<PAGE> 1
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 August 29, 1998
Commission file number 1-11250
GTECH Holdings Corporation
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 05-0450121
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
55 Technology Way, West Greenwich, Rhode Island 02817
(Address of principal executive offices) (Zip Code)
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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 October 3, 1998 there were 41,281,123 shares of the registrant's Common
Stock outstanding.
<PAGE> 2
INDEX
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
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Page
PART I. FINANCIAL INFORMATION Number
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Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Income Statements 4-5
Consolidated Statement of Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition 11-19
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20-21
Item 2. Changes in Securities 22
Item 4. Submission of Matters to Vote of Security Holders 22
Item 5. Other information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBITS 25-36
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<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
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GTECH HOLDINGS CORPORATION AND SUBSIDIARIES (Unaudited)
August 29, February 28,
ASSETS 1998 1998
----------- -----------
(In thousands, except share amounts)
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CURRENT ASSETS
Cash and cash equivalents $ 9,526 $ 8,250
Trade accounts receivable 88,277 93,778
Sales-type lease receivables 11,518 13,958
Inventories 33,802 27,853
Deferred income taxes 40,897 40,897
Assets held for sale 14,178 14,178
Other current assets 19,044 14,141
----------- -----------
TOTAL CURRENT ASSETS 217,242 213,055
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 1,252,937 1,204,552
Less: Accumulated Depreciation (738,942) (677,696)
----------- -----------
513,995 526,856
GOODWILL, net 138,999 118,537
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 12,443 64,808
OTHER ASSETS 98,839 100,556
----------- -----------
$ 981,518 $ 1,023,812
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 30,354 $ 39,451
Accrued expenses 57,444 57,155
Special charge 11,950 33,631
Employee compensation 15,986 25,648
Advance payments from customers 22,327 504
Income taxes payable 57,989 25,392
Current portion of long-term debt 2,391 3,903
----------- -----------
TOTAL CURRENT LIABILITIES 198,441 185,684
LONG-TERM DEBT, less current portion 352,191 453,587
OTHER LIABILITIES 36,984 19,171
DEFERRED INCOME TAXES 20,160 20,160
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,
44,121,565 and 43,922,627 shares issued, 41,280,484 and 41,284,146 shares
outstanding at August 29, 1998 and February 28, 1998, respectively 441 439
Additional paid-in capital 175,911 171,302
Equity carryover basis adjustment (7,008) (7,008)
Accumulated other comprehensive income (9,965) (42)
Retained earnings 296,482 255,955
----------- -----------
455,861 420,646
Less cost of 2,841,081 and 2,638,481 shares in treasury at
August 29, 1998 and February 28, 1998, respectively (82,119) (75,436)
----------- -----------
373,742 345,210
----------- -----------
$ 981,518 $ 1,023,812
=========== ===========
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See notes to consolidated financial statements
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CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
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(Unaudited)
Three Months Ended
-------------------------------
August 29, August 30,
1998 1997
--------- ---------
(Dollars in thousands,
except per share amounts)
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Revenues:
Services $ 224,582 $ 209,139
Sales of products 8,952 17,671
--------- ---------
233,534 226,810
Costs and expenses:
Costs of services 148,523 143,548
Costs of sales 6,812 9,169
--------- ---------
155,335 152,717
--------- ---------
Gross profit 78,199 74,093
Selling, general and administrative 29,504 32,939
Research and development 8,648 7,869
--------- ---------
Operating income 40,047 33,285
Other income (expense):
Interest income 832 1,792
Equity in earnings of unconsolidated affiliates 870 4,957
Other income 2,840 510
Interest expense (6,920) (7,916)
--------- ---------
Income before income taxes 37,669 32,628
Income taxes 15,821 12,403
--------- ---------
Net income $ 21,848 $ 20,225
========= =========
Basic earnings per share $ .53 $ .48
========= =========
Diluted earnings per share $ .53 $ .48
========= =========
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See notes to consolidated financial statements
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CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
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(Unaudited)
Six Months Ended (1)
-------------------------------
August 29, August 30,
1998 1997
--------- ---------
(Dollars in thousands,
except per share amounts)
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Revenues:
Services $ 446,463 $ 435,069
Sales of products 19,350 36,912
--------- ---------
465,813 471,981
Costs and expenses:
Costs of services 297,112 300,263
Costs of sales 14,823 20,497
--------- ---------
311,935 320,760
--------- ---------
Gross profit 153,878 151,221
Selling, general and administrative 59,701 68,853
Research and development 18,243 16,044
--------- ---------
Operating income 75,934 66,324
Other income (expense):
Interest income 1,577 3,545
Equity in earnings of unconsolidated affiliates 4,236 8,671
Other income 2,535 880
Interest expense (14,408) (14,592)
--------- ---------
Income before income taxes 69,874 64,828
Income taxes 29,347 25,283
--------- ---------
Net income $ 40,527 $ 39,545
========= =========
Basic earnings per share $ .98 $ .94
========= =========
Diluted earnings per share $ .97 $ .93
========= =========
</TABLE>
(1) 26 weeks in the six month period ended August 29, 1998 and 27 weeks in the
six month period ended August 30, 1997
See notes to consolidated financial statements
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY-(Unaudited)
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
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Equity
Common Stock Additional Carryover
Issued Paid-in Basis
Shares Amount Capital Adjustment
---------- ---------- ---------- ----------
(Dollars in thousands)
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Balance at February 28, 1998 43,922,627 $ 439 $ 171,302 $ (7,008)
Comprehensive income:
Net income -- -- -- --
Other comprehensive income, net of tax:
Foreign currency translation -- -- -- --
Comprehensive income
Purchase of 202,600
shares of common stock -- -- -- --
Common stock issued
under stock award plans 198,938 2 4,609 --
---------- ---------- ---------- ----------
Balance at August 29, 1998 44,121,565 $ 441 $ 175,911 $ (7,008)
========== ========== ========== ==========
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Accumulated
Other
Comprehensive Retained Treasury
Income Earnings Stock Total
---------- ---------- ---------- ----------
(Dollars in thousands)
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Balance at February 28, 1998 $ (42) $ 255,955 $ (75,436) $ 345,210
Comprehensive income:
Net income -- 40,527 -- 40,527
Other comprehensive income, net of tax:
Foreign currency translation (9,923) -- -- (9,923)
----------
Comprehensive income 30,604
Purchase of 202,600
shares of common stock -- -- (6,683) (6,683)
Common stock issued
under stock award plans -- -- -- 4,611
---------- ---------- ---------- ----------
Balance at August 29, 1998 $ (9,965) $ 296,482 $ (82,119) $ 373,742
========== ========== ========== ==========
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See notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
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(Unaudited)
Six Months Ended (1)
-------------------------------
August 29, August 30,
1998 1997
--------- ---------
(Dollars in thousands)
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OPERATING ACTIVITIES
Net income $ 40,527 $ 39,545
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 103,354 99,289
Equity in earnings of unconsolidated affiliates,
net of dividends received (2,473) (1,813)
Other (919) 1,930
Changes in operating assets and liabilities:
Trade accounts receivable 10,160 24,132
Inventories (4,945) (8,408)
Special charge (19,683) --
Other assets and liabilities 15,250 (24,099)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 141,271 130,576
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts (85,818) (174,939)
Cash proceeds from sale of equity investment 84,904 --
Acquisitions (net of cash acquired) (21,864) (4,426)
Other (9,903) (10,384)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (32,681) (189,749)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 84,956 433,818
Principal payments on long-term debt (188,693) (356,592)
Purchases of treasury stock (6,683) (15,834)
Other 4,473 (1,712)
--------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (105,947) 59,680
Effect of exchange rate changes on cash (1,367) (549)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,276 (42)
Cash and cash equivalents at beginning of period 8,250 11,985
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,526 $ 11,943
========= =========
</TABLE>
(1) 26 weeks in the six month period ended August 29, 1998 and 27 weeks in the
six month period ended August 30, 1997
See notes to consolidated financial statements
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<PAGE> 8
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 six-month period ended August 29, 1998 are
not necessarily indicative of the results that may be expected for the full 1999
fiscal year ending February 27, 1999. The balance sheet at February 28, 1998 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 1998 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 was a 53-week year. The Company included the extra week
in the fiscal 1998 first quarter ended May 31, 1997. Accordingly, there are 26
weeks in the six-month period ended August 29, 1998, versus 27 weeks in the
six-month period ended August 30, 1997.
