599,243 502,301
GOODWILL, net .................................................................... 119,551 112,853
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES ......................... 58,993 56,693
OTHER ASSETS ..................................................................... 101,759 81,465
------------ ------------
$ 1,075,972 $ 956,541
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings ....................................................... $ 209 $ 1,395
Accounts payable ............................................................ 26,160 53,944
Accrued expenses ............................................................ 57,526 52,625
Advance payments from customers ............................................. 7,663 10,534
Employee compensation ....................................................... 25,968 27,991
Income taxes payable ........................................................ 29,380 13,777
Current portion of long-term debt ........................................... 5,090 6,049
------------ ------------
TOTAL CURRENT LIABILITIES ............................................ 151,996 166,315
LONG-TERM DEBT, less current portion ............................................. 489,443 382,499
OTHER LIABILITIES ................................................................ 16,020 25,907
DEFERRED INCOME TAXES ............................................................ 23,687 23,687
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.01 per share--20,000,000 shares authorized, --- ---
none issued
Common Stock, par value $.01 per share--150,000,000 shares authorized,
43,892,002 and 43,845,651 shares issued, 41,672,221 and 42,490,770 shares
outstanding at November 29, 1997 and February 22, 1997, respectively ..... 439 438
Additional paid-in capital .................................................. 170,665 169,705
Equity carryover basis adjustment ........................................... (7,008) (7,008)
Cumulative translation adjustment ........................................... 1,309 1,472
Retained earnings ........................................................... 292,219 228,741
------------ ------------
457,624 393,348
Less cost of 2,219,781 and 1,354,881 shares in treasury at
November 29, 1997 and February 22, 1997, respectively .................... (62,798) (35,215)
------------ ------------
394,826 358,133
------------ ------------
$ 1,075,972 $ 956,541
============ ============
See notes to consolidated financial statements
</TABLE>
<PAGE>
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
---------------------------
November 29, November 23,
1997 1996
------------ ------------
(In thousands, except
per share amounts)
<S> <C> <C>
Revenues:
Services ............................................ $ 213,116 $ 198,259
Sales of products ................................... 51,649 33,621
------------ ------------
264,765 231,880
Costs and expenses:
Costs of services ................................... 150,476 138,867
Costs of sales ...................................... 32,284 21,050
------------ ------------
182,760 159,917
------------ ------------
Gross profit .............................................. 82,005 71,963
Selling, general and administrative ....................... 32,982 33,163
Research and development .................................. 7,720 8,576
------------ ------------
Operating income .......................................... 41,303 30,224
Other income (expenses):
Interest income ..................................... 1,296 1,181
Equity in earnings of unconsolidated affiliates...... 4,919 4,155
Other income (expense) .............................. (925) 1,445
Interest expense .................................... (7,359) (4,108)
------------ ------------
Income before income taxes ................................ 39,234 32,897
Income taxes .............................................. (15,301) (13,817)
------------ ------------
Net income ................................................ $ 23,933 $ 19,080
============ ============
Earnings per common share ................................. $ .57 $ .44
============ ============
Weighted average common shares outstanding ................ 41,908 43,054
============ ============
See notes to consolidated financial statements
</TABLE>
<PAGE>
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended (1)
---------------------------
November 29, November 23,
1997 1996
------------ ------------
(In thousands, except
per share amounts)
<S> <C> <C>
Revenues:
Services ............................................ $ 648,185 $ 585,057
Sales of products ................................... 88,561 72,949
------------ ------------
736,746 658,006
Costs and expenses:
Costs of services ................................... 450,739 404,529
Costs of sales ...................................... 52,781 44,741
------------ ------------
503,520 449,270
------------ ----------
Gross profit .............................................. 233,226 208,736
Selling, general and administrative ....................... 101,835 93,789
Research and development .................................. 23,764 23,750
------------ ------------
Operating income .......................................... 107,627 91,197
Other income (expenses):
Interest income ..................................... 4,841 2,630
Equity in earnings of unconsolidated affiliates...... 13,590 10,746
Other income (expense)............................... (45) 3,912
Interest expense .................................... (21,951) (14,031)
------------ ------------
Income before income taxes ................................ 104,062 94,454
Income taxes .............................................. (40,584) (39,670)
------------ ------------
Net income ................................................ $ 63,478 $ 54,784
============ ============
Earnings per common share ................................. $ 1.51 $ 1.27
============ ============
