<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 26, 2000
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
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(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 30, 2000 there were 34,596,033 shares of the registrant's Common
Stock outstanding.
<PAGE> 2
INDEX
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
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 8-11
Item 2. Management's Discussion and Analysis of Financial Condition 12-18
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19-20
Item 2. Changes in Securities 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBITS
</TABLE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
August 26, February 26,
2000 2000
----------- ------------
(In thousands, except share amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,958 $ 11,115
Trade accounts receivable 105,058 115,358
Sales-type lease receivables 10,032 10,110
Inventories 72,961 67,418
Deferred income taxes 15,853 15,853
Other current assets 20,141 19,346
----------- -----------
TOTAL CURRENT ASSETS 234,003 239,200
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 1,265,197 1,231,755
Less: Accumulated Depreciation (899,835) (855,837)
----------- -----------
365,362 375,918
GOODWILL, net 125,271 130,710
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 35,208 25,898
OTHER ASSETS 103,792 119,297
----------- -----------
$ 863,636 $ 891,023
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 40,435 $ 53,103
Accrued expenses 54,383 44,898
Special charge 21,557 --
Employee compensation 24,070 30,057
Advance payments from customers 35,591 33,438
Income taxes payable 30,651 49,382
Current portion of long-term debt -- 69
----------- -----------
TOTAL CURRENT LIABILITIES 206,687 210,947
LONG-TERM DEBT, less current portion 331,000 349,400
OTHER LIABILITIES 28,265 27,363
DEFERRED INCOME TAXES 6,737 6,737
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,
44,183,315 and 44,171,315 shares issued, 34,906,389 and 34,804,004 shares
outstanding at August 26, 2000 and February 26, 2000, respectively 442 442
Additional paid-in capital 176,953 176,750
Equity carryover basis adjustment (7,008) (7,008)
Accumulated other comprehensive income (75,838) (69,493)
Retained earnings 435,755 437,830
----------- -----------
530,304 538,521
Less cost of 9,276,926 and 9,367,311 shares in treasury at
August 26, 2000 and February 26, 2000, respectively (239,357) (241,945)
----------- -----------
290,947 296,576
----------- -----------
$ 863,636 $ 891,023
=========== ===========
</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 26, August 28,
2000 1999
---------- ----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Revenues:
Services $ 204,209 $ 209,843
Sales of products 23,399 45,546
--------- ---------
227,608 255,389
Costs and expenses:
Costs of services 142,622 138,351
Costs of sales 29,615 34,374
--------- ---------
172,237 172,725
--------- ---------
Gross profit 55,371 82,664
Selling, general and administrative 32,237 29,780
Research and development 13,351 11,290
Goodwill amortization 1,609 1,563
--------- ---------
Operating expenses 47,197 42,633
--------- ---------
Special charge 40,018 --
Operating income (loss) (31,844) 40,031
Other income (expense):
Interest income 1,044 864
Equity in earnings of unconsolidated affiliates 838 793
Other income 1,754 2,332
Interest expense (6,653) (7,149)
--------- ---------
Income (loss) before income taxes (34,861) 36,871
Income taxes (benefit) (13,595) 15,117
--------- ---------
Net income (loss) $ (21,266) $ 21,754
========= =========
Basic and diluted earnings (loss) per share $ (.61) $ .58
========= =========
</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 26, August 28,
2000 1999
---------- ----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Revenues:
Services $ 426,840 $ 421,001
Sales of products 42,766 73,048
--------- ---------
469,606 494,049
Costs and expenses:
Costs of services 285,385 278,263
Costs of sales 45,426 52,492
--------- ---------
330,811 330,755
--------- ---------
Gross profit 138,795 163,294
Selling, general and administrative 64,798 60,218
Research and development 26,277 21,966
Goodwill amortization 3,218 3,126
--------- ---------
Operating expenses 94,293 85,310
--------- ---------
Special charge 40,018 --
Operating income 4,484 77,984
Other income (expense):
Interest income 2,969 1,701
Equity in earnings of unconsolidated affiliates 2,094 1,936
Other income 2,441 1,278
Interest expense (13,688) (13,934)
--------- ---------
Income (loss) before income taxes (1,700) 68,965