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NOTE B--INVENTORIES August 29, February 28,
1998 1998
--------------- ---------------
(Dollars in thousands)
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Inventories consist of:
Purchased components $ 18,300 $ 17,202
Finished subassemblies 1,706 1,719
Work-in-process 10,166 7,789
Finished goods 3,630 1,143
--------------- ---------------
$ 33,802 $ 27,853
=============== ===============
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NOTE C--LONG-TERM DEBT August 29, February 28,
1998 1998
--------------- ---------------
(Dollars in thousands)
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Long-term debt consists of:
7.75% Series A Senior Notes due 2004 $ 150,000 $ 150,000
7.87% Series B Senior Notes due 2007 150,000 150,000
Revolving credit facility 50,000 135,000
Other 4,582 22,490
--------------- ---------------
354,582 457,490
Less current portion 2,391 3,903
--------------- ---------------
$ 352,191 $ 453,587
=============== ===============
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The Company has an unsecured revolving credit facility of $400 million expiring
in June 2002 (the "Credit Facility"). At August 29, 1998, the weighted average
interest rate for all outstanding borrowings under the Credit Facility was
5.83%.
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<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE D--INCOME TAXES
The Company's effective income tax rate is 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.
NOTE F--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
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Three Months Ended Six Months Ended
------------------------------- ------------------------------
August 29, August 30, August 29, August 30,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 21,848 $ 20,225 $ 40,527 $ 39,545
Denominator:
Weighted average shares-Basic 41,293 42,046 41,351 42,065
Effect of dilutive securities:
Employee stock options 254 343 304 333
Weighted average shares-Diluted 41,547 42,389 41,655 42,398
============== ============= ============= =============
Basic earnings per share $ .53 $ .48 $ .98 $ .94
============== ============= ============= =============
Diluted earnings per share $ .53 $ .48 $ .97 $ .93
============== ============= ============= =============
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NOTE G--ACQUISITION
On July 1, 1998, the Company acquired 80% of the equity of Europrint Holdings
Ltd. ("Europrint") and its wholly owned subsidiaries, including Interactive
Games International ("IGI") for a net cash purchase price of $21,864,000,
including related acquisition costs. The Company has the option, and in certain
circumstances the obligation, to acquire the remaining 20% of the equity of
Europrint and IGI within the next five years. Europrint is among the world's
largest providers of media promotional games, and IGI has pioneered the
development of interactive, televised lottery games.
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<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE H --NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", that is required
to be adopted in years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after its issuance. The
Company plans to adopt the new Statement effective August 30, 1998 (the first
day of its fiscal 1999 third quarter) and, based on the Company's derivative
positions at August 30, 1998 the new Statement will not have a significant
effect on earnings or the financial position of the Company. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings.
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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 that the Company is
engaged in or expects to engage in, (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 elsewhere in this report and in the Company's press releases and its
fiscal 1998 Form 10-K and subsequent 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 lottery service contracts. These contracts 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 vary depending on the
size of the lottery and the scope of services provided to the lottery. Product
sale 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 sale revenues from period
to period. Fiscal 1998 was a significant year for product sales, including a
large product sale to the Massachusetts State Lottery in the second quarter of
fiscal 1998. The Company currently anticipates that product purchases by
lotteries during fiscal 1999 could be lower than the fiscal 1998 level of $122.0
million by as much as 50%.
The Company has taken steps to broaden its offerings of high-volume transaction
processing services outside of its core business of providing on-line lottery
services. For example, the Company's Dreamport subsidiary ("Dreamport") provides
gaming technology and a comprehensive array of management, development and
strategic services to the gaming and entertainment market.
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 under way.
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 materially adverse effect on the Company's business, including its
ability to retain existing contracts and to obtain new or renewal
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<PAGE> 12
contracts. In addition, continuing adverse publicity resulting from these
investigations and related matters could have such a materially 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" in the Company's fiscal
1998 annual report on Form 10-K; and Note G to the Consolidated Financial
Statements in the Company's fiscal 1998 annual report on Form 10-K for further
information concerning these matters and other contingencies.
The Company operates on a 52-to 53-week fiscal year ending on the last Saturday
in February. Fiscal 1998 was a 53-week year. The Company included the extra week
in the fiscal 1998 first quarter ended May 31, 1997. Accordingly, there are 26
weeks in the six-month period ended August 29, 1998, versus 27 weeks in the
six-month period ended August 30, 1997.
Acquisition
On July 1, 1998, the Company acquired 80% of the equity of Europrint Holdings
Ltd. ("Europrint") and its wholly owned subsidiaries, including Interactive
Games International ("IGI") for a net cash purchase price of $21,864,000,
including related acquisition costs. The Company has the option, and in certain
circumstances the obligation, to acquire the remaining 20% of the equity of
Europrint and IGI within the next five years. Europrint is among the worlds
largest providers of media promotional games, and IGI has pioneered the
development of interactive, televised lottery games.
Results of Operations
Second Quarter
Revenues for the second quarter of fiscal 1999 were $233.5 million, representing
a $6.7 million, or 3.0%, increase over revenues of $226.8 million in the second
quarter of fiscal 1998.
Service revenues in the fiscal 1999 second quarter were $224.6 million,
representing a $15.5 million, or 7.4%, increase over the $209.1 million of
service revenues in the second quarter of fiscal 1998. This increase was driven
primarily by higher service revenues from the record breaking Powerball jackpot
in the second quarter of fiscal 1999, higher service revenues from the on-line
lottery system in Brazil that was implemented by the Company in fiscal 1998,
higher service revenues from Dreamport and higher service revenues from certain
of the Company's international lottery customers. These increases were partially
offset by lower service revenues from the Company's Texas lottery contract
(resulting primarily from lower sales generated by the Texas lottery).
Product sales in the second quarter of fiscal 1999 were $9.0 million, a decrease
of $8.7 million, or 49.3%, from the $17.7 million of product sales in the second
quarter of fiscal 1998. This decrease resulted primarily from fewer terminal
sales as well as fewer sales of lottery equipment to existing lottery customers
in the second quarter of fiscal 1999 than in the second quarter of fiscal 1998,
partially offset by approximately $6 million of product sales from Europrint
that was acquired by the Company in the second quarter of fiscal 1999. The
Company sold approximately 30 lottery terminals in the second quarter of fiscal
1999 as compared to approximately 2,000 lottery terminals in the second quarter
of fiscal 1998.
Gross margins on service revenues were 33.9% in the fiscal 1999 second quarter
compared to 31.4% in the second quarter of fiscal 1998. This increase was due
primarily to the record breaking Powerball jackpot in the second quarter of
fiscal 1999 along with lower costs resulting from the restructuring announced in
the fourth quarter of fiscal 1998, partially offset by lower margins realized
from the Company's Texas lottery contract (primarily as a function of lower
sales generated by the Texas lottery) and lower margins relating to the start-up
nature of the on-line lottery in Brazil.
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<PAGE> 13
Gross margins on product sales fluctuate due to the mix, volume and timing of
product sales contracts. Gross margins on product sales were 23.9% in the second
quarter of fiscal 1999 compared to 48.1% in the second quarter of fiscal 1998.
This change reflects the lower volume of peripheral equipment sales in the
second quarter of fiscal 1999, along with product sales from Europrint that
carried lower margins than were realized in the second quarter of fiscal 1998.