Weighted average common shares outstanding ................ 42,014 43,076
============ ============
(1) 40 weeks in the nine month period ended November 29, 1997 and 39 weeks in
the nine month period ended November 23, 1996
See notes to consolidated financial statements
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY-(Unaudited)
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Retained Treasury
Shares Amount Capital Other Earnings Stock Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 22, 1997.... 43,845,651 $ 438 $ 169,705 $ (5,536) $ 228,741 $ (35,215) $ 358,133
Net income ..................... --- --- --- --- 63,478 --- 63,478
Common stock issued under
stock award plans .......... 46,351 1 960 --- --- --- 961
Purchase of 864,900 shares
of common stock ............ --- --- --- --- --- (27,583) (27,583)
Foreign currency translation.... --- --- --- (163) --- --- (163)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at November 29, 1997.... 43,892,002 $ 439 $ 170,665 $ (5,699) $ 292,219 $ (62,798) $ 394,826
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended (1)
--------------------------
November 29, November 23,
1997 1996
------------ ------------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income .................................................................... $ 63,478 $ 54,784
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................... 153,940 125,234
Equity in earnings of unconsolidated affiliates ......................... (13,590) (10,746)
Other ................................................................... 19,506 (214)
Changes in operating assets and liabilities:
Trade accounts receivable ............................................. (2,447) (24,959)
Inventories ........................................................... 6,430 4,658
Other assets and liabilities .......................................... (27,197) 9,423
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 200,120 158,180
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts......... (239,388) (149,427)
Acquisitions (net of cash acquired)............................................ (20,964) ---
Investments in and advances to affiliates ..................................... (5,322) (11,782)
Cash received from affiliates ................................................. 3,393 12,806
Other ......................................................................... (15,712) (4,095)
------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES ........................................ (277,993) (152,498)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ...................................... 466,121 8,768
Net payments under short-term borrowing arrangements .......................... (1,174) ---
Principal payments on long-term debt .......................................... (360,770) (2,984)
Purchases of treasury stock ................................................... (27,583) (5,060)
Other ......................................................................... (1,436) 44
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 75,158 768
Effect of exchange rate changes on cash ....................................... (1,089) (197)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............................. (3,804) 6,253
Cash and cash equivalents at beginning of period .............................. 11,985 8,519
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 8,181 $ 14,772
============ ============
(1) 40 weeks in the nine month period ended November 29, 1997 and 39 weeks in
the nine month period ended November 23, 1996
See notes to consolidated financial statements
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of GTECH Holdings
Corporation (the "Company"), the parent of GTECH Corporation ("GTECH"), have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended November 29, 1997
are not necessarily indicative of the results that may be expected for the full
1998 fiscal year ending February 28, 1998. The balance sheet at February 22,
1997 has been derived from the audited financial statements at that date. For
further information refer to the consolidated financial statements and footnotes
thereto included in GTECH Holdings Corporation's fiscal 1997 Annual Report on
Form 10-K.
The Company operates on a 52 to 53 week fiscal year ending on the last Saturday
in February. Fiscal 1998 is a 53 week year. The Company has included the extra
week in its first quarter ended May 31, 1997. Accordingly, there are forty weeks
in the nine month period ended November 29, 1997, versus thirty-nine weeks in
the nine month period ended November 23, 1996.
NOTE B--INVENTORIES
November 29, February 22,
1997 1997
----------- -----------
(Dollars in thousands)
Inventories consist of:
Purchased components $ 12,511 $ 11,483
Finished subassemblies 1,085 1,993
Work-in-process 14,465 16,106
Finished goods 1,055 5,744
----------- -----------
$ 29,116 $ 35,326
=========== ===========
NOTE C--LONG-TERM DEBT
November 29, February 22,
1997 1997
----------- -----------
(Dollars in thousands)
Long-term debt consists of:
Revolving credit facility $ 170,700 $ 367,000
7.75% Series A Senior Notes due 2004 150,000 ---
7.87% Series B Senior Notes due 2007 150,000 ---
Other 23,833 21,548
----------- -----------
494,533 388,548
Less current maturities 5,090 6,049
----------- -----------
$ 489,443 $ 382,499
=========== ===========
The Company has an unsecured revolving credit facility of $400 million expiring
in June 2002 (the "Credit Facility"). At November 29, 1997, the weighted average
interest rate for all outstanding borrowings under the Credit Facility was
5.96%. On May 29, 1997, the Company issued in a private placement, $150 million
of 7.75% Series A Senior Notes due 2004 and $150 million of 7.87% Series B
Senior Notes due 2007 (collectively, the "Senior Notes"). Interest on each issue
is payable semiannually in arrears. The proceeds from the sale of the Senior
Notes were used to pay down the Credit Facility.