Income taxes (benefit) (663) 28,276
--------- ---------
Net income (loss) $ (1,037) $ 40,689
========= =========
Basic and diluted earnings (loss) per share $ (.03) $ 1.08
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE> 6
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY-(Unaudited)
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Equity Accumulated
Additional Carryover Other
Outstanding Common Paid-in Basis Comprehensive
Shares Stock Capital Adjustment Income
----------- ------ ---------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at February 26, 2000 34,804,004 $442 $176,750 $(7,008) $(69,493)
Comprehensive loss:
Net loss -- -- -- -- --
Other comprehensive income (loss),
net of tax:
Foreign currency translation -- -- -- -- (6,371)
Net gain on derivative instruments -- -- -- -- 26
Comprehensive loss
Treasury shares repurchased (69,100) -- -- -- --
Shares reissued under employee stock
purchase and stock award plans 159,485 -- -- -- --
Shares issued upon exercise of stock
options 12,000 -- 203 -- --
----------- ---- -------- ------- --------
Balance at August 26, 2000 34,906,389 $442 $176,953 $(7,008) $(75,838)
=========== ==== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Retained Treasury
Earnings Stock Total
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at February 26, 2000 $ 437,830 $(241,945) $ 296,576
Comprehensive loss:
Net loss (1,037) -- (1,037)
Other comprehensive income (loss),
net of tax:
Foreign currency translation -- -- (6,371)
Net gain on derivative instruments -- -- 26
---------
Comprehensive loss (7,382)
Treasury shares repurchased -- (1,530) (1,530)
Shares reissued under employee stock
purchase and stock award plans (1,038) 4,118 3,080
Shares issued upon exercise of stock
options -- -- 203
--------- --------- ---------
Balance at August 26, 2000 $ 435,755 $(239,357) $ 290,947
========= ========= =========
</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 26, August 28,
2000 1999
---------- ----------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,037) $ 40,689
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and other intangibles amortization 87,575 88,129
Goodwill amortization 3,218 3,126
Special charge 40,018 --
Equity in earnings of unconsolidated affiliates,
net of dividends received (1,130) 138
Other 998 (2,224)
Changes in operating assets and liabilities:
Trade accounts receivable 12,087 (24,091)
Inventories (5,541) 9,361
Special charge (11,628) (3,904)
Other assets and liabilities (17,951) (15,396)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 106,609 95,828
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts (66,641) (62,549)
Investments in and advances to unconsolidated subsidiaries (11,688) (10,586)
Other (7,593) (10,236)
--------- --------
NET CASH USED FOR INVESTING ACTIVITIES (85,922) (83,371)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 38,000 97,200
Principal payments on long-term debt (56,466) (39,235)
Purchases of treasury stock (1,530) (70,327)
Other 1,269 207
--------- --------
NET CASH USED FOR FINANCING ACTIVITIES (18,727) (12,155)
Effect of exchange rate changes on cash (3,117) 715
--------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,157) 1,017
Cash and cash equivalents at beginning of period 11,115 7,733
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,958 $ 8,750
========= ========
</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, 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 26, 2000 are not necessarily indicative of the
results that may be expected for the full fiscal year ending February 24, 2001.
The balance sheet at February 26, 2000 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 the
Company's fiscal 2000 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 26 February 26,
2000 2000
--------- ------------
(Dollars in thousands)
<S> <C> <C>
Inventories consist of:
Raw materials $36,775 $23,623
Work in progress 34,167 42,701
Finished goods 2,019 1,094
------- -------
$72,961 $67,418
======= =======
</TABLE>
<TABLE>
<CAPTION>
NOTE C--LONG-TERM DEBT August 26, February 26,
2000 2000
---------- ------------
(Dollars in thousands)
<S> <C> <C>
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 31,000 45,000
Other -- 4,469
-------- --------
331,000 349,469
Less current portion -- 69
-------- --------
$331,000 $349,400
======== ========
</TABLE>
The Company has an unsecured revolving credit facility of $400,000,000 expiring
in June 2002 (the "Credit Facility"). At August 26, 2000, the weighted average
interest rate for outstanding borrowings under the Credit Facility was 6.87%.