Selling, general and administrative expenses in the second quarter of fiscal
1999 were $29.5 million, representing a $3.4 million, or 10.4%, decrease from
the $32.9 million incurred in the second quarter of fiscal 1998. This decrease
was due primarily to cost savings resulting from the restructuring announced in
February 1998, along with lower legal expenses associated with investigations
and legal proceedings. As a percentage of revenues, selling, general and
administrative expenses were 12.6% and 14.5% during the second quarters of
fiscal 1999 and 1998, respectively.
Research and development expenses in the second quarter of fiscal 1999 were $8.6
million, representing a $.7 million, or 9.9%, increase over research and
development expenses of $7.9 million in the second quarter of fiscal 1998. This
increase reflects costs associated with the continuing development of the
Company's Internet wagering platform. As a percentage of revenues, research and
development expenses were 3.7% and 3.5% during the second quarters of fiscal
1999 and 1998, respectively.
Equity in earnings of unconsolidated affiliates in the second quarter of fiscal
1999 was $.9 million, a decrease of $4.1 million from the $5.0 million earned
during the second quarter of fiscal 1998. This decrease was due primarily to the
sale by the Company, in April 1998, of its 22.5% equity interest in Camelot
Group plc ("Camelot") to Camelot for approximately $84.9 million. The book value
of the Camelot investment at the time of sale was approximately $51.8 million. A
portion of the cash received by the Company would have to be returned to Camelot
in the event that Camelot loses its operating license for reasons attributable
to actions of the Company or its employees. Accordingly, the Company has
deferred the recognition of the gain from the sale of its investment and will
recognize such gain evenly over the remaining period of Camelot's operating
license. The sale of the equity interest does not affect the Company's position
as the principal supplier of goods and services to Camelot, but has reduced the
Company's equity in earnings of unconsolidated affiliates. (Reference is made to
the Company's Report on Form 8-K and 8-K/A filed with the SEC in May 1998 for
further information concerning the sale of the Company's equity interest in
Camelot).
Other income in the second quarter of fiscal 1999 was $2.8 million, an increase
of $2.3 million over the $.5 million recorded in the second quarter of fiscal
1998. This increase was due primarily to the amortization of the deferred gain
on the sale of the Camelot investment discussed above.
Interest expense in the second quarter of fiscal 1999 was $6.9 million, a
decrease of $1.0 million from the $7.9 million incurred during the second
quarter of fiscal 1998. This decrease was due primarily to lower average debt
balances, partially offset by higher average interest rates.
Year to Date
Revenues for the first six months of fiscal 1999 were $465.8 million,
representing a $6.2 million, or 1.3%, decrease from revenues of $472.0 million
in the first six months of fiscal 1998.
Service revenues for the first six months of fiscal 1999 were $446.5 million,
representing an $11.4 million, or 2.6%, increase over the $435.1 million of
service revenues for the first six months of fiscal 1998. This increase was due
primarily to higher service revenues from the on-line lottery system in Brazil,
higher jackpot activity resulting from two large Powerball jackpots in the first
six months of fiscal 1999, higher service revenues from certain of the Company's
U.S. and international lottery customers and higher service revenues from
Dreamport. These increases were partially offset by lower service
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<PAGE> 14
revenues from the Company's Texas lottery contract (resulting primarily from
lower sales generated by the Texas lottery). Further, there were 26 weeks of
service revenues in the six-month period ended August 29, 1998, versus 27 weeks
in the six-month period ended August 30, 1997. After a number of years of
growth, the Company has witnessed a slowing in the sales generated by its U.S.
lottery customers. The Company believes that the overall growth rate for its
U.S. lottery customer's sales will be in the 1-3% range in fiscal 1999. However,
there can be no assurance that this will be the case.
Product sales in the first six months of fiscal 1999 were $19.3 million, a
decrease of $17.6 million, or 47.6%, from the $36.9 million of product sales in
the first six months of fiscal 1998. This decrease resulted primarily from lower
central lottery system, instant ticket validation system, terminal and
peripheral equipment sales in the first six months of fiscal 1999 than in the
first six months of fiscal 1998. These lower revenues were partially offset by
the recognition of deferred revenues on product sales to Camelot and other
members of the U.K. lottery consortium and product sales from Europrint. Prior
to the sale of the Company's investment in Camelot, the Company deferred 22.5%
of the revenues attributable to any product sales to Camelot and the other
consortium members and recognized such deferred revenue over the depreciable
life of the equipment. The sale of the Camelot investment triggered an
acceleration in the recognition of this deferred revenue. The Company had no
sales of lottery central systems in the first six months of fiscal 1999 compared
to the sale of one new central lottery system and one new instant ticket
validation system in the first six months of fiscal 1998. The Company sold
approximately 200 lottery terminals in the first six months of fiscal 1999 as
compared to approximately 3,100 lottery terminals in the first six months of
fiscal 1998.
Gross margins on service revenues were 33.5% in the first six months of fiscal
1999 compared to 31.0% in the first six months of fiscal 1998. This increase was
due primarily to higher Powerball jackpots in the first six months of fiscal
1999 than in the corresponding period of fiscal 1998, along with lower costs
resulting from the restructuring announced in the fourth quarter of fiscal 1998,
partially offset by lower margins realized from the Company's Texas lottery
contract (primarily as a function of lower sales generated by the Texas lottery)
and lower margins relating to the start-up nature of the on-line lottery in
Brazil.
Gross margins on product sales were 23.4% in the first six months of fiscal 1999
compared to 44.5% in the first six months of fiscal 1998. This decrease reflects
the acceleration into the first six months of fiscal 1999 of deferred revenue
and related cost associated with prior years' product sales to Camelot and other
members of the U.K. lottery consortium, along with product sales of Europrint,
compared to higher margin central lottery, instant ticket validation system,
terminal and peripheral equipment sales in the first six months of fiscal 1998.
Selling, general and administrative expenses in the first six months of fiscal
1999 were $59.7 million, representing a $9.2 million, or 13.3%, decrease from
the $68.9 million incurred in the first six months of fiscal 1998. This decrease
was due primarily to cost savings resulting from the restructuring announced in
February 1998, along with lower legal expenses associated with investigations
and legal proceedings. As a percentage of revenues, selling, general and
administrative expenses were 12.8% and 14.6% during the first six months of
fiscal 1999 and 1998, respectively.
Research and development expenses in the first six months of fiscal 1999 were
$18.2 million, representing a $2.2 million, or 13.7%, increase over research and
development expenses of $16.0 million in the first six months of fiscal 1998.
This increase reflects costs associated with the continuing development of the
Company's Internet wagering platform. As a percentage of revenues, research and
development expenses were 3.9% and 3.4% during the first six months of fiscal
1999 and 1998, respectively.
Interest income in the first six months of fiscal 1999 was $1.6 million, a
decrease of $1.9 million from the $3.5 million earned during the first six
months of fiscal 1998. During the first six months of fiscal
- 14 -
<PAGE> 15
1998 the Company had higher dollar-denominated cash balances on hand in Brazil
than in the comparable period of fiscal 1999 to fund the on-line lottery system
implementation that was completed in February 1998.
Equity in earnings of unconsolidated affiliates in the first six months of
fiscal 1999 was $4.2 million, a decrease of $4.4 million from the $8.7 million
earned during the second quarter of fiscal 1998. This decrease was due primarily
to the sale by the Company, in April 1998, of its 22.5% equity interest in
Camelot.
Other income in the first six months of fiscal 1999 was $2.5 million, an
increase of $1.6 million over the $.9 million recorded in the first six months
of fiscal 1998. This increase was due primarily to the amortization of the gain
on the sale of the Camelot investment, partially offset by the timing impact of
foreign exchange costs incurred relating to the marking to market of hedges
utilized to protect certain fiscal 1999 profit.
