<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 28, 1999
Commission file number 1-11250
GTECH Holdings Corporation
(Exact name of registrant as specified in its charter)
Delaware 05-0450121
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
55 Technology Way, West Greenwich, Rhode Island 02817
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 392-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At September 23, 1999 there were 34,865,455 shares of the registrant's Common
Stock outstanding.
<PAGE> 2
INDEX
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION Number
- ------- --------------------- ------
<S> <C>
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 11-17
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBITS
</TABLE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES (Unaudited)
August 28, February 27,
ASSETS 1999 1999
--------------- ------------
(In thousands, except share amounts)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 8,750 $ 7,733
Trade accounts receivable 130,343 106,693
Sales-type lease receivables 6,899 6,743
Inventories 52,532 61,893
Deferred income taxes 29,419 29,419
Other current assets 17,157 14,047
----------- -----------
TOTAL CURRENT ASSETS 245,100 226,528
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 1,176,140 1,157,683
Less: Accumulated Depreciation (790,592) (760,122)
----------- -----------
385,548 397,561
GOODWILL,net 132,535 135,662
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 20,713 10,801
OTHER ASSETS 106,009 103,663
----------- -----------
$ 889,905 $ 874,215
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 46,375 $ 43,402
Accrued expenses 53,428 55,609
Special charge 2,154 6,058
Employee compensation 23,016 27,379
Advance payments from customers 26,584 30,458
Income taxes payable 53,591 57,907
Current portion of long-term debt 929 1,960
----------- -----------
TOTAL CURRENT LIABILITIES 206,077 222,773
LONG-TERM DEBT, less current portion 377,975 319,078
OTHER LIABILITIES 25,462 29,908
DEFERRED INCOME TAXES 18,550 18,550
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,
44,159,565 and 44,152,565 shares issued, 35,902,455 and 38,722,063 shares
outstanding at August 28, 1999 and February 27, 1999, respectively 442 442
Additional paid-in capital 176,552 176,434
Equity carryover basis adjustment (7,008) (7,008)
Accumulated other comprehensive income (78,445) (84,842)
Retained earnings 385,446 345,018
----------- -----------
476,987 430,044
Less cost of 8,257,110 and 5,430,502 shares in treasury at
August 28, 1999 and February 27, 1999, respectively (215,146) (146,138)
----------- -----------
261,841 283,906
----------- -----------
$ 889,905 $ 874,215
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
- 3 -
<PAGE> 4
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
---------------------------
August 28, August 29,
1999 1998
--------- ---------
(Dollars in thousands,
except per share amounts)
Revenues:
<S> <C> <C>
Services $ 209,843 $ 224,582
Sales of products 45,546 8,952
--------- ---------
255,389 233,534
Costs and expenses:
Costs of services 138,857 148,523
Costs of sales 34,373 6,812
--------- ---------
173,230 155,335
--------- ---------
Gross profit 82,159 78,199
Selling, general and administrative 30,838 29,504
Research and development 11,290 8,648
--------- ---------
Operating income 40,031 40,047
Other income (expense):
Interest income 864 832
Equity in earnings of unconsolidated affiliates 793 870
Other income 2,332 2,840
Interest expense (7,149) (6,920)
--------- ---------
Income before income taxes 36,871 37,669
Income taxes 15,117 15,821
--------- ---------
Net income $ 21,754 $ 21,848
========= =========
Basic earnings per share $ .58 $ .53
========= =========
Diluted earnings per share $ .58 $ .53
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
- 4 -
<PAGE> 5
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
--------------------------
August 28, August 29,
1999 1998
--------- ---------
(Dollars in thousands,
except per share amounts)
Revenues:
<S> <C> <C>
Services $ 421,001 $ 446,463
Sales of products 73,048 19,350
--------- ---------
494,049 465,813
Costs and expenses:
Costs of services 279,274 297,112
Costs of sales 52,491 14,823
--------- ---------
331,765 311,935
--------- ---------
Gross profit 162,284 153,878
Selling, general and administrative 62,334 59,701
Research and development 21,966 18,243
--------- ---------
Operating income 77,984 75,934
Other income (expense):
Interest income 1,701 1,577
Equity in earnings of unconsolidated affiliates 1,936 4,236
Other income 1,278 2,535
Interest expense (13,934) (14,408)
--------- ---------
Income before income taxes 68,965 69,874
Income taxes 28,276 29,347
--------- ---------
Net income $ 40,689 $ 40,527
========= =========
Basic earnings per share $ 1.08 $ .98
========= =========
Diluted earnings per share $ 1.08 $ .97