-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
primarily due 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
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
August 26, August 28, August 26, August 28,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $(21,266) $21,754 $ (1,037) $40,689
Denominator:
Weighted average shares-Basic 34,840 37,193 34,835 37,507
Effect of dilutive securities:
Employee stock options and unvested
restricted shares -- 51 -- 54
-------- ------- -------- -------
Weighted average shares-Diluted 34,840 37,244 34,835 37,561
======== ======= ======== =======
Basic and diluted earnings (loss) per share $ (.61) $ .58 $ (.03) $ 1.08
======== ======= ======== =======
</TABLE>
The diluted share base for the three months and six months ended August 26, 2000
excludes 64,000 and 85,000 shares, respectively, related to employee stock
options and unvested restricted shares. These shares are excluded due to their
antidilutive effect as a result of the Company's net loss during those periods.
-9-
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE G -- COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income (loss):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ---------------------------
August 26, August 28, August 26, August 28,
2000 1999 2000 1999
---------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $(21,266) $ 21,754 $(1,037) $ 40,689
Other comprehensive income (loss), net of tax:
Foreign currency translation 1,728 (9,608) (6,371) 6,734
Net gain (loss) on derivative instruments (321) (242) 26 (337)
-------- -------- ------- --------
Comprehensive income (loss) $(19,859) $ 11,904 $(7,382) $ 47,086
======== ======== ======= ========
</TABLE>
NOTE H -- SEGMENT INFORMATION
The Company presently has one reportable segment, the Lottery segment, which
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. Revenues
from the Company's Transactive and Dreamport subsidiaries are the principal
components of all other revenues reported below.
The Company's business segment data is summarized below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
August 26, August 28, August 26, August 28,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues from external sources:
Lottery $ 211,535 $ 236,448 $ 434,880 $ 456,620
All other 16,073 18,941 34,726 37,429
--------- --------- --------- ---------
Consolidated $ 227,608 $ 255,389 $ 469,606 $ 494,049
========= ========= ========= =========
Net operating profit after income taxes:
Lottery $ 13,862 $ 28,196 $ 39,588 $ 51,166
All other (2,494) (1,168) (2,758) (167)
--------- --------- --------- ---------
Consolidated $ 11,368 $ 27,028 $ 36,830 $ 50,999
========= ========= ========= =========
</TABLE>
-10-
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
A reconciliation of net operating profit after income taxes to net income (loss)
as reported on the consolidated income statements is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ---------------------------
August 26, August 28, August 26, August 28,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net operating profit after income taxes $ 11,368 $ 27,028 $ 36,830 $ 50,999
Reconciling items, net of tax:
Special charge (24,411) -- (24,411) --
Interest expense (4,058) (4,218) (8,350) (8,221)
Other (4,165) (1,056) (5,106) (2,089)
-------- -------- -------- --------
Net income (loss) $(21,266) $ 21,754 $ (1,037) $ 40,689
======== ======== ======== ========
</TABLE>
NOTE I -- SPECIAL AND ADDITIONAL CHARGES
In the second quarter of fiscal 2001, the Company recorded a $40,018,000 special
charge ($24,411,000 after-tax, or $0.70 per share) in connection with certain
contractual obligations and a value assessment of the Company's business
operations. The major components of the special charge consist of $11,556,000
for contractual obligations in connection with the departures in July, 2000 of
the Company's former Chairman and Chief Executive Officer and former President
and Chief Operating Officer, $10,378,000 for a workforce reduction that
eliminated approximately 175 Company positions worldwide, $8,415,000 of legal
expenses and other costs for the exit of certain business strategies and product
lines, $6,130,000 for the termination of consulting agreements, and $4,567,000
of facility exit costs and other miscellaneous charges. The latter charges were
offset by net gains of $1,028,000 on the disposition of Company aircraft.
A summary of the special charge activity is as follows:
<TABLE>
<CAPTION>
Exit of
Certain
Executive Worldwide Business Terminate
Contractual Workforce Strategies & Consulting
Obligations Reduction Product Lines Contracts Other Total
----------- --------- -------------- ---------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Special charge $ 11,556 $ 10,378 $ 8,415 $ 6,130 $ 3,539 $ 40,018
Cash expenditures (9,477) (87) (1,384) (460) (220) (11,628)
Noncash charges -- -- (4,396) -- (2,437) (6,833)
-------- -------- ------- ------- ------- --------
Balance at August 26, 2000 $ 2,079 $ 10,291 $ 2,635 $ 5,670 $ 882 $ 21,557
======== ======== ======= ======= ======= ========
</TABLE>
The Company also recorded $5,108,000 ($3,116,000 after-tax, or $0.09 per share)
of additional charges in the second quarter of fiscal 2001 principally
associated with the Company's recently implemented Restricted Stock Plan. These
charges are included in selling, general & administrative expenses in the
Company's consolidated income statements.