Interest expense in the first six months of fiscal 1999 was $14.4 million, a
decrease of $.2 million from the $14.6 million incurred during the first six
months of fiscal 1998. This decrease was due primarily to lower average debt
balances, partially offset by higher average interest rates.
The Company's effective income tax rate increased from 39% in the first six
months of fiscal 1998 to 42% in the first six months of fiscal 1999 due
principally to the loss of the beneficial tax effect of U.K. equity earnings
that were reported on an after-tax basis. The Company's effective income tax
rate is greater than the statutory rate due primarily to state income taxes and
certain expenses that are not deductible for income tax purposes.
Special Charge
In the fourth quarter of fiscal 1998 the Company's Board of Directors approved a
plan of reorganization and restructuring of the Company's operations (the
"Plan"). The Company estimated and recorded a $99.4 million special charge
($60.6 million after-tax) in connection with the Plan. The major components of
the Plan consisted of the sale of electronic benefit transfer (EBT) contracts
and certain related assets held by the Company's Transactive subsidiary
("Transactive"), contractual obligations in connection with the departures of
the Company's former Chairman and Vice Chairman from the Company, legal costs in
connection with the Branson litigation and judgment in the U.K., asset
impairment charges relating to two of the Company's lottery contracts, and a
worldwide workforce reduction to eliminate a total of approximately 800 company
positions worldwide. See Note P to the Consolidated Financial Statements in the
Company's fiscal 1998 annual report on Form 10-K for further information.
The Company expects total pre-tax savings in fiscal 1999 in the range of $40.0
to $45.0 million resulting from the Plan. For the six month period ended August
29, 1998 the savings associated with the Plan were in line with the Company's
expectations.
The sale of EBT contracts and certain related assets held by Transactive is
subject to the consents of the applicable state contract parties and to
approvals from regulatory agencies, including the U.S. Department of Justice,
that has challenged the transaction on anti-trust grounds. The Company has
received consents from two of the four state contract parties. The Company has
contested the Department of Justice's position and expects a resolution by the
end of fiscal 1999. In the event that the court's decision is unfavorable, the
agreement with Citibank is modified or is terminated by either party, or
requisite customer approvals are not received, an additional charge may be
required.
- 15 -
<PAGE> 16
Impact of Year 2000
Like many other companies, the year 2000 computer issue creates risks for the
Company. If lottery, gaming or EBT systems that the Company supplies to
customers or management information systems that the Company uses internally do
not correctly recognize and process date information beyond the year 1999, there
could be an adverse impact on the customer's and/or the Company's operations.
The Company has begun a program to assess the capability of its lottery, gaming
and EBT products and interfaces to customer systems to handle the year 2000. The
major challenge for the Company in remediating the year 2000 issue with respect
to customer systems is the multinational nature of the Company's business and
the high degree of coordination that is required with customers, suppliers and
employees across the globe. The Company expects to complete the assessment phase
of this program in 1998, and further currently plans to complete any necessary
remediation in this area by September 1999. The Company is actively working with
its customers to ensure integration with their systems and to ensure that
customer controlled telecommunications will work properly in the new millennium.
The Company is also actively working with critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are year 2000 capable. The Company will continue to
monitor their progress toward year 2000 capability.
To address year 2000 issues with its internal management information systems,
the Company has been pursuing a 5 year comprehensive program that is designed to
deal with the most critical systems first. The Company currently plans to have
changes to critical systems completed and tested by July 1999. These activities
are intended to encompass all major categories of internal systems in use by the
Company, including manufacturing, sales, finance and human resources. We expect
that remediation activities will be on-going throughout 1998 and 1999 with the
goal of appropriately resolving all internal systems issues by July 1999. The
Company has a limited number of non-IT systems that are primarily in use by the
engineering and manufacturing departments of the Company. The Company plans to
begin assessment of these systems in October 1998 in order to complete
remediation by September 1999.
The Company's contingency planning involves using already established problem
resolution processes to resolve any problems encountered during the Year 2000
timeframe. As a standard practice, the Company provides 24 hours a day
operational support. This support provides focused individuals in all
disciplines that respond real time to operational issues. In addition, an
expanded team will be staffing our year 2000 help desk to provide greater
responsiveness to issues.
The costs incurred to date related to these programs has been less than
$500,000. The Company currently expects that the total cost of these programs
will not exceed $25 million, including $11 million for the purchase of software
and hardware that will be capitalized. The total cost estimate does not include
potential costs related to any customer or other claims or the cost of internal
software and hardware replaced in the normal course of business but does include
the cost to install new software and hardware that is being accelerated to
afford a solution to year 2000 issues. The total cost estimate is based on the
current assessment of the project and is subject to change as the project
progresses.
Based on currently available information, management does not believe that the
year 2000 matters discussed above will pose significant operational problems;
however there can be no assurance that this will be the case. Year 2000 issues
could have a significant impact on the Company's operations and its financial
results if modifications cannot be completed on a timely basis, unforeseen needs
or problems arise, or, if systems operated by third parties are not year 2000
compliant. In addition to the potential for a significant loss of revenues
associated with year 2000 issues, certain of the Company's United States lottery
contracts provide for up to $10,000 or more in liquidated damages per minute for
system downtime in excess of a stipulated grace period and certain of the
Company's international customers reserve the right to assess substantial
liquidated damages in the event that system downtime does occur.
- 16 -
<PAGE> 17
Strategies
The Company currently is evaluating a number of possible alternatives to
increase shareholder value. Such alternatives include, but are not limited to,
increasing debt and expanding the share repurchase program while focusing on the
Company's core gaming and entertainment business; making strategic non-gaming
acquisitions that would allow the Company to leverage its strengths in data
communications and high volume transaction processing; and taking the Company
private through a leveraged buy out. Under certain alternatives, the Company may
consider a recapitalization that would involve higher debt and a substantial
reduction in equity. Every alternative would include continued commitment to the
core business. The Company expects to complete its evaluation of these and other
strategic alternatives by the end of November 1998. However, there can be no
assurance that such timetable will be met or that any such actions or
transactions will actually be consummated.
Changes in Financial Position, Liquidity and Capital Resources
During the first six months of fiscal 1999, the Company generated $141.3 million
of cash from operations. This cash, together with $84.9 million of cash received
from the sale of the Company's investment in Camelot, was used to pay down the
Credit Facility, to fund the purchase of $85.8 million of systems, equipment and
other assets relating to contracts, to fund the acquisition of Europrint for
$21.9 million and to repurchase $6.7 million of the Company's common stock.
The cost of systems, equipment and other assets relating to contracts increased
by $48.3 million, from $1,204.6 million at February 28, 1998 to $1,252.9 million
at August 29, 1998. This increase reflects the continuing installation of new
lottery systems for lotteries in Michigan and the Czech Republic and the
expansion of lottery systems in several domestic and international locations,
partially offset by the write-off of fully depreciated assets in certain U.S.
and international jurisdictions.
Goodwill increased by $20.5 million, from $118.5 million at February 28, 1998 to
$139.0 million at August 29, 1998, due primarily to the acquisition of
Europrint.
Investments in and advances to unconsolidated affiliates decreased by $52.4
million, from $64.8 million at February 28, 1998 to $12.4 million at August 29,
1998, due primarily to the sale of the Company's investment in Camelot.
Accounts payable decreased by $9.1 million, from $39.5 million at February 28,
1998 to $30.4 million at August 29, 1998, due primarily to the current lower
volume of ongoing lottery and benefits delivery system installations.
Special charge decreased by $21.6 million, from $33.6 million at February 28,
1998 to $12.0 million at August 29, 1998, due to approximately $15.0 million of
severance and related payments.
Employee compensation decreased by $9.7 million, from $25.6 million at February
28, 1998 to $16.0 million at August 29, 1998, due primarily to the payment of
fiscal 1998 management bonuses and employee profit sharing along with lower
anticipated management bonus costs.