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
- 5 -
<PAGE> 6
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY-(Unaudited)
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Common Stock Equity
---------------------------- Additional Carryover
Issued Paid-in Basis
Shares Amount Capital Adjustment
---------- ----------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at February 27, 1999 44,152,565 $ 442 $ 176,434 $ (7,008)
Comprehensive income:
Net income - - - -
Other comprehensive income, net of tax:
Foreign currency translation - - - -
Net loss on derivative instruments - - - -
Comprehensive income
Purchase of 2,876,300
shares of common stock - - - -
Reissuance of 1,787 shares under
director stock election plan - - - -
Reissuance of 47,905 shares under
employee stock purchase plan - - - -
Common stock issued
under stock award plans 7,000 - 118 -
---------- ----------- -------------- ----------
Balance at August 28, 1999 44,159,565 $ 442 $ 176,552 $ (7,008)
========== =========== ============== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Treasury
Income Earnings Stock Total
------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at February 27, 1999 $ (84,842) $ 345,018 $ (146,138) $ 283,906
Comprehensive income:
Net income - 40,689 - 40,689
Other comprehensive income, net of tax:
Foreign currency translation 6,734 - - 6,734
Net loss on derivative instruments (337) - - (337)
-------------
Comprehensive income 47,086
Purchase of 2,876,300
shares of common stock - - (70,327) (70,327)
Reissuance of 1,787 shares under
director stock election plan - (7) 47 40
Reissuance of 47,905 shares under
employee stock purchase plan - (254) 1,272 1,018
Common stock issued
under stock award plans - - - 118
------------- ------------- ------------- -------------
Balance at August 28, 1999 $ (78,445) $ 385,446 $ (215,146) $ 261,841
============= ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
- 6 -
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
--------------------------
August 28, August 29,
1999 1998
--------- ---------
(Dollars in thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 40,689 $ 40,527
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 91,255 103,354
Equity in earnings of unconsolidated affiliates,
net of dividends received 138 (2,473)
Other (2,224) (919)
Changes in operating assets and liabilities:
Trade accounts receivable (24,091) 10,160
Inventories 9,361 (4,945)
Special charge (3,904) (19,683)
Other assets and liabilities (15,396) 15,250
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 95,828 141,271
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts (62,549) (85,818)
Investments in and advances to unconsolidated subsidiaries (10,586) 114
Cash proceeds from sale of equity investment -- 84,904
Acquisitions (net of cash acquired) -- (21,864)
Other (10,236) (10,017)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (83,371) (32,681)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 97,200 85,206
Principal payments on long-term debt (39,235) (188,693)
Purchases of treasury stock (70,327) (6,683)
Other 207 4,223
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES (12,155) (105,947)
Effect of exchange rate changes on cash 715 (1,367)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 1,017 1,276
Cash and cash equivalents at beginning of period 7,733 8,250
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,750 $ 9,526
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
- 7 -
<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 28, 1999 are
not necessarily indicative of the results that may be expected for the full
fiscal year ending February 26, 2000. The balance sheet at February 27, 1999 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 1999 Annual Report on Form 10-K.
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
<TABLE>
<CAPTION>
NOTE B--INVENTORIES August 28, February 27,
1999 1999
--------------- ---------------
(Dollars in thousands)
Inventories consist of:
<S> <C> <C>
Purchased components $ 25,907 $ 27,323
Finished subassemblies 2,244 2,922
Work-in-process 23,111 23,309
Finished goods 1,270 8,339
--------------- ---------------
$ 52,532 $ 61,893
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
NOTE C--LONG-TERM DEBT August 28, February 27,
1999 1999
--------------- ---------------
(Dollars in thousands)
Long-term debt consists of:
<S> <C> <C>
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 76,900 18,000
Other 2,004 3,038
--------------- ---------------
378,904 321,038
Less current portion 929 1,960
--------------- ---------------
$ 377,975 $ 319,078
=============== ===============
</TABLE>
The Company has an unsecured revolving credit facility of $400 million expiring
in June 2002 (the "Credit Facility"). At August 28, 1999, the weighted average
interest rate for all outstanding borrowings under the Credit Facility was
5.51%.