-11-
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this section and elsewhere in this report are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934. Such statements
include, without limitation, statements relating to (i) the future prospects for
and stability of the lottery industry and other businesses in which the Company
is engaged or expects to be engaged, (ii) the future operating and financial
performance of the Company, (iii) the ability of the Company to retain existing
business and to obtain and retain new business, and (iv) the results and effects
of legal proceedings and investigations. Such forward-looking statements reflect
management's assessment based on information currently available, but are not
guarantees and are subject to risks and uncertainties 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, in the Company's fiscal 2000 Form
10-K, and in the Company's subsequent press releases and Form 10-Q's and other
reports and filings with the Securities and Exchange Commission ("SEC").
General
The Company's fiscal year ends on the last Saturday in February each year and
fiscal 2001 ends on February 24, 2001.
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, installation of new software 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
sales during fiscal 2001 will be in a range of $120.0 million to $125.0 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 IGI subsidiary has pioneered the
development of interactive, televised lottery games. In addition, the Company's
UWin! subsidiary offers secure Internet gaming solutions for
government-authorized wagering, where permitted.
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. In light of the fact that
such investigations frequently are conducted in secret, the Company would not
necessarily know of the existence of an investigation which might involve the
Company. Because the Company's reputation for integrity is an important factor
in its business dealings with lottery and other government agencies, if
government authorities were to make an allegation of, or if there were to be a
finding of, improper conduct on the part of or attributable to the Company in
any matter, such an allegation or finding could have a material adverse effect
on the Company's business, including its ability to retain existing contracts
and to obtain new or renewal contracts. In addition, continuing adverse
publicity resulting from these investigations and related matters could have
such a material adverse effect. See
-12-
<PAGE> 13
"Legal Proceedings" in Part II, Item 1 herein; 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 2000 Annual Report on Form 10-K; and Note G to the consolidated financial
statements in the Company's fiscal 2000 Annual Report on Form 10-K for further
information concerning these matters and other contingencies.
Special Charge
On August 25, 2000, the Company's Board of Directors approved a plan of
repositioning and restructuring of the Company's operations (the "Plan") upon
the completion of a previously announced value assessment of the Company's
business operations. The Company estimated and recorded a $40.0 million special
charge ($24.4 million after-tax or $0.70 per share) in the second quarter of
fiscal 2001 in connection with certain contractual obligations and the execution
of the Plan. The major components of the special charge consist of $11.6 million
for contractual obligations in connection with the departures in July, 2000 of
the Company's former Chairman and Chief Executive Officer and former President
and Chief Operating Officer, $10.4 million for a workforce reduction that
eliminated approximately 175 Company positions worldwide, $8.4 million of legal
expenses and other costs for the exit of certain business strategies and product
lines, $6.1 million for the termination of consulting agreements, and $4.5
million of facility exit costs and other miscellaneous charges. The latter
charges were offset by net gains of $1.0 million on the disposition of Company
aircraft.
As a result of the value assessment, the Company has taken a number of steps to
strengthen its focus on its core lottery operations and has implemented a
Company-wide resizing to better position itself for future business
opportunities. Dreamport, the Company's gaming and entertainment subsidiary,
will concentrate its efforts towards assisting lotteries to expand their
offerings in the area of video-machine gaming and central systems. The Company
plans to consolidate and/or divest activities and assets of Dreamport, which are
peripheral to the Company's core lottery business, and to relocate remaining
operations from Florida to Rhode Island. UWin!, the Company's Internet-gaming
subsidiary, will continue to pursue Internet-based lottery applications in
government authorized jurisdictions. Gamescape and other marketing-based
organizations within the Company will be consolidated and singularly focused on
driving value to customers in the area of retail network optimization, game
development, and research and management of new product initiatives into the
lottery industry. The Company will continue its product development efforts
respecting new product offerings in its core lottery business, including
PC-based terminals, central system software, and other point-of-sale devices
designed to enhance retail sales. The Company plans to make the majority of
these products and services available for eventual sale and delivery, but has
decided not to continue the additional development of two peripheral products.