Advance payments from customers increased by $21.8 million, from $.5 million at
February 28, 1998 to $22.3 million at August 29, 1998. This increase reflects
the current portion of the deferred gain from the
- 17 -
<PAGE> 18
sale of the Company's investment in Camelot, along with downpayments received
from several international customers.
Income taxes payable, that are reported net against income tax refunds
receivable, increased by $32.6 million, from $25.4 million at February 28, 1998
to $58.0 million at August 29, 1998, due primarily to an income tax refund
received relating to the special charge, along with the timing of income tax
payments.
Long-term debt, less current portion decreased by $101.4 million, from $453.6
million at February 28, 1998 to $352.2 million at August 29, 1998, due primarily
to the proceeds received from the sale of the Company's investment in Camelot
that were utilized to reduce the Credit Facility, along with higher net cash
provided by operations.
Other liabilities increased by $17.8 million, from $19.2 million at February 28,
1998 to $37.0 million at August 29, 1998. This increase reflects the long-term
portion of the deferred gain from the sale of the Company's investment in
Camelot. See discussion of Camelot sale in "Results of Operations - Second
Quarter" above.
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 1999 will be in a
range of $160.0 million to $210.0 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. As of October 3, 1998 the Company had
utilized approximately $24.7 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.
However, see "Strategies" above.
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 began using the local
currency in Brazil as the functional currency on March 1, 1998 because of the
significant reduction in the rate of inflation in Brazil. The change in
functional currency is not expected to materially affect the Company's
operations. At August 29, 1998, the net book value of the Company's investments
in Brazil was approximately $172.5 million.
The Company uses various techniques to reduce the risk associated with future
increases in interest rates, including the issuance of seven- and ten-year fixed
rate debt on May 29, 1997, in a private placement.
The Company manages 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 and option contracts. In addition, a
significant portion of the costs attributable to the Company's foreign currency
revenues are payable in the local currencies.
The Company, from time to time, enters into foreign currency exchange and option
contracts to reduce the exposure associated with certain firm sales commitments,
anticipated local currency margin and certain assets and liabilities denominated
in foreign currencies. The Company does not engage in
- 18 -
<PAGE> 19
currency speculation. Unrealized 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 local currency margin and
certain assets and liabilities are marked to market with the resulting
transaction gains or losses included in other income. As of October 3, 1998, the
Company had approximately $1.1 million of outstanding foreign currency exchange
contracts to purchase foreign currencies (primarily Australian dollars) and
approximately $210.6 million of outstanding foreign currency exchange and
futures contracts to sell foreign currencies (primarily pounds Sterling,
Brazilian Reals, Spanish pesetas and Australian dollars).
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", that is required
to be adopted in years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after its issuance. The
Company plans to adopt the new Statement effective August 30, 1998 (the first
day of its fiscal 1999 third quarter) and, based on the Company's derivative
positions at August 30, 1998 the new Statement will not have a significant
effect on earnings or the financial position of the Company. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings.
- 19 -
<PAGE> 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As previously publicly reported, in October 1994, the U.S. Attorney's Office for
the District of New Jersey indicted J. David Smith, the former sales manager of
the Company (who resigned in early 1994 for reasons unrelated to the
indictments), and two other individuals who served as consultants to the
Company. The indictment alleged essentially that, unbeknownst to the Company,
Mr. Smith had received kickbacks from the consultants for his own benefit. The
indictment did not charge the Company with any wrongdoing, and the actions
complained of did not affect the Company's New Jersey lottery operations. The
trial of Mr. Smith and the two consultants commenced in September 1996 in the
U.S. District Court for New Jersey, and on October 4, 1996, Mr. Smith and one of
the two consultants were found guilty of all charges. The other consultant was
found not guilty. The New Jersey U.S. Attorney immediately announced in a press
release that a grand jury investigation in that jurisdiction was continuing but
did not specify the scope of such investigation. In October 1996, Mr. Smith
moved for a new trial. In the midst of these events, the New Jersey Lottery
Commission awarded the Company a contract to continue operating the State
lottery. Mr. Smith still has not been sentenced respecting the October 1996 jury
verdict against him. In August 1998, the New Jersey Federal Court denied a
motion brought by Mr. Smith for a new trial. A hearing respecting Mr. Smith's
sentencing is currently scheduled for October 8, 1998.
As previously publicly reported, in April 1997, Nora Linares, the former
Executive Director of the Texas Lottery Commission, filed suit against GTECH and
James Hosker, the Company's Texas Site Director (captioned Nora Alicia Linares
v. GTECH Corporation and James Hosker, et al.) in the District Court of Travis
County, Texas (261st Judicial District). Ms. Linares, who had been terminated as
Executive Director of the Texas Lottery Commission in January 1997, alleged that
GTECH, in violation of Texas State Law and its lottery contract with the State
of Texas, engaged in questionable business practices, tortiously interfered with
her employment relationship with her former employer by, among other things,
hiring Michael Moeller, with whom she had a personal relationship, as a
consultant, and intentionally inflicted emotional distress upon her. Ms. Linares
sought both a declaratory judgment setting forth the rights, duties and
responsibilities which GTECH owes to public officials such as Ms. Linares, as
well as actual and exemplary damages from GTECH. In August 1998, GTECH and Ms.
Linares settled this litigation on mutually agreed terms involving the payment
by GTECH of amounts which are not material to the Company's consolidated
financial position, results of operations or cash flows.
As previously publicly reported, in July 1997, Border Capital (Nevada) Corp.
("BCNC"), Border Capital Corp., IBC Investments Limited ("IBC") and Gaming
Properties & Investments, LLC ("GPI") filed suit against the Arizona Lottery,
the Company and GTECH in the United States District Court for the District of
Delaware. The plaintiffs alleged that "Arizona Bingo," a game offered by GTECH
and the Arizona Lottery, infringed upon United States patents issued in 1994 and
1996, which are represented to be owned by IBC and exclusively licensed to BCNC
and GPI. The plaintiffs sought a declaratory judgment that IBC is the owner of
the patents and that the patents have been willfully infringed by the
defendants; injunctive relief enjoining further alleged infringement; and actual
and exemplary damages from the defendants respecting such alleged infringement.
GTECH filed its answer in October 1997 and asserted, among other defenses, that
the patents in suit are invalid and unenforceable. GTECH filed a counterclaim
for declaratory relief. In March 1998, the Arizona Lottery ceased operating the
"Arizona
- 20 -
<PAGE> 21
Bingo Game" for reasons unrelated to the lawsuit described above, and in August
1998, the plaintiffs and GTECH agreed to the dismissal of the lawsuit without
prejudice.
The Company monitors, and occasionally affirmatively becomes involved in,
litigation involving Indian gaming in states where such litigation may, directly
or indirectly, concern or call into question the legal rights and operations of
state lotteries to which the Company provides contract services. The purpose of
this effort is to protect state lottery interests, and thus the Company's
revenue streams, from service contracts. One such piece of litigation is Rumsey
Indian Rancheria v. Wilson, recently pending in the U.S. District Court for the
Eastern District of California, which involved a suit by several California
Indian tribes against the Governor of California under the federal Indian Gaming
Regulatory Act ("IGRA"). The Indian Tribes claimed that certain elements of the
California State Lottery (which is a customer of the Company) and the equipment
on which it is run involve the operation of slot machines and, therefore, under
IGRA, the tribes also must be permitted to operate slot machines. The State of
California argued that the California Lottery does not involve the operation of
slot machines; however, the State also appeared to take the position that, if
and to the extent the California Lottery does involve the operation of slot
machines, it must be terminated because the California Lottery is not exempt
from the California law prohibiting the operation of slot machines. The Company
recently filed amicus curiae briefs in this case which argued that the
California Lottery does not involve the operation of slot machines and that even
if it does, the California Lottery is exempt from the State law prohibition on
slot machines. In September 1998, the Court entered summary judgment for the
defendants. In so doing, the Court declined to rule on the issue of whether the
California Lottery operates slot machines, thus removing the risk that this
action will result in an order curtailing California Lottery operations.