NOTE D--INCOME TAXES
The Company's effective income tax rate was greater than the statutory rate due
primarily to state income taxes and certain expenses that are not deductible for
income tax purposes.
NOTE E--COMMITMENTS AND CONTINGENCIES
See Legal Proceedings in Part II Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I, Item 2
herein.
<PAGE>
NOTE F--EARNINGS PER COMMON SHARE
Earnings per common share are calculated by dividing net income by weighted
average common shares outstanding during the period. The exercise of outstanding
stock options would not result in a material dilution of earnings per common
share.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", that is required to be adopted by the Company in the
fourth quarter of fiscal 1998. At that time, the Company will be required to
change the method currently used to calculate earnings per share and to restate
all prior periods presented. Under the new standard, primary earnings per share
will be replaced with basic earnings per share and fully diluted earnings per
share will be replaced with diluted earnings per share. Basic earnings per share
is computed by dividing income available to common stockholders by weighted
average common shares outstanding for the period without consideration for
common stock equivalents. Diluted earnings per share is computed similarly to
fully diluted earnings per share under the provisions of APB Opinion No. 15. Had
the provisions of Statement No. 128 been used to calculate earnings per share
for the first nine months of fiscal 1998 and 1997, earnings per share would not
have differed materially from the reported amounts.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements contained in this section and elsewhere in this report are
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934. Such statements
include, without limitation, statements relating to (i) the future prospects for
and stability of the lottery industry and other businesses in which the Company
is or expects to be engaged, (ii) the future operating and financial performance
of the Company, (iii) the ability of the Company to retain existing business and
to obtain and retain new business, and (iv) the results and effects of legal
proceedings and investigations. Such forward looking statements reflect
management's assessment based on information currently available, but are not
guarantees and are subject to risks and uncertainties which could cause actual
results to differ materially from those contemplated in the forward looking
statements. These risks and uncertainties include but are not limited to those
set forth herein and in the Company's press releases and filings with the
Securities and Exchange Commission.
General
The Company has derived substantially all of its revenues from the rendering of
services and the sale or supply of computerized on-line lottery systems and
components to government-authorized lotteries. Service revenues have been
derived primarily from service contracts, that are typically of at least five
years' duration, and are generally based upon a percentage of a lottery's gross
on-line lottery sales. These percentages typically fall within a range of 1.5%
to 5.0%. Product sales revenues have been derived primarily from the
installation of new on-line lottery systems and sales of lottery terminals and
equipment in connection with the expansion of existing lottery systems. The size
and timing of these transactions have resulted in variability in product sales
revenues from period to period.
The Company also has taken steps to broaden its offerings of high volume
transaction processing services outside of its core business of providing
on-line lottery services. The Company's Transactive subsidiary ("Transactive")
currently provides benefits delivery systems and services on behalf of
government authorities. The Company's Dreamport subsidiary ("Dreamport") pursues
gaming opportunities other than on-line lottery. In addition, the Company's
WorldServ subsidiary provides network communications services to private sector
clientele and the Company's VideoSite subsidiary ("VideoSite"), acquired in
October 1997, provides multimedia broadcasting software.
The Company's business is highly regulated, and the competition to secure new
government contracts is often intense. Awards of contracts to the Company are,
from time to time, challenged by competitors. Further, there have been and
continue to be investigations of various types, including grand jury
investigations, conducted by governmental authorities into possible
improprieties and wrongdoing in connection with efforts to obtain and/or the
awarding of lottery contracts and related matters. Although the Company does not
believe that it has engaged in any wrongdoing in connection with these matters,
certain investigations that are conducted largely in secret are still underway.
Accordingly, the Company lacks sufficient information to determine with
certainty their ultimate scope and whether the government authorities will
assert claims resulting from these or other investigations that could implicate
or reflect adversely upon the Company. Because the Company's reputation for
integrity is an important factor in its business dealings with lottery and other
government agencies, if government authorities were to make an allegation of, or
if there were to be a finding of, improper conduct on the part of or
attributable to the Company in any matter, such an allegation or finding could
have a material adverse effect on the Company's business, including its ability
to retain existing contracts and to obtain new or renewal contracts. In
addition, continuing adverse publicity resulting from these investigations and
related matters could have such a material adverse effect. See "Legal
Proceedings" in Part II, Item 1 herein; Part I, Item 1 - "Factors Affecting
Future Performance - Maintenance of Business Relationships and Certain Legal
Matters" and Part I, Item 3 - "Legal Proceedings" of the Company's fiscal 1997
annual report on Form 10-K; and Note H to the Consolidated Financial Statements
in the Company's fiscal 1997 annual report on Form 10-K for further information
concerning these matters and other contingencies.