In addition, the Company has terminated a number of consulting agreements, will
close an office in the United Kingdom, and will dispose of corporate aircraft
and related facilities.
Beginning in fiscal 2002, the Company expects total annual pre-tax savings in
the range of $24.0 to $26.0 million resulting from the Plan.
Results of Operations
Second Quarter
Revenues for the second quarter of fiscal 2001 were $227.6 million, representing
a $27.8 million, or 10.9%, decrease from revenues of $255.4 million in the
second quarter of fiscal 2000.
-13-
<PAGE> 14
Service revenues, including lottery and other services, in the fiscal 2001
second quarter were $204.2 million, representing a $5.6 million, or 2.7%,
decrease from service revenues of $209.8 million in the second quarter of fiscal
2000. This decrease reflects an 11.7% decrease in domestic lottery service
revenues offset by a 12.7% increase in international lottery service revenues.
In the fiscal 2001 second quarter, lottery sales by the Company's domestic
customers decreased 3% compared with the second quarter of fiscal 2000,
primarily driven by lower jackpot activity in Powerball and Big Game states.
This decrease, along with a contractual rate reduction in Texas and the impact
of four lost contracts, resulted in an 11.7% decrease in the Company's domestic
service revenues.
Lottery sales by the Company's international customers increased 5.6% in the
fiscal 2001 second quarter compared with the second quarter of fiscal 2000,
primarily driven by growth in Brazil. This increase, coupled with the launch of
the national lotteries in South Africa and Morocco, was partially offset by the
impact of the reduction in the dollar value of foreign currencies resulting in a
12.7% increase in the Company's international lottery service revenues.
Product sales in the second quarter of fiscal 2001 were $23.4 million, a
decrease of $22.1 million from the $45.5 million of product sales in the second
quarter of fiscal 2000. In the second quarter of last year, the Company recorded
a significant sale of an online lottery system to Israel. The Company did not
sell any lottery terminals during the second quarter of fiscal 2001, as compared
to the sale of approximately 2,700 lottery terminals during the fiscal 2000
second quarter.
Gross margins on service revenues were 30.2% in the fiscal 2001 second quarter
compared to 34.1% in the second quarter of fiscal 2000. This decrease was
primarily driven by lower margins on new system start-ups in South Africa and
Morocco, coupled with lower jackpot activity.
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales in the second quarter
of fiscal 2001 were negative (26.6%) compared to 24.5% in the second quarter of
fiscal 2000, primarily due to the previously announced cost over-runs on
projects the Company is currently implementing in New South Wales, Australia and
Israel.
Operating expenses in the second quarter of fiscal 2001 were $47.2 million,
representing a $4.6 million, or 10.7%, increase over operating expenses of $42.6
million in the second quarter of fiscal 2000. This increase was principally due
to costs associated with the Company's recently implemented Restricted Stock
Plan. As a percentage of revenues, operating expenses were 20.7% and 16.7%
during the second quarters of fiscal 2001 and 2000, respectively.
The Company's effective income tax rate decreased from 41% in the second quarter
of fiscal 2000 to 39% in the second quarter of fiscal 2001 principally due to
lower state taxes and increased research and development tax credits.
Year to Date
Revenues for the first six months of fiscal 2001 were $469.6 million,
representing a $24.4 million, or 4.9%, decrease from revenues of $494.0 million
in the first six months of fiscal 2000.
Service revenues, including lottery and other services, in the first six months
of fiscal 2001 were $426.8 million, representing a $5.8 million, or 1.4%,
increase over the $421.0 million of service revenues in the first six months of
fiscal 2000. This increase reflects an 11.9% increase in international lottery
service revenues, partially offset by a 4.7% decline in domestic lottery service
revenues.
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Lottery sales by the Company's international customers increased approximately
7.2% in the first six months of fiscal 2001 compared with the first six months
of fiscal 2000, primarily driven by growth in Brazil and Mexico. This increase,
coupled with a contractual rate increase in Brazil and the launch of the
national lotteries in South Africa and Morocco, was partially offset by the
impact of the reduction in the dollar value of foreign currencies resulting in
an 11.9% increase in the Company's international lottery service revenues.