On July 27, 1998, the U.S. Department of Justice filed suit in the U.S. District
Court for the District of Delaware, U.S. v. Citicorp, Inc., Citicorp Services,
Inc., GTECH Holdings Corporation and Transactive Corporation, seeking to enjoin
the consummation of a transaction between Citicorp Services, Inc. and the
Company's Transactive subsidiary respecting the sale to Citicorp of
Transactive's electronic benefits transfer contracts and certain related assets
(which transaction is described in particularity in connection with the
discussion of the $99.4 million special charge [$60.6 million after-tax] special
charge recorded by the Company in the fourth quarter of fiscal 1998 set forth in
Item 2 "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Special Charge"). The Department of Justice alleges in its suit
that the proposed sale of assets would tend substantially to lessen competition
in the electronic benefits transfer market in violation of Section 7 of the
Clayton Act, as amended (15 U.S.C. Section 18), and would constitute an
unreasonable restraint of trade in violation of Section 1 of the Sherman Act (15
U.S.C. Section 1). The lawsuit requests the issuance of preliminary and
permanent injunctions against the consummation of the sale of Transactive's
electronic benefit transfer assets and the recovery of costs incurred by the
government in bringing the action. While the Company intends to vigorously
contest this action, if the government's lawsuit is successful, the Company may
be required to record additional material charges.
For further information respecting legal proceedings, refer to Items 1 and 3 of,
and Note G of Notes to Consolidated Financial Statements included in, the
Company's fiscal 1998 Annual Report on Form 10-K; to Part I, Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and Part II, Item 1, "Legal Proceedings", of the Company's
Quarterly Report for the period ending May 30, 1998; and to Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this report.
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<PAGE> 22
Item 2. CHANGES IN SECURITIES
(c) During the quarter, 3,000 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) and (c)
The Company's Annual Meeting of Shareholders was held on July 13, 1998, and in
connection therewith, proxies were solicited by management pursuant to
Regulation 14 under the Securities Exchange Act of 1934. An aggregate of
41,354,559 shares of the Company's common stock ("Shares") were outstanding and
entitled to vote at the meeting. At the meeting, the following matters (not
including ordinary procedural matters) were submitted to a vote of the holders
of Shares, with the results indicated below:
1. Election of two directors to serve until the 2001 Annual Meeting.
The following persons were elected. There was no solicitation in opposition
to such nominees. The tabulation of votes was as follows:
<TABLE>
<CAPTION>
Withheld
Nominee For (including broker nonvotes)
------- --- ---------------------------
<S> <C> <C>
Robert M. Dewey, Jr. 36,771,660 Shares 255,319 Shares
The Rt. Hon. Lord Moore 36,747,255 Shares 279,724 Shares
of Lower Marsh, P.C.
</TABLE>
2. Approval of the Company's Employee Stock Purchase Plan. The tabulation of
votes was as follows:
<TABLE>
<CAPTION>
Abstentions
For Against (including broker nonvotes)
--- ------- ---------------------------
<S> <C> <C>
36,886,371 Shares 89,723 Shares 50,885 Shares
</TABLE>
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<PAGE> 23
Item 5. OTHER INFORMATION
Recently, the Securities and Exchange Commission adopted a new proxy rule (Rule
14a-4(c)(i) under the Securities Exchange Act of 1934) which specifies the
circumstances in which a company's annual meeting proxies executed by its
shareholders may confer discretionary authority on the persons named in the
proxies to vote on shareholder proposals which may be presented at the annual
meeting. Under this new rule, such proxies may confer discretionary authority to
vote on shareholder proposals presented at an annual meeting if: (i) the company
did not have notice of the shareholder proposal at least 45 days before the date
on which the company first mailed its proxy materials for the prior year's
annual meeting, and (ii) a specific statement to that effect is made in the
company's proxy statement or form of proxy.
The Company intends to avail itself of the provisions of Rule 14a-4(c)(i), and,
accordingly, with respect to the Company's 1999 annual meeting, Company proxies
executed by shareholders will be deemed to have granted discretionary authority
to vote on any shareholder proposals presented at the 1999 annual meeting of
which the Company has not received written notice (addressed to the Company at
its principal executive offices set forth on the cover page of this Report,
Attention: Corporate Secretary) by April 24, 1999, or such other date as the
Company may hereafter specify.
The foregoing has no affect on the requirement (as set forth in the Company's
proxy statement for its July 13, 1998 annual meeting) that in order to be
eligible for inclusion in the Company's proxy statement relating to its 1999
annual meeting, shareholder proposals must be received by the Company not later
than February 15, 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits to this report are as follows:
3 Amended and Restated By-Laws
27 Financial Data Schedule - August 29, 1998
27.1 Financial Data Schedule - August 30, 1997
(b) The Company did not file any reports on form 8-K during the quarter
to which this report relates
- 23 -
<PAGE> 24
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: October 7, 1998 By /s/ Thomas J. Sauser
---------------------------------------
Thomas J. Sauser, Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: October 7, 1998 By /s/ Robert J. Plourde
----------------------------------------
Robert J. Plourde, Vice President and
Corporate Controller (Principal Accounting
Officer)
- 24 -
<PAGE> 25
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
3 Amended and Restated By-Laws
27 Financial Data Schedule - August 29, 1998
27.1 Financial Data Schedule - August 30, 1997
<PAGE> 1
Exhibit 3
AMENDED AND RESTATED
BY-LAWS
OF
GTECH HOLDINGS CORPORATION
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be
in the City of Wilmington, County of New Castle/City of Dover, County of Kent,
State of Delaware, or such other address as the Board of Directors may by
resolution determine from time to time.
Section 2. Other Offices. The Corporation may also have
offices at such other places both within and without the State of Delaware as
the Board of Directors may time to time determine or the business of the
Corporation may require.
Section 3. Books. The books of the Corporation may be kept
within or without of the State of Delaware as the Board of Directors may from
time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place of Meetings. All meetings of
stockholders shall be held at such place, either within or without the State of
Delaware, on such date and at such time as may be determined from time to time
by the Board of Directors (or the Chairman or any Co-Chairman in the absence of
a designation by the Board of Directors).
Section 2. Annual Meetings. Annual meetings of stockholders
shall be held to elect the Board of Directors and transact such other business
as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of stockholders
may only be called by the Chairman or the President and shall be called by the
Chairman, the President or the Secretary at the request in writing of a majority
of the total number of directors of the Corporation or the holders of record of
a majority of the outstanding capital stockholders of the Corporation entitled
to vote. Such request shall state the purpose or purposes of the proposed
meeting.
Section 4. Notice of Meetings and Adjourned Meetings; Waivers
of Notice. (a) A written notice of stockholders' meetings shall be given which
shall state the place, date and hour of the meeting,
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and, in the case of a special meeting, the purpose or purposes for which the
meeting is called. Unless otherwise provided by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended ("Delaware
Law"), such notice shall be given not less than 10 nor more than 60 days before
the date of the meeting to each stockholder of record entitled to vote at such
meeting. Unless these bylaws otherwise require, when a meeting is adjourned to
another time or place (whether or not a quorum is present), notice need not be
given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than 30 days, or after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
(b) A written waiver of any such notice signed by the person
entitled thereto, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends
the meeting for the express purpose of objecting, and does so object, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Business transacted at any special meeting
of stockholders shall be limited to the purposes stated in the notice.
Section 5. Quorum. Unless otherwise provided under the
certificate of incorporation or these bylaws and subject to Delaware Law, the
presence, in person or by proxy, of the holders of a majority of the outstanding
capital stock of the Corporation entitled to vote at a meeting of stockholders
shall constitute a quorum for the transaction of business.