- 8 -
<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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Dollars and shares in thousands, except per share amounts)
Numerator:
<S> <C> <C> <C> <C>
Net income $ 21,754 $ 21,848 $ 40,689 $ 40,527
Denominator:
Weighted average shares-Basic 37,193 41,293 37,507 41,351
Effect of dilutive securities:
Employee stock options 51 254 54 304
---------- ---------- ---------- ----------
Weighted average shares-Diluted 37,244 41,547 37,561 41,655
========== ========== ========== ==========
Basic earnings per share $ .58 $ .53 $ 1.08 $ .98
========== ========== ========== ==========
Diluted earnings per share $ .58 $ .53 $ 1.08 $ .97
========== ========== ========== ==========
</TABLE>
NOTE G--COMPREHENSIVE INCOME
For the three month period ended August 28, 1999 and August 29, 1998, total
comprehensive income amounted to $11,904,000 and $20,308,000, respectively.
During the first six months of fiscal 2000 and fiscal 1999, total comprehensive
income amounted to $47,086,000 and $30,604,000, respectively.
- 9 -
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE H--SEGMENT INFORMATION
The Company presently has one reportable segment. The Lottery segment provides
online, high speed, highly secured transaction processing systems to the
worldwide lottery industry. Executive management of the Company evaluates
segment performance based on net operating profit after income taxes. All other
revenues (as reported below) are comprised principally of revenues from the
Company's Transactive, Dreamport and Europrint subsidiaries.
The Company's business segment data is summarized below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ------------------------------
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
(Dollars in thousands)
Revenues from external sources:
<S> <C> <C> <C> <C>
Lottery $ 236,448 $ 212,333 $ 456,620 $ 429,201
All other 18,941 21,201 37,429 36,612
-------------- ------------- ------------- -------------
Consolidated $ 255,389 $ 233,534 $ 494,049 $ 465,813
============== ============= ============= =============
Net operating profit after income taxes:
Lottery $ 28,218 $ 28,160 $ 53,105 $ 53,595
All other (1,191) (1,260) (2,083) (2,635)
-------------- ------------- ------------- -------------
Consolidated $ 27,027 $ 26,900 $ 51,022 $ 50,960
============== ============= ============= =============
</TABLE>
The following is a reconciliation of net operating profit after income taxes to
net income as reported on the consolidated income statements:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ------------------------------
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net operating profit after income taxes $ 27,027 $ 26,900 $ 51,022 $ 50,960
Reconciling items, net of tax:
Interest expense (4,217) (4,014) (8,220) (8,357)
Other (1,056) (1,038) (2,113) (2,076)
-------------- ------------- ------------- -------------
Net income $ 21,754 $ 21,848 $ 40,689 $ 40,527
============== ============= ============= =============
</TABLE>
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<PAGE> 11
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, (iv) the Company's program to
address potential issues relating to the change of date to January 1, 2000
("Year 2000"), and (v) the results and effects of legal proceedings and
investigations. Such forward-looking statements reflect management's assessment
based on information currently available, but are not guarantees and are subject
to risks and uncertainties that could cause actual results to differ materially
from those contemplated in the forward-looking statements. These risks and
uncertainties include, but are not limited to, those set forth below and
elsewhere in this report and in the Company's press releases and its Forms 10-K,
10-Q, 8-K and other reports and filings with the Securities and Exchange
Commission (the "SEC").
General
The Company has derived substantially all of its revenues from the rendering of
services and the sale or supply of computerized online lottery systems and
components to government-authorized lotteries. Service revenues have been
derived primarily from lottery service contracts. These contracts are typically
at least five years in duration, and are generally based upon a percentage of a
lottery's gross online 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 online
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. The Company currently anticipates that product purchases during
fiscal 2000 will be in a range of $160.0 million to $170.0 million.
The Company has taken steps to broaden its offerings of high-volume transaction
processing services outside of its core business of providing online lottery
services. For example, the Company's Dreamport subsidiary ("Dreamport") provides
gaming technology and a comprehensive array of management, development and
strategic services to the gaming and entertainment markets. Also, in the second
quarter of fiscal 1999, the Company acquired 80% of the equity of Europrint
Holdings Ltd. ("Europrint") and its wholly owned subsidiaries, including
Interactive Games International ("IGI"). Europrint is among the world's largest
providers of media promotional games and IGI has pioneered the development of
interactive, televised lottery games.