The Company's domestic service revenues declined 4.7% in the first six months of
fiscal 2001 compared with the same period of fiscal 2000, primarily due to a
contractual rate reduction in Texas, along with the impact of four lost
contracts. These decreases were partially offset by a 2.4% increase in lottery
sales by the Company's domestic customers, primarily driven by higher sales in
Texas, New Jersey and New York.
Product sales in the first six months of fiscal 2001 were $42.8 million, a
decrease of $30.2 million from the $73.0 million of product sales in the first
six months of fiscal 2000. The first six months of fiscal 2000 included the
significant sale of an online lottery system to Israel. The Company sold
approximately 400 lottery terminals during the first six months of fiscal 2001,
as compared to approximately 3,700 lottery terminals during the first six months
of fiscal 2000.
Gross margins on service revenues were 33.1% in the first six months of fiscal
2001 compared to 33.9% in the first six months of fiscal 2000, primarily driven
by lower margins on a new system start-up in Morocco.
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales decreased from 28.1%
in the first six months of fiscal 2000 to negative (6.2%) in the first six
months of fiscal 2001, primarily due to the previously announced cost over-runs
on projects the Company is currently implementing in New South Wales, Australia
and Israel.
Operating expenses in the first six months of fiscal 2001 were $94.3 million,
representing a $9.0 million, or 10.5%, increase over the $85.3 million incurred
in the first six months of fiscal 2000. This increase was primarily attributable
to costs associated with the Company's recently implemented Restricted Stock
Plan along with increased development activity on interactive media. As a
percentage of revenues, operating expenses were 20.1% and 17.3% during the first
six months of fiscal 2001 and 2000, respectively.
The Company's effective income tax rate decreased from 41% in the first six
months of fiscal 2000 to 39% in the first six months of fiscal 2001 principally
due to lower state taxes and 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.
Recent Developments
As previously announced, the scheduled start-up of Colombia's National Lottery
has been postponed by the Colombian government. This delay is expected to impact
fiscal 2001 revenues by approximately $13.0 million. While the Company currently
expects to launch the system during the Company's fourth quarter of fiscal 2001,
there cannot be any assurance that the system launch will not be indefinitely
delayed or cancelled as a result of political uncertainties in Colombia. In the
event of further delays or cancellations, some or all of the Company's $14.8
million investment may be at risk.
See "Legal Proceedings" in Part II, Item 1 herein for a discussion of certain
recent developments respecting the United Kingdom National Lottery.
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Changes in Financial Position, Liquidity and Capital Resources
During the first six months of fiscal 2001, the Company generated $106.6 million
of cash from operations. This cash was primarily used to fund the purchase of
$66.6 million of systems, equipment and other assets relating to contracts and
to repay $18.5 million of long-term debt.
Trade accounts receivable decreased by $10.3 million, from $115.4 million at
February 26, 2000 to $105.1 million at August 26, 2000, primarily due to
collections on product sales recorded in fiscal 2000.
Inventories increased by $5.6 million, from $67.4 million at February 26, 2000
to $73.0 million at August 26, 2000, primarily due to spending related to the
Company's product sale contract in France, expected to be recorded in the fourth
quarter of next fiscal year.
The cost of systems, equipment and other assets relating to contracts increased
by $33.4 million, from $1,231.8 million at February 26, 2000 to $1,265.2 million
at August 26, 2000. This increase reflects the continuing installation of a new
lottery system in Illinois and the expansion of a lottery system in Brazil.
Investments in and advances to unconsolidated affiliates increased by $9.3
million, from $25.9 million at February 26, 2000 to $35.2 million at August 26,
2000, primarily due to the Company's previously announced investment in Indicii
Salus, a leading Internet security company.
Other assets decreased by $15.5 million, from $119.3 million at February 26,
2000 to $103.8 million at August 26, 2000, primarily due to the return of
deposits on corporate aircraft that was disposed of in August 2000.
Accounts payable decreased by $12.7 million, from $53.1 million at February 26,
2000 to $40.4 million at August 26, 2000, primarily due to the timing of
payments relating to ongoing lottery system installations.