Section 6. Voting. (a) Unless otherwise provided in the
certificate of incorporation and subject to Delaware Law, each stockholder shall
be entitled to one vote for each outstanding share of capital stock of the
Corporation held by such stockholder. Unless otherwise provided by Delaware Law,
the certificate of incorporation or these bylaws, in all matters other than the
election of directors (which shall be decided by plurality vote) the affirmative
vote of a majority of the outstanding capital stock of the Corporation shall be
the act of the stockholders; provided, however, that with respect to any matter
which has been approved by a majority of the total number of directors of the
Corporation, the affirmative vote of a majority of the shares of capital stock
present in person or represented by proxy at a meeting of stockholders and
entitled to vote on the matter shall be the act of the stockholders.
(b) Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to a corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date.
Section 7. Action by Consent. (a) Unless otherwise provided in
the certificate of incorporation, and subject to the applicable rules of any
stock exchange on which any securities of the Corporation may be listed, any
action required to be taken at any annual or special meeting of stockholders, or
any action which may be taken at any annual or special meeting of stockholders,
may be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding capital stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
and shall be delivered to the Corporation by delivery to its registered office
in Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a
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<PAGE> 3
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within 60 days of the
earliest dated consent delivered in the manner required by this Section and
Delaware Law to the Corporation, written consents signed by a sufficient number
of holders to take action are delivered to the Corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested.
Section 8. Organization. At each meeting of stockholders, the
Chairman or any Co-Chairman or Vice Chairman of the Board, if one shall have
been elected (or if the members of the Board of Directors otherwise agree, any
director of the Corporation), shall act as chairman of the meeting. The
Secretary (or in his absence or inability to act, the person whom the chairman
of the meeting shall appoint secretary of the meeting) shall act as secretary of
the meeting and keep the minutes thereof.
Section 9. Order of Business. The order of business at all
meetings of stockholders shall be as determined by the chairman of the meeting.
At such meetings, each member of the Board of Directors shall be entitled to
present any matter for consideration and discussion.
ARTICLE III
DIRECTORS
Section 1. General Powers. Except as otherwise provided in
Delaware Law or the certificate of incorporation, the business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors.
Section 2. Number, Election and Term of Office. The number of
directors which shall constitute the whole Board shall be such number not less
than six and not more than twelve as shall be designated from time to time by
resolution of the Board. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as nearly
as may be possible, of one-third of the total number of directors constituting
the entire Board of Directors. The term of the initial Class I directors
terminated on the date of the 1993 annual meeting of stockholders; the term of
the initial Class II directors terminated on the date of the 1994 annual meeting
of stockholders; and the term of the initial Class III directors terminated on
the date of the 1995 annual meeting of stockholders. At each annual meeting of
stockholders beginning in 1993, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three year term. If the
number of directors is changed, any increase or decrease shall be apportioned by
the Board of Directors among the classes so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
A director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall have been duly elected and qualified
or until such director's earlier death, resignation, retirement,
disqualification or removal from office. Directors need not be stockholders. No
person shall be eligible
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<PAGE> 4
for election or reelection as a director of the Company after he or she has
reached the age of 72; provided, however, that this limitation shall not prevent
any director who is serving as such the time he or she reaches the age of 72
from continuing to serve for the remainder of his or her then current term.
Section 3. Nomination of Directors. (a) Nominations for the
election of directors may be made by the Board of Directors, a committee
appointed by the Board or by a stockholder entitled to vote in the election of
directors. A stockholder entitled to vote in the election of directors, however,
may make such a nomination only if written notice of such stockholder's intent
to do so has been given, either by personal delivery or by United States mail,
postage prepaid, and received by the Corporation: (i) with respect to an
election to be held at an annual meeting or stockholders, not later than sixty
nor more than ninety days prior to the first anniversary of the preceding year's
annual meeting (or, if the date of the annual meeting is changed by more than
twenty days from such anniversary date, within ten days after the date the
Corporation mails or otherwise gives notice of the date of such meeting), and
(ii) with respect to an election to be held at a special meeting of stockholders
called for that purpose, within ten days after the date on which notice of the
special meeting was first mailed to stockholders of the Corporation.
(b) Each stockholder's notice of intent to make a nomination
shall set forth: (i) the name(s) and address(es) of the stockholder who intends
to make the nomination and of the person or person to be nominated, (ii) a
representation that the stockholder: (1) is a holder of record of stock of the
Corporation entitled to vote at such meeting, (2) will continue to hold such
stock through the date on which the meeting is held, and (3) intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice, (iii) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination is to be made by the
stockholder, (iv) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to Regulation 14A promulgated under Section 14 of the Securities
Exchange Act of 1934, as amended, as now in effect or hereafter modified, had
the nominee been nominated by the Board of Directors; and (v) the consent of
each nominee to serve as a director of the Corporation if so elected. The
Corporation may require any proposed nominee to furnish such other information
as may reasonably be required by the Corporation to determine the qualifications
of such person to serve as a director.
(c) The officer presiding at the meeting of stockholders may
declare invalid any nomination made by a stockholder which is not in compliance
with the foregoing procedure, and, in such case, any votes cast in the election
of directors for such person shall not be counted by the inspector(s) of
election.
Section 4. Quorum and Manner of Acting. General Provisions.
Unless the certificate of incorporation or these bylaws require a greater
number, a majority of the total number of directors shall constitute a quorum
for the transaction of business, and the affirmative vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. When a meeting is adjourned to another time or place
(whether or not a quorum is present), notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the Board of Directors may
transact any business which might have been transacted at the original meeting.
If a quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting, from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 5. Time and Place of Meetings. The Board of Directors
shall hold its meetings at such place, either within or without the State of
Delaware, and at such time as may be determined from
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<PAGE> 5
time to time by the Board of Directors (or the Chairman or any Co-Chairman or
Vice Chairman in the absence of a determination by the Board of Directors).
Section 6. Annual Meeting. The Board of Directors shall meet
for the purpose of organization, the election of officers and the transaction of
other business, as soon as practicable after each annual meeting of
stockholders, on the same day and at the same place where such annual meeting
shall be held. Notice of such meeting need not be given. In the event such
annual meeting is not so held, the annual meeting of the Board of Directors may
be held at such place either within or without the State of Delaware, on such
date and at such time as shall be specified in a notice thereof given as
hereinafter provided in Section 7 of this Article III or in a waiver of notice
thereof signed by any director who chooses to waive the requirement of notice.
Section 7. Regular Meetings. The place and time of regular
meetings of the Board of Directors shall be determined by the Board of
Directors. Notice of regular meetings of the Board of Directors shall be given
to each director at least seven days before the date of the meetings.
Section 8. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman or any Co-Chairman or Vice Chairman of
the Board or the President and shall be called by the Chairman or any
Co-Chairman or Vice Chairman of the Board, the President or the Secretary on the
written request of any director. Notice of such special meeting shall be given
to each director at least two days before the date of the meeting in such manner
as is reasonably determined by the Board of Directors.
Section 9. Meetings. At annual, special or regular meetings of
the Board of Directors, each director shall be entitled to present any matter
for consideration or discussion.
Section 10. Action by Consent. Unless otherwise restricted by
the certificate of incorporation or these bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if all members of the Board consent thereto in writing, and
the writing or writings are filed with the minute of proceedings of the Board.
Section 11. Telephonic Meetings. Unless otherwise restricted
by the certificate of incorporation or these bylaws, members of the Board of
Directors may participate in a meeting of the Board of Directors by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting shall constitute presence in person at the meeting.
Section 12. Resignation. Any director may resign at any time
by giving written notice to the Board of Directors or to the Secretary of the
Corporation. The resignation of any director shall take effect upon receipt of
notice thereof or at such later time as shall be specified in such notice; and
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 13. Vacancies. (a) Unless otherwise provided in the
certificate of incorporation and subject to subparagraph (e) below, vacancies
and newly created directorships resulting from any increase in the authorized
number of directors elected by all the stockholders having the right to vote as
a single class may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. Whenever the
holders of any class or classes of stock or series thereof are entitled to elect
one or more directors by the certificate of incorporation, vacancies and newly
created directorships of such class or classes or series may be filled by a
majority of directors elected by such class or classes
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<PAGE> 6
or series thereof then in office, or by a sole remaining director so elected,
unless otherwise provided by the Certificate of Incorporation or resolution or
resolutions adopted by the Board of Directors.