Transactive
The Company is aggressively considering various alternatives aimed at maximizing
the value of its investment in Transactive. Such alternatives include raising
additional capital by selling a portion of the business to a strategic investor,
selling the entire business, or revamping Transactive's cost structure to
improve its operating results. Although the Company is presently uncertain which
alternative will be selected, the Company could be required to recognize a
charge to operations depending upon the alternative selected, to reflect an
impairment in the value of its investment in Transactive. Such charge may be
recorded as early as the fourth quarter of fiscal 1998.
Results of Operations
The Company operates on a 52 to 53 week fiscal year ending on the last Saturday
in February. Fiscal 1998 is a 53 week year. The Company has included the extra
week in its first quarter ended May 31, 1997. Accordingly, there are forty weeks
in the nine month period ended November 29, 1997, versus thirty-nine weeks in
the nine month period ended November 23, 1996.
Revenues for the third quarter of fiscal 1998 were $264.8 million, representing
a $32.9 million, or 14.2%, increase over revenues of $231.9 million in the third
quarter of fiscal 1997.
Service revenues in the fiscal 1998 third quarter were $213.1 million,
representing a $14.8 million, or 7.5%, increase over the $198.3 million of
service revenues in the third quarter of fiscal 1997. This increase resulted
primarily from $12.5 million of service revenues from the new on-line lottery
system that the Company implemented in Brazil. Brazil's National Lottery is run
by Caixa Economica Federal ("Caixa"), Latin America's largest financial
institution. After a number of years of growth, the Company is witnessing a
downward trend in the sales generated by its U.S. lottery customers over the
Company's last two fiscal quarters. The Company believes that this is a
temporary condition and that the growth rate for its U.S. lottery customers
sales will be in the two to four percent range in calendar 1998. However, there
can be no assurance that this will be the case.
Product sales in the third quarter of fiscal 1998 were $51.7 million,
representing an $18.1 million, or 53.6%, increase over the $33.6 million of
product sales in the third quarter of fiscal 1997. This increase resulted
primarily from higher terminal sales and higher central system sales in the
third quarter of fiscal 1998 than in the third quarter of fiscal 1997. During
the quarter, the Company completed the sale of a new on-line lottery system to
the State of Massachusetts and a video lottery system to the State of Oregon.
The Company sold approximately 7,200 lottery terminals in the third quarter of
fiscal 1998 as compared to approximately 4,500 lottery terminals in the third
quarter of fiscal 1997.
Gross margins on service revenues were 29.4% in the fiscal 1998 third quarter
compared to 30.0% in the third quarter of fiscal 1997. This decrease was due
primarily to losses on Transactive's Illinois EBT contract along with lower
margins experienced on new lottery contracts in the early stages of operations.
These decreases were partially offset by improved margins on certain existing
lottery contracts.
Gross margins on product sales fluctuate due to the mix, volume and timing of
product sales contracts. Gross margins on product sales were 37.5% in the third
quarter of fiscal 1998 compared to 37.4% in the third quarter of fiscal 1997.
This improvement was reflective of the change in product mix.
Selling, general and administrative expenses in the third quarter of fiscal 1998
were $33.0 million, representing a $.2 million, or .5%, decrease from the $33.2
million incurred in the third quarter of fiscal 1997. As a percentage of
revenues, selling, general and administrative expenses were 12.5% and 14.3%
during the third quarters of fiscal 1998 and 1997, respectively.
Research and development expenses in the third quarter of fiscal 1998 were $7.7
million, representing a $.9 million, or 10%, decrease from research and
development expenses of $8.6 million in the third quarter of fiscal 1997. This
decrease reflects higher capitalization of costs relating to the various
projects underway in the fiscal 1998 third quarter. As a percentage of revenues,
research and development expenses were 2.9% and 3.7% during the third quarters
of fiscal 1998 and 1997, respectively.
Equity in earnings of unconsolidated affiliates in the third quarter of fiscal
1998 was $4.9 million, an increase of $.7 million over the $4.2 million earned
during the third quarter of fiscal 1997. This increase was due primarily to
higher equity income from Camelot along with higher equity income from Dreamport
partnerships in Delaware and Oregon.
Other expense in the third quarter of fiscal 1998 was $.9 million representing
foreign exchange losses resulting primarily from the marking to market of hedges
utilized to protect certain fiscal 1998 European denominated anticipated profit.
Other income of $1.4 million earned during the third quarter of fiscal 1997
represented the gain on the sale of a portion of the Company's investment in
Pacific Online Systems Corporation ("Pacific").