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 may
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 may still be 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
- 11 -
<PAGE> 12
attributable to the Company in any matter, such an allegation or finding could
have a material adverse effect on the Company's business, including its ability
to retain existing contracts and to obtain new or renewal contracts. In
addition, continuing adverse publicity resulting from these investigations and
related matters could have such a material adverse effect. See "Legal
Proceedings" in Part II, Item 1 herein and in the Company's Report on Form 10-Q
for the quarterly period ended May 29, 1999; Part I, Item 1 - "Certain Factors
That May Affect Future Performance - Maintenance of Business Relationships and
Certain Legal Matters" and Part I, Item 3 - "Legal Proceedings" in the
Company's fiscal 1999 annual report on Form 10-K; and Note G to the
Consolidated Financial Statements in the Company's fiscal 1999 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 2000 and fiscal 1999 are 52-week years.
Results of Operations
Second Quarter
Revenues for the second quarter of fiscal 2000 were $255.4 million, representing
a $21.9 million, or 9.4%, increase over revenues of $233.5 million in the second
quarter of fiscal 1999.
Service revenues, including lottery and other services, in the fiscal 2000
second quarter were $209.8 million, representing a $14.8 million, or 6.6%,
decrease from the $224.6 million of service revenues in the second quarter of
fiscal 1999. This decrease reflects a decline in both domestic and international
service revenues.
In the fiscal 2000 second quarter, lottery sales by the Company's domestic
customers declined approximately 4% compared with the second quarter of fiscal
1999, primarily reflecting the continued decline in sales in Texas, the
temporary suspension of Quick Draw in New York and lower jackpot activity. This
decline, coupled with contractual rate reductions in Texas and California,
resulted in a 9% decline in the Company's domestic service revenues.
Sales of the Company's international lottery customers increased approximately
12% in the fiscal 2000 second quarter compared with the second quarter of fiscal
1999, primarily driven by growth in Brazil, Germany, Poland and the Czech
Republic. This increase was offset by the impact of the reduction in the dollar
value of foreign currencies, resulting in a 3% decline in the Company's
international lottery service revenues.
Worldwide lottery sales by the Company's customers increased approximately 2% in
the fiscal 2000 second quarter as compared with the second quarter of fiscal
1999. Due to contractual rate changes and the impact of the reduction in the
dollar value of foreign currencies, the Company's total lottery service revenues
declined approximately 7%.
On April 1, 1999, Quick Draw, the keno-style game operated in New York on a
lottery system provided by the Company, terminated due to the failure of the New
York State Legislature to extend the legislation authorizing the game. On August
1, 1999, the New York State Legislature extended the legislation authorizing the
game through March 31, 2001.
Product sales in the second quarter of fiscal 2000 were $45.5 million, an
increase of $36.5 million over the $9.0 million of product sales in the second
quarter of fiscal 1999. This increase was driven by the sale of an online
lottery system to Israel and the sale of a central system upgrade to Belgium.
The Company sold approximately 2,700 lottery terminals during the second quarter
of fiscal 2000, as compared to approximately 30 lottery terminals during the
fiscal 1999 second quarter.
- 12 -
<PAGE> 13
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales increased from 23.9%
in the second quarter of fiscal 1999 to 24.5% in the second quarter of fiscal
2000, primarily due to the change in product mix.
Selling, general and administrative expenses in the second quarter of fiscal
2000 were $30.8 million, representing a $1.3 million, or 4.5%, increase over the
$29.5 million incurred in the second quarter of fiscal 1999. This increase was
primarily attributable to the Company's bi-annual user's conference, the World
Leader's Forum. As a percentage of revenues, selling, general and administrative
expenses were 12.1% and 12.6% during the second quarters of fiscal 2000 and
1999, respectively.
Research and development expenses in the second quarter of fiscal 2000 were
$11.3 million, representing a $2.7 million, or 30.6%, increase over research and
development expenses of $8.6 million in the second quarter of fiscal 1999. This
reflects the increase in development activities associated with the Company's
next generation operating system and terminals. As a percentage of revenues,
research and development expenses were 4.4% and 3.7% during the second quarters
of fiscal 2000 and 1999, respectively.
Year to Date
Revenues for the first six months of fiscal 2000 were $494.0 million,
representing a $28.2 million, or 6.1%, increase over revenues of $465.8 million
in the first six months of fiscal 1999.