(b) Each director so chosen shall hold office for a term that shall
coincide with the term of the class to which such director shall have been
elected, or until his earlier death, resignation or removal.
(c) If there are no directors in office, then an election of directors
may be held in accordance with Delaware Law.
(d) Unless otherwise provided in the certificate of incorporation, when
one or more directors shall resign from the Board, effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have the power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in the filling of other
vacancies.
Section 14. Removal. No director may be removed from office by
the stockholders except for cause with the affirmative vote of the holders of
not less than a majority of the total voting power of all outstanding Securities
of the corporation then entitled to vote generally in the election of directors,
voting together as a single class.
Section 15. Compensation. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall have
authority to fix the compensation of directors, including fees and reimbursement
of expenses.
Section 16. Committees of Directors. The Board of Directors
may, by resolution passed by a majority of the whole Board, designate one or
more committees, each committee to consist to one or more of the directors of
the Corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or qualified member at any
meeting of the committee. Any such committee, to the extent provided in the
resolution, shall have and may exercise all of the powers and authority of the
Board of Directors and may authorize the seal of the Corporation to be affixed
to all papers which may require it, but no such committee shall have the power
or authority in reference to amending the certificate of incorporation (except
that a committee may, to the extent authorized in the resolution providing for
the issuance of shares of stock adopted by the Board of Directors, fix any
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation), adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
bylaws the Corporation; and, unless the resolution expressly so provides, no
such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Each committee shall keep a record of its meetings and report the same to the
Board of Directors when requested.
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<PAGE> 7
ARTICLE IV
OFFICERS
Section 1. Principal Officers. The principal officers of the
Corporation shall be a President, a Chairman, one or more Co-Chairman, one or
more Vice Chairmen, one or more corporate Vice Presidents, a Treasurer and a
Secretary who shall have the duty, among other things, to record the proceedings
of the meetings of stockholders and directors in a book kept for that purpose.
The Corporation may also have such other principal officers, including one or
more Controllers, as the Board may in its discretion appoint. One person may
hold the offices and perform the duties of any two or more of said offices,
except that no one person shall hold the offices and perform the duties of
President and Secretary.
Section 2. Election, Term of Office and Renumeration. The
principal officers of the Corporation shall be elected annually by the Board of
Directors at the annual meeting thereof. Each such officer shall hold office
until his successor is elected and qualified, or until his earlier death,
resignation or removal. Any vacancy in any office shall be filled in such manner
as the Board of Directors shall determine.
Section 3. Subordinate Officers. In addition to the principal
officers enumerated in Section 1 of this Article IV, the Corporation may have
one or more non-corporate Vice Presidents, Assistant Treasurers, Assistant
Secretaries and Assistant Controllers and such other subordinate officers,
agents and employees as the Board of Directors may deem necessary, each of whom
shall hold office for such period as the Board of Directors may from time to
time determine. The Board of Directors may delegate to any principal officer the
power to appoint and to remove any such subordinate officers, agents or
employees.
Section 4. Removal. Except as otherwise permitted with respect
to subordinate officers, any officer may be removed, with or without cause, at
any time, by the Board of Directors.
Section 5. Resignations. Any officer may resign at any time by
giving written notice to the Board of Directors (or to a principal officer if
the Board of Directors has delegated to such principal officer the power to
appoint and to remove such officer). The resignation of any officer shall take
effect upon receipt of notice thereof or at such later time as shall be
specified in such notice; and unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
Section 6. Powers and Duties. The officers of the Corporation
shall have such powers and perform such duties incident to each of their
respective offices and such other duties as may from time to time be conferred
upon or assigned to them by the Board of Directors.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. The Corporation shall
indemnify, to the full extent permissible under Delaware law, any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
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<PAGE> 8
or investigative, by reason of the fact that he is or was a director or officer
of the Corporation, or while a director or officer of the Corporation is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines,
excise taxes and amounts paid in settlement actually and reasonably incurred by
such person in connection with such action, suit or proceeding.
Section 2. Payment of Expenses in Advance. Expenses incurred
in defending an action, suit or proceeding referred to in Section 1 of this
Article V shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding in the manner and to the full extent
permissible under Delaware law upon request of any person requesting
indemnification under Section 1 of this Article V.
Section 3. Procedure. On the request of any person requesting
indemnification under Section 1 of this Article V or an advance under Section 2
of this Article V, the Board of Directors or a committee thereof shall determine
whether such indemnification or advance is permissible or such determination
shall be made by independent legal counsel if the Board or committee so directs
or if the Board or committee is not empowered by statute to make such
determination.
Section 4. Other Rights. The indemnification provided by these
bylaws shall not be deemed exclusive of any other rights to which a person
seeking indemnification may be entitled under any statute, agreement, vote of
stockholders or disinterested directors, or otherwise both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Without limiting the generality of the
foregoing, by action of the Board of Directors (notwithstanding the interest of
its members in the transaction) the Corporation may enter into agreements with
persons indemnified under this Article V and others providing for
indemnification of and advancement of expenses to such persons by the
Corporation either under the provisions of this Article V or otherwise, and, in
the event of any conflict between the provisions of this Article V and the
provisions of any such indemnification agreement, the provisions of such
indemnification agreement shall prevail.
Section 5. Insurance. The Corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a director
or officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of these bylaws.
Section 6. Effect; Benefit; Modification. The obligations of
the Corporation to indemnify and to advance expenses to a party under the
provisions of this Article V shall be in the nature of a contract between the
Corporation and each such party. No amendment or repeal of any provision of this
Article V shall alter, to the detriment of such party, the right of such party
to indemnification or the advancement of expenses with respect to any claim
based on an actual or alleged act or failure to act which took place prior to
such amendment, repeal or termination.
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<PAGE> 9
ARTICLE VI
GENERAL PROVISIONS
Section 1. Fixing the Record Date. (a) In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than 60 nor less than 10 days before the
date of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice or to vote at
a meeting of stockholders shall apply to any adjournment of the meeting;
provided that the Board of Directors may fix a new record date for the adjourned
meeting.
(b) In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which date shall not be more than 10 days after
the date upon which the resolution fixing the record date is adopted by the
Board of Directors. If no record date has been fixed by the Board of Directors,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by Delaware Law, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation by delivery to its registered office in Delaware,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested if no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by Delaware Law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(c) In order that the Corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors, may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than 60 days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
Section 2. Dividends. Subject to limitations contained in
Delaware Law and the certificate of incorporation, the Board of Directors may
declare and pay dividends upon the shares of capital stock of the Corporation,
which dividends may be paid either in cash, in property or in shares of the
capital stock of the Corporation.
Section 3. Fiscal Year. The fiscal year of the Corporation
shall commence (i) on the day after the last Saturday of the month of February
in any particular calendar year and end on the last Saturday of
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<PAGE> 10
the month of February of the next succeeding calendar year or (ii) as otherwise
determined by the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed, affixed or otherwise reproduced.
Section 5. Voting of Stock Owned by the Corporation. The Board
of Directors may authorize any person, on behalf of the Corporation, to attend,
vote at and grant proxies to be used at any meeting of stockholders of any
corporation (except this Corporation) in which the Corporation may hold stock,
and on behalf of the Corporation to consent to any action by any such
corporation without meeting.
Section 6. Amendments. These bylaws or any of them, may be
altered, amended or repealed, or new bylaws may be made, by the stockholders
entitled to vote thereon at any annual or special meeting thereof or by the
Board of Directors.
- 34 -
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0
0
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</TABLE>