Interest expense in the third quarter of fiscal 1998 was $7.4 million, an
increase of $3.3 million over the $4.1 million incurred during the third quarter
of fiscal 1997. This increase was due primarily to higher average debt
outstanding to fund the on-line lottery system implementation underway for the
Caixa along with higher average interest rates.
Revenues for the first nine months of fiscal 1998 were $736.7 million,
representing a $78.7 million, or 12%, increase over revenues of $658.0 million
in the first nine months of fiscal 1997.
Service revenues for the first nine months of fiscal 1998 were $648.2 million,
representing an increase of $63.1 million, or 10.8%, over the $585.1 million of
service revenues in the first nine months of fiscal 1997. This increase resulted
primarily from $44.8 million of higher revenues from the Company's existing
lottery customer base along with $23.2 million of service revenues from the
Caixa, partially offset by the absence of service revenues from the Maryland
contract. As mentioned previously, the Company is witnessing a downward trend
in the sales generated by its U.S. lottery customers over the Company's last
two fiscal quarters.
Product sales in the first nine months of fiscal 1998 were $88.5 million,
representing an increase of $15.6 million, or 21.4%, over the $72.9 million of
product sales in the first nine months of fiscal 1997. This increase resulted
primarily from higher central system and terminal sales in the first nine months
of fiscal 1998 than in the first nine months of fiscal 1997. These increases
were partially offset by lower sales of component parts and equipment to Camelot
and other members of the U.K. lottery consortium. The Company sold approximately
10,200 lottery terminals in the first nine months of fiscal 1998 as compared to
approximately 7,500 lottery terminals in the first nine months of fiscal 1997.
Gross margins on service revenues were 30.5% in the first nine months of fiscal
1998 compared to 30.9% in the first nine months of fiscal 1997. This decline was
due primarily to lower margins experienced on new lottery contracts in the early
stages of operations along with losses on Transactive's Illinois EBT contract,
partially offset by improved margins on certain existing lottery contracts.
Gross margins on product sales were 40.4% in the first nine months of fiscal
1998 compared to 38.7% in the first nine months of fiscal 1997. This improvement
was reflective of the change in product mix.
Selling, general and administrative expenses in the first nine months of fiscal
1998 were $101.8 million, representing an $8.0 million, or 8.6%, increase over
the $93.8 million incurred in the first nine months of fiscal 1997. These
increases were primarily attributable to higher incentive compensation and sales
and business development costs along with higher legal costs relating in large
part to investigations and legal proceedings. As a percentage of revenues,
selling, general and administrative expenses were 13.8% and 14.3% during the
first nine months of fiscal 1998 and 1997, respectively.
Research and development expenses in the first nine months of fiscal 1998 were
$23.8 million compared to $23.7 million in the first nine months of fiscal 1997.
This increase reflects increased development activity for new hardware products
and the design and related software for new games, partially offset by the
higher capitalization of costs relating to the higher level of project activity
in the first nine months of fiscal 1998. As a percentage of revenues, research
and development expenses were 3.2% and 3.6% during the first nine months of
fiscal 1998 and 1997, respectively.
Interest income in the first nine months of fiscal 1998 was $4.8 million, an
increase of $2.2 million over interest income of $2.6 million earned during the
first nine months of fiscal 1997. This increase reflects higher dollar
denominated cash balances in Brazil to fund the on-line lottery system
implementation underway for the Caixa along with interest earned on sales type
lease receivables.
Equity in earnings of unconsolidated affiliates in the first nine months of
fiscal 1998 was $13.6 million, an increase of $2.9 million over the $10.7
million earned during the first nine months of fiscal 1997. These increases were
due primarily to higher equity income from Camelot along with higher equity
income from Dreamport partnerships in Delaware and Oregon.
Other income of $3.9 million earned during the first nine months of fiscal 1997
primarily represented the gain on the sale of the Company's investment in
Pacific.
Interest expense in the first nine months of fiscal 1998 was $21.9 million, an
increase of $7.9 million over the $14.0 million incurred during the first nine
months of fiscal 1997. This increase was due primarily to higher average debt
outstanding to fund the on-line lottery system implementation underway for the
Caixa along with higher average interest rates.
The Company's effective income tax rate decreased from 42% in the first nine
months of fiscal 1997 to 39% in the first nine months of fiscal 1998 due
principally to a reduction in nondeductible expenditures, increased recognition
of tax credits and the full year effect of the restructuring of financing and
operations in Brazil. The Company's effective income tax rate was greater than
the statutory rate due primarily to state income taxes and certain expenses that
are not deductible for income tax purposes.