Service revenues, including lottery and other services, in the first six months
of fiscal 2000 were $421.0 million, representing a $25.5 million, or 5.7%,
decrease from the $446.5 million of service revenues in the first six months of
fiscal 1999. This decrease reflects a decline in both domestic and international
service revenues.
In the first six months of fiscal 2000, lottery sales by the Company's domestic
customers declined approximately 5% compared with the first six months of fiscal
1999, primarily reflecting the continued decline in sales in Texas, the
temporary suspension of Quick Draw in New York and lower jackpot activity. This
decline, coupled with contractual rate reductions in Texas and California,
resulted in a 9% decline in the Company's domestic service revenues.
Lottery sales by the Company's international customers increased approximately
14% in the first six months of fiscal 2000 compared with the first six months of
fiscal 1999, primarily driven by growth in Brazil, the Czech Republic, the
United Kingdom, Poland and Puerto Rico. This increase, partially offset by the
impact of the reduction in the dollar value of foreign currencies, resulted in a
1% decline in the Company's international lottery service revenues.
Worldwide sales by the Company's lottery customers in the first six months of
fiscal 2000 increased approximately 2% as compared with the first six months of
fiscal 1999. The Company's total lottery service revenues decreased
approximately 6% as a result of contractual rate changes and the impact of the
reduction in the dollar value of foreign currencies.
Product sales in the first six months of fiscal 2000 were $73.0 million, an
increase of $53.7 million over the $19.3 million of product sales in the first
six months of fiscal 1999. This increase was primarily driven by the sale of an
online lottery system to Israel, a new PRO:SYS central system, including instant
ticket validation capabilities to Sweden and a central system upgrade to
Belgium. The Company sold approximately 3,700 lottery terminals during the first
six months of fiscal 2000, as compared to approximately 200 lottery terminals
during the first six months of fiscal 1999.
- 13 -
<PAGE> 14
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales increased from 23.4%
in the first six months of fiscal 1999 to 28.1% in the first six months of
fiscal 2000, primarily due to the change in product mix.
Selling, general and administrative expenses in the first six months of fiscal
2000 were $62.3 million, representing a $2.6 million, or 4.4%, increase over the
$59.7 million incurred in the first six months of fiscal 1999. This increase was
primarily attributable to the Company's bi-annual user's conference, held during
July 1999. As a percentage of revenues, selling, general and administrative
expenses were 12.6% and 12.8% during the first six months of fiscal 2000 and
1999, respectively.
Research and development expenses in the first six months of fiscal 2000 were
$22.0 million, representing a $3.8 million, or 20.4%, increase over research and
development expenses of $18.2 million in the first six months of fiscal 1999.
This increase reflects development activities associated with the Company's next
generation operating system and terminals. As a percentage of revenues, research
and development expenses were 4.4% and 3.9% during the first six months of
fiscal 2000 and 1999, respectively.
Equity in earnings of unconsolidated affiliates in the first six months of
fiscal 2000 was $1.9 million, a decrease of $2.3 million from the $4.2 million
of such earnings during the first six months of fiscal 1999. This decrease
resulted principally from the Company's sale, in April 1998, of its 22.5% equity
interest in Camelot Group plc ("Camelot").
Other income in the first six months of fiscal 2000 was $1.3 million,
representing a $1.2 million decrease from the $2.5 million recorded in the first
six months of fiscal 1999. This decrease was primarily attributable to net
foreign exchange losses associated with the Company's global asset protection
and foreign exchange management programs designed to protect future cash flows,
partially offset by the amortization of the gain on the sale of the Camelot
investment.
The Company's effective income tax rate decreased from 42% in the first six
months of fiscal 1999 to 41% in the first six months of fiscal 2000 principally
due to the increased recognition of the Research and Development tax credit.
The Company's effective income tax rate was greater than the statutory rate
primarily due to state income taxes and certain expenses that are not
deductible for income tax purposes.
Changes in Financial Position, Liquidity and Capital Resources
During the first six months of fiscal 2000, the Company generated $95.8 million
of cash from operations. This cash, together with $58.0 million of net
borrowings, was used primarily to fund the purchase of $62.5 million of systems,
equipment and other assets relating to contracts and to repurchase $70.3 million
of the Company's common stock.
Trade accounts receivable increased by $23.6 million, from $106.7 million at
February 27, 1999 to $130.3 million at August 28, 1999, primarily due to the
timing of the collection of receivables from product sales recorded in the
second quarter of fiscal 2000.
Inventories decreased by $9.4 million, from $61.9 million at February 27, 1999
to $52.5 million at August 28, 1999, primarily due to the sale of a new PRO:SYS
central system to Sweden in the first quarter of fiscal 2000.
The cost of systems, equipment and other assets relating to contracts increased
by $18.4 million, from $1,157.7 million at February 27, 1999 to $1,176.1 million
at August 28, 1999. This increase reflects the completion of a new lottery
system in Michigan, the continuing installation of new lottery systems in Puerto
Rico and Arizona and the expansion of lottery systems in several domestic and
international
- 14 -
<PAGE> 15
locations, along with $9.4 million relating to the strengthening of the
Brazilian real versus the U.S. dollar in the first six months of fiscal 2000
compared to fiscal 1999.
Investments in and advances to unconsolidated affiliates increased by $9.9
million, from $10.8 million at February 27, 1999 to $20.7 million at August 28,
1999, primarily due to the Company's 10% equity investment and associated loans
to Uthingo, the consortium that recently signed a contract to operate the South
Africa National Lottery and the March 1999 purchase by Dreamport of a one-third
interest in Turfway Park racetrack.
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 2000 will be in a
range of $200.0 million to $220.0 million. The principal sources of liquidity
for the Company are cash generated from operations and borrowings under the
Company's Credit Facility. As of August 28, 1999 the Company had utilized
approximately $76.9 million of its $400 million Credit Facility. The Company
currently expects that its cash flow from operations and available borrowings
under its Credit Facility will be sufficient to fund its anticipated working
capital and ordinary capital expenditure needs, to service its debt obligations
and to fund anticipated internal growth in the foreseeable future.
Market Risk Disclosures
The primary market risk inherent in the Company's financial instruments and
exposures is the potential loss arising from adverse changes in interest rates
and foreign currency rates. The Company's exposure to commodity price changes is
not considered material and is managed through its procurement and sales
practices. The Company did not own any marketable equity securities during the
first six months of fiscal 2000.
Interest rates
Interest rate market risk is estimated as the potential change in the fair value
of the Company's total debt or current earnings resulting from a hypothetical
10% adverse change in interest rates. At August 28, 1999, the estimated fair
value of the Company's fixed rate debt, as determined by an independent
investment banker, approximated $304.0 million. A hypothetical 10% increase in
interest rates would change the estimated fair value of the Company's fixed rate
debt to $312.5 million. A hypothetical 10% decrease in interest rates would
change the estimated fair value of the Company's fixed rate debt to $302.5
million.
A hypothetical 10% adverse or favorable change in interest rates applied to
variable rate debt would not have a material affect on current earnings.
The Company uses various techniques to reduce the risk associated with future
increases in interest rates, the most significant being the private placement of
seven- and 10-year fixed rate debt on May 29, 1997.
Foreign Currency Exchange Rates
Foreign exchange exposures arise from current transactions and anticipated
transactions denominated in a currency other than an entity's functional
currency and from the translation of foreign currency balance sheet accounts
into U.S. dollar balance sheet accounts.
The Company seeks to manage its foreign exchange risk by securing payment from
its customers in U.S. dollars, by sharing risk with its customers, by utilizing
foreign currency borrowings, by leading and
- 15 -
<PAGE> 16
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.
Whenever possible, the Company negotiates clauses into its contracts that allow
for price adjustments should a material change in foreign exchange rates occur.
The Company, from time to time, enters into foreign currency exchange and option
contracts to reduce the exposure associated with current transactions and
anticipated transactions denominated in foreign currencies. However, the Company
does not engage in currency speculation. At August 28, 1999, a hypothetical 10%
adverse change in foreign exchange rates would result in a translation loss of
$16.0 million that would be recorded in the equity section of the Company's
balance sheet.
At August 28, 1999, a hypothetical 10% adverse change in foreign exchange rates
would result in a net transaction loss of $1.5 million recorded in current
earnings after considering the effects of foreign exchange contracts currently
in place.