As previously reported, the Texas Lottery Commission had indicated its intention
to rebid the Texas Lottery contract currently held by GTECH and in August 1997
the Commission issued a Request for Proposals ("RFP") with respect to the
contract. (See "Legal Proceedings" in Part II, Item 1). In December 1997, GTECH
announced that it had declined to submit a proposal in response to the
Commission's RFP in light of perceived flaws in the RFP and the related
procurement process and the Company's belief that it is party to a valid
contract with the Commission through August 2002. Previously, the Chairman of
the Commission had declared that issuing the RFP is not and should not be deemed
an exercise by the Texas Lottery of the termination provision of GTECH's
contract, without cause, upon 30 days prior notice. The Texas Lottery Commission
had further asserted that it has no obligation to deal with GTECH in good faith
with respect to the termination of its contract with the Company, a position
with which GTECH strongly disagrees. Pursuant to the amendment to GTECH's
contract executed in April 1996, which extended the term of the contract through
August 2002, the Company is making major capital investments of more than $20.0
million and has incurred additional related expenses. A substantial portion of
the Company's existing investment in its Texas lottery contract ($35.7 million
at November 29, 1997) would have to be written off, as early as the fourth
quarter of fiscal 1998, should the Company lose the entire Texas lottery
contract. The remaining investment, including capital investments made pursuant
to the amendment to the contract, would have to be depreciated over the
remaining term of the existing contract. The Company is pursuing all available
options to ensure that its contract, negotiated in good faith with the Texas
Lottery, is honored. In fiscal 1996 and 1997, and the first nine months of
fiscal 1998, the aggregate revenues from the Company's lottery operations in the
State of Texas represented 17.5%, 15.8% and 14.6%, respectively, of the
Company's consolidated revenues, and a somewhat higher percentage of operating
income, for such periods. No other customer accounted for as much as 10% of the
Company's consolidated revenues in such periods, although the Company's lottery
contracts in a number of jurisdictions, including Brazil, California, Georgia,
New York and the United Kingdom, are important sources of revenues and earnings
for the Company. Reference is also made to Items 1 and 3 of, and Note H of Notes
to Consolidated Financial Statements included in, the Company's fiscal 1997
Annual Report on Form 10-K, Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Part II, Item 1 "Legal
Proceedings" herein and of the Company's Quarterly Reports on Form 10-Q for its
periods ending May 31, 1997 and August 30, 1997, for further information
respecting legal proceedings and related matters involving the Company.
The Company is in the process of evaluating any possible consequences related to
the "Year 2000" computer software issue. At present, the Company does not
anticipate that the Year 2000 issue will pose significant operational problems
for the Company's computer systems or that the Company will incur significant
operating expenses or be required to invest heavily in computer systems to be
Year 2000 compliant.
Changes in Financial Position, Liquidity and Capital Resources
During the first nine months of fiscal 1998, the Company generated $200.1
million of cash from operations. This cash, along with $104.2 million of net
borrowings was used primarily to fund the purchase of $239.4 million of systems,
equipment and other assets relating to contracts, the repurchase of $27.6
million of the Company' common stock and acquisition activity totaling $21.0
million.
The cost of systems, equipment and other assets relating to contracts increased
by $204.1 million from $1,063.7 million at February 22, 1997 to $1,267.8 million
at November 29, 1997. This increase reflects the installation of a substantial
portion of the new lottery system for the Caixa, the installation of new lottery
systems for lotteries in Wisconsin, Kansas, and Ohio, the continuing
installation of a new lottery system for the Oregon lottery and the expansion of
lottery systems in several domestic and international locations.
Inventories decreased by $6.2 million from $35.3 million at February 22, 1997 to
$29.1 million at November 29, 1997, due primarily to the high level of product
sales in the third quarter of fiscal 1998.
Other assets increased by $20.3 million from $81.5 million at February 22, 1997
to $101.8 million at November 29, 1997, due primarily to software acquired as
part of the acquisition of VideoSite and the capitalization of costs relating to
standard software product offerings.
Accounts payable decreased by $27.7 million from $53.9 million at February 22,
1997 to $26.2 million at November 29, 1997, due primarily to lower inventory and
the current lower volume of ongoing lottery and benefits delivery system
installations.