At August 28, 1999, a hypothetical 10% adverse change in foreign exchange rates
would result in a net reduction of cash flows from anticipatory transactions in
fiscal 2000 by $3.0 million after considering the effects of foreign exchange
contracts currently in place. The percentage of fiscal 2000 anticipatory cash
flows that were hedged varied throughout the first six months of fiscal 2000,
but averaged 57%.
As of August 28, 1999, the Company had approximately $103.1 million of
outstanding foreign currency exchange contracts to sell foreign currencies
(primarily pounds sterling, Brazilian reals, Mexican pesos and Australian
dollars) and approximately $73.5 million of outstanding foreign currency
exchange contracts to purchase foreign currencies (primarily pounds sterling).
IMPACT OF YEAR 2000
The Year 2000 computer issue creates potentially significant risks for the
Company. If lottery, gaming or electronic benefits transfer ("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 customers' and/or the
Company's operations. The Company is actively managing its program to assess the
capability of its lottery, gaming and EBT products and its interfaces to
customer systems to handle the Year 2000. With respect to customer systems, the
major challenge for the Company in remediating the Year 2000 issue is the
multinational nature of the Company's business and the high degree of global
coordination that is required with customers, suppliers and employees.
The Company has established a Year 2000 project team and a program office at its
corporate headquarters, made up of dedicated and shared resources, to provide
the guidance and support necessary to accomplish the Year 2000 initiative. The
status of the Company's six-phase program as of September 23, 1999 is as
follows:
- - The inventory phase consists of compiling a comprehensive list of software
and hardware technologies that the Company supplies to customers and
management information systems that the Company uses internally. This phase
is complete.
- - The assessment phase consists of determining the compliance status of each
technology identified in the inventory phase. This phase is complete.
- - The planning phase consists of developing plans to upgrade hardware and/or
software to Year 2000 compliance. This phase is complete.
- 16 -
<PAGE> 17
- - The implementation phase consists of executing the tasks identified in the
planning phase. This phase is complete.
- - The quality assurance phase consists of testing and validating systems
replaced or modified as part of the implementation phase. This phase is
complete.
- - The special case phase consists of developing and implementing specific
plans for any Year 2000 issues that cannot be handled by the previous
phases. This phase will include monitoring each site for change control,
contingency planning, monitoring vendor compliance issues and other matters
that may arise. This phase is underway and will continue through December
1999.
The Company is actively working with and seeking to enlist the cooperation of
its customers to ensure integration with their systems and telecommunications
networks. 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.
The Company's critical internal management information systems (including SAP's
R/3 system, System Union's SUN accounting system and Hyperion's Pillar software)
are Year 2000 compliant. 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 remediation of these systems is complete.
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 hour a day
operational support. This support provides focused individuals in all
disciplines that respond in real time to operational issues. The Company's
contingency planning will include the expansion of the Year 2000 help desk team
and the creation of eight to 10 command centers worldwide to provide the
necessary response to issues that may arise as January 1, 2000 approaches.
The Company currently expects that the total cost of the Year 2000 program will
not exceed $25 million, including $5 million for the purchase of software and
hardware that will be capitalized and $20 million that will be expensed. As of
September 23, 1999 the Company had spent approximately $15.7 million on the
program. The total cost estimate does not include possible 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 provide a solution to Year
2000 issues. The total cost estimate is based on the Company's current
assessment of the program and is subject to change as the program progresses.
Year 2000 issues could have a significant impact on the Company's operations and
its financial condition and results if modifications cannot be completed on a
timely basis, unforeseen needs or problems arise, or systems operated by third
parties are not Year 2000 compliant. In addition to the potential for a
significant loss of revenues and possible damage claims by third parties
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. Based on
currently available information, management does not believe that the Year 2000
matters discussed above will cause significant operational or financial problems
for the Company; however there can be no assurance that this will be the case.
- 17 -
<PAGE> 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk Disclosures" in Part I, Item 2 herein.
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 through their wholly-owned company, The Benchmark Group, Inc. 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 in October 1996, Mr. Smith and one of the two consultants
were found guilty of all charges. The other consultant, Joseph LaPorta, 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 the midst of these events,
the New Jersey Lottery Commission awarded the Company a contract to continue
operating its State lottery. In October 1998, the Court sentenced Mr. Smith to
a prison term of 63 months, ordered him to pay restitution to the Company in
the amount of $169,500 and fined him $20,000. Mr. Smith subsequently appealed
his conviction to the United States Court of Appeals for the Third Circuit. In
August 1999, the Court of Appeals affirmed Mr. Smith's conviction but remanded
the case to the District Court for the resentencing of Mr. Smith. In November
1998, the U.S. Attorney's Office for the District of New Jersey advised the
Company that currently GTECH is not the subject of an ongoing grand jury
investigation by that office.
As previously publicly reported, in June 1999, TransAct Technologies
Incorporated ("TransAct") and its wholly-owned subsidiary, Magnetec Corporation
("Magnetec"), filed suit against GTECH Corporation in Superior Court for Kent
County, Rhode Island. Magnetec, which had previously contracted with the Company
to design and manufacture printer modules on behalf of the Company, alleged
breach of contract, misappropriation of trade secrets, and related claims in
connection with the Company's efforts to manufacture its own printer. The
plaintiffs sought temporary, preliminary and permanent injunctive relief and
damages. In July 1999, TransAct and the Company announced that Magnetec and
GTECH Corporation had agreed to the settlement and dismissal with prejudice of
this suit in connection with the parties' execution of a new five-year agreement
under which Magnetec will be the exclusive manufacturer and supplier to GTECH
Corporation of a 27-wire impact printer for use in GTECH's Isys(TM) online
lottery terminal. As part of the agreement, GTECH agreed to pay Magnetec $1
million for Magnetec's past design efforts, development costs and manufacturing
interruption costs and placed a non-cancelable order for delivery by Magnetec of
approximately $8 million of printers during calendar year 2000.
For information respecting certain other legal proceedings, refer to Part I,
Item 1 - "Certain Factors That May Affect Future Performance - Maintenance of
Business Relationships and Certain Legal Matters" and Part I, Item 3 - "Legal
Proceedings" in the Company's fiscal 1999 Annual Report on Form 10-K; Note G to
Consolidated Financial Statements included in the Company's fiscal 1999 Annual
Report on Form 10-K; and Part II, Item 1 - "Legal Proceedings" in the Company's
Report on Form 10-Q for the quarterly period ended May 29, 1999.
- 18 -
<PAGE> 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) and (c)
The Company's Annual Meeting of Shareholders was held on August 18, 1999, and in
connection therewith, proxies were solicited by management pursuant to
Regulation 14 under the Securities Exchange Act of 1934. An aggregate of
37,606,632 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 2002 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>
Anthony Ruys 32,100,672 Shares 937,016 Shares
William Y. O'Connor 32,102,111 Shares 935,577 Shares
</TABLE>
2. Approval of the Company's 1999 Non- Employee Directors Stock Purchase
Plan.
The tabulation of votes was as follows:
<TABLE>
<CAPTION>
Abstentions
For Against (including broker nonvotes)
--- ------- ---------------------------
<S> <C> <C>
29,542,732 Shares 3,456,735 Shares 38,211 Shares
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits to this report are as follows:
27 Financial Data Schedule
(b) The Company did not file any reports on form 8-K during the quarter to
which this report relates
- 19 -
<PAGE> 20
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: September 23, 1999 By /s/ Thomas J. Sauser
-------------------------------------------------
Thomas J. Sauser, Senior Vice President, Chief
Financial Officer and Treasurer (Principal
Financial Officer)
Date: September 23, 1999 By /s/ Robert J. Plourde
-------------------------------------------------
Robert J. Plourde, Vice President and Corporate
Controller (Principal Accounting Officer)
- 20 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-START> FEB-28-1999
<PERIOD-END> AUG-28-1999
<CASH> 8,750
<SECURITIES> 0
<RECEIVABLES> 137,242
<ALLOWANCES> 0
<INVENTORY> 52,532
<CURRENT-ASSETS> 245,100
<PP&E> 1,176,140
<DEPRECIATION> 790,592
<TOTAL-ASSETS> 889,905
<CURRENT-LIABILITIES> 206,077
<BONDS> 377,975
0
0
<COMMON> 442
<OTHER-SE> 261,399
<TOTAL-LIABILITY-AND-EQUITY> 889,905
<SALES> 73,048
<TOTAL-REVENUES> 494,049
<CGS> 52,491
<TOTAL-COSTS> 331,765
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,934
<INCOME-PRETAX> 68,965
<INCOME-TAX> 28,276
<INCOME-CONTINUING> 40,689
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,689
<EPS-BASIC> 1.08
<EPS-DILUTED> 1.08
</TABLE>