The Company's business is capital-intensive. Although it is not possible to
estimate precisely, due to the nature of the business, the Company currently
anticipates that the level of capital expenditures for systems, equipment and
other assets relating to contracts required during fiscal 1998 will be in a
range of $275.0 million to $290.0 million. Approximately $120.0 million of this
amount relates to the implementation of the on-line lottery system for the
Caixa. At November 29, 1997, the net book value of the Company's investments in
Brazil was approximately $180.0 million. The principal sources of liquidity for
the Company are expected to be cash generated from operations and borrowings
under the Company's Credit Facility. On January 3, 1998 the Company had utilized
approximately $155 million of its $400 million Credit Facility. The Company
currently expects that its cash flow from operations and available borrowings
under its Credit Facility, together with other sources of capital believed to be
available, will be sufficient to permit it to meet its anticipated working
capital and ordinary capital expenditure needs, to service its debt obligations
and to permit it to fund anticipated internal growth.
Inflation, Interest Rates and Foreign Exchange Fluctuation
The impact of inflation on the Company's operations has not been significant to
date. While the Company believes that its business is not highly sensitive to
inflation, there can be no assurance that a high rate of inflation in the future
would not have an adverse effect on the Company's operations, particularly in
emerging markets such as Brazil. The Company has historically used the U.S.
dollar as the functional currency for its operations in Brazil due to the high
levels of inflation in the Brazilian economy. The Company is currently in the
process of evaluating the functional currency to be used for its Brazilian
operations now that the inflation rate has declined significantly.
The Company uses various techniques to reduce the risk associated with future
increases in interest rates, the most significant of which was the issuance of
seven and ten year fixed rate debt on May 29, 1997, in a private placement.
The Company attempts to manage its foreign exchange risk by securing payment
from its customers in U.S. dollars, by sharing risk with its customers, by
utilizing foreign currency borrowings, by leading and lagging receipts and
payments and by entering into foreign currency exchange contracts. In addition,
a significant portion of the costs attributable to the Company's foreign
currency revenues are incurred in the local currencies.
The Company, from time to time, enters into foreign currency exchange and option
contracts to hedge the risk associated with certain firm sales commitments,
anticipated revenue streams and certain assets and liabilities denominated in
foreign currencies. The Company does not engage in currency speculation. Gains
and losses on contracts that hedge specific foreign currency commitments are
deferred and accounted for as part of the transaction being hedged. Contracts
used to hedge anticipated revenue streams and certain assets and liabilities are
marked to market, and the resulting transaction gain or loss is included in the
determination of net income. As of January 3, 1998, the Company had
approximately $99.0 million of outstanding foreign currency exchange contracts
to purchase foreign currencies (primarily Japanese Yen) and approximately $145.8
million of outstanding foreign currency exchange and option contracts to sell
foreign currencies (primarily Japanese Yen).
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As previously reported, the Texas Lottery Commission indicated its intention to
rebid the Texas Lottery contract currently held by GTECH and in August 1997 the
Commission issued a Request for Proposals (the "RFP") with respect to the
contract. The RFP invited vendors to submit proposals for any or all of three
components: On-Line Gaming System and Services, Instant Ticket Gaming System and
Services and Instant Ticket Manufacturing and Services. Under the terms of the
RFP, the Commission may award contracts to one or several vendors, and may award
a contract with respect to the On-Line Gaming System and Services to two
separate vendors. The Commission also reserved the right to reject all bids.
Subsequent to the issuance of the RFP, GTECH filed a protest with the
Commission's General Counsel challenging the issuance and various terms of the
RFP and the Executive Director of the Texas Lottery issued his determination
with respect to GTECH's protest, denying the vast majority of the protest and
amending certain discrete provisions of the RFP in response to GTECH's protest.
GTECH thereupon appealed the Executive Director's determination to the
Commission and, in September 1997, the Commission denied GTECH's appeal.
In November 1997, GTECH appealed the Commission's decision to the Travis County
District Court by filing an Original Petition seeking judicial review to remedy
alleged unauthorized and ultra vires acts of the Commission. At this time, GTECH
also filed a Supplemental Protest with the Commission providing additional
evidence in support of its claim that the RFP should be revoked due to alleged
bias by the former Executive Director of the Lottery who had designed the RFP.
The Commission denied the Supplemental Protest in late November 1997 and
responded to the Original Petition by asserting that the Travis County District
Court lacked jurisdiction to consider GTECH's claims. In December 1997, GTECH
filed a First Amended Original Petition with the Travis County District Court
appealing the denial of the Supplemental Protest. In December 1997, GTECH also
announced that it had declined to submit a proposal in response to the
Commission's RFP in light of the perceived flaws in the RFP and the related
procurement process and the Company's position that it is party to a valid
contract with the Commission through August 2002. Previously, the Chairman of
the Commission had declared that issuing the RFP is not and should not be deemed
an exercise by the Texas Lottery of the termination provision of GTECH's
contract, without cause, upon 30 days prior notice. The Texas Lottery Commission
had further asserted that it has no obligation to deal with GTECH in good faith
with respect to the termination of its contract with the Company, a position
with which GTECH strongly disagrees. Pursuant to the amendment to GTECH's
contract executed in April 1996, which extended the term of the contract through
August 2002, the Company is making major capital investments of more than $20
million and has incurred additional related expenses. (See Part I, Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations). The Texas Lottery contract is GTECH's largest, accounting for
approximately 16% of GTECH's total revenues in fiscal 1997, and approximately
15% of GTECH's total revenues for the first nine months of fiscal 1998, and a
somewhat higher percentage of operating income for these periods. GTECH is
pursuing all available options to ensure that its contract, negotiated in good
faith with the Texas Lottery, is honored.
For further information respecting legal proceedings and related matters, refer
to: (i) Items 1 and 3 of, and Note H of Notes to Consolidated Financial
Statements included in, the Company's fiscal 1997 Annual Report on Form 10-K;
(ii) Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Item 1, Part II, "Legal Proceedings" of the
Company's Quarterly Reports on Form 10-Q for the periods ending May 31, 1997 and
August 30, 1997; and (iii) Part 1 Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," herein.
Item 2. CHANGES IN SECURITIES
(c) During the quarter, 125 shares of the Company's unregistered common stock
vested under stock award plans. Pursuant to the terms of these plans the
shares were issued with no cash consideration to the Company. Registration
of such shares was not required because the transaction did not constitute
a "sale" under Section 2 (3) of the Securities Act of 1933 or,
alternatively, the transaction was exempt pursuant to the private offering
provisions of the Act and the rules thereunder.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits to this report are as follows:
11. Computations of Earnings per Share
27. Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
quarter to which this report relates.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GTECH HOLDINGS CORPORATION
Date By /s/ Thomas J. Sauser
Thomas J. Sauser, Senior Vice President & Chief
Financial Officer (Principal Financial Officer)
Date By /s/ Robert J. Plourde
Robert J. Plourde, Vice President and Corporate
Controller (Principal Accounting Officer)
EXHIBIT 11--COMPUTATIONS OF EARNINGS PER SHARE
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
November 29, November 23, November 29, November 23,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Primary: (1)
Net income ....................................... $ 23,933 $ 19,080 $ 63,478 $ 54,784
============ ============ ============ ============
Weighted average common shares outstanding ....... 41,908 43,054 42,014 43,076
Net effect of dilutive stock options--based on the
treasury stock method using the average market
price for the period ............................ 386 326 354 303
------------ ------------ ------------ ------------
Totals ........................................... 42,294 43,380 42,368 43,379
============ ============ ============ ============
Earnings per common share ........................ $ .57 $ .44 $ 1.50 $ 1.26
============ ============ ============ ============
Fully diluted: (1)
Net income ....................................... $ 23,933 $ 19,080 $ 63,478 $ 54,784
============ ============ ============ ============
Weighted average common shares outstanding ....... 41,908 43,054 42,014 43,076
Net effect of dilutive stock options--based on the
treasury stock method using the average market
price for the three months ended
November 29, 1997 and the ending market price
for all other periods ........................... 386 384 357 379
------------ ------------ ------------ ------------
Totals ........................................... 42,294 43,438 42,371 43,455
============ ============ ============ ============
Earnings per common share ........................ $ .57 $ .44 $ 1.50 $ 1.26
============ ============ ============ ============
(1) The primary and fully diluted earnings per share were not presented on the
face of the Consolidated Income Statements because the resulting amounts
were not materially dilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Feb-28-1998
<PERIOD-START> Feb-23-1997
<PERIOD-END> Nov-29-1997
<CASH> 8,181
<SECURITIES> 0
<RECEIVABLES> 124,480
<ALLOWANCES> 0
<INVENTORY> 29,116
<CURRENT-ASSETS> 196,426
<PP&E> 1,356,490
<DEPRECIATION> 720,351
<TOTAL-ASSETS> 1,075,972
<CURRENT-LIABILITIES> 151,996
<BONDS> 489,443
0
0
<COMMON> 439
<OTHER-SE> 394,387
<TOTAL-LIABILITY-AND-EQUITY> 1,075,972
<SALES> 88,561
<TOTAL-REVENUES> 736,746
<CGS> 52,781
<TOTAL-COSTS> 503,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,951
<INCOME-PRETAX> 104,062
<INCOME-TAX> 40,584
<INCOME-CONTINUING> 63,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,478
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51
</TABLE>