Accrued expenses increased by $9.5 million, from $44.9 million at February 26,
2000 to $54.4 million at August 26, 2000, primarily due to the estimated loss
provision on the project the Company is currently implementing in New South
Wales, Australia.
As previously discussed, the Company recorded a $40.0 million special charge in
the second quarter of fiscal 2001. The remaining current liability balance at
August 26, 2000 was $21.6 million, primarily consisting of severance payments to
be made to terminated employees and costs associated with the termination of
consulting contracts.
Income taxes payable (which are reported net of income tax refunds receivable)
decreased by $18.7 million, from $49.4 million at February 26, 2000 to $30.7
million at August 26, 2000, primarily due to foreign taxes paid on current and
prior year foreign earnings.
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 2001 will be in a
range of $155.0 million to $165.0 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 August 26, 2000 the Company had
utilized approximately $31.0 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.
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<PAGE> 17
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 2001.
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 26, 2000, after taking into
consideration $150.0 million of interest rate swaps, the estimated fair value of
the Company's fixed rate debt approximated $290.6 million. A hypothetical 10%
increase in interest rates would change the estimated fair value of the
Company's fixed rate debt to $288.2 million and a hypothetical 10% decrease in
interest rates would change the estimated fair value of the Company's fixed rate
debt to $293.2 million. An independent investment banker determined the
estimated fair value amounts.
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 adjust the risk associated with future
changes in interest rates, including entering into interest rate swaps and the
private placement of fixed rate debt.
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 United States dollar balance sheet accounts.
The Company seeks to manage its foreign exchange risk by attempting to secure
payment from its customers in United States 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.
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 26, 2000, a hypothetical 10%
adverse change in foreign exchange rates would result in a translation loss of
$16.8 million that would be recorded in the equity section of the Company's
balance sheet.
At August 26, 2000, a hypothetical 10% adverse change in foreign exchange rates
would result in a net transaction loss of $2.7 million, which would be recorded
in current earnings after considering the effects of foreign exchange contracts
currently in place.
At August 26, 2000, a hypothetical 10% adverse change in foreign exchange rates
would result in a net reduction of cash flows from anticipated foreign currency
service revenues in fiscal 2001 by $5.8 million
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<PAGE> 18
after considering the effects of foreign exchange contracts currently in place.
The percentage of fiscal 2001 anticipated cash flows that were hedged varied
throughout the first six months of fiscal 2001, but averaged 18%.
As of August 26, 2000, the Company had contracts for the sale of foreign
currency of approximately $77.2 million (primarily South African rand, Spanish
pesetas and Australian dollars) and contracts for the purchase of foreign
currency of approximately $52.5 million (primarily pounds sterling, Mexican
pesos, and Irish punts).
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.
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<PAGE> 19
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Since July 1994, the United Kingdom National Lottery has been operated under a
license held by Camelot Group Plc ("Camelot"). During the entire term of this
license, which expires in September 2001, the Company has provided lottery goods
and services to Camelot under technology supply and services agreements.
Responsibility for the award of a new license with effect from October 1, 2001
lies with the National Lottery Commission (the "NLC"), the United Kingdom
lottery regulatory authority. In 1999, the NLC established a competitive
procedure for the award of the new license, and two bidders, Camelot and The
People's Lottery ("TPL"), subsequently submitted bids for the new license.
Camelot's bid is supported by agreements with the Company pursuant to which the
Company has contracted to continue to supply lottery goods and services to
Camelot during the term of the new license in the event that Camelot is awarded
the new license.
As previously publicly reported, in or around April or May 2000, the NLC
commenced an investigation into a lottery terminal software malfunction in the
United Kingdom in which, under certain rare circumstances, a duplicate
transaction was recorded on the Company's central system while only one ticket
was presented to the retailer. The software malfunction resulted in what is
believed to be a relatively small amount of overcharges to lottery retailers
with respect to the duplicate transactions and overpayments or underpayments to
certain prizewinners. The Company first identified this software malfunction in
the United Kingdom in June 1998 and corrected the malfunction in July 1998, but
without notifying Camelot or the NLC, as it should have done. The Company, which
has fully cooperated with the NLC's investigation, has undertaken to implement a
number of measures respecting its corporate compliance and governance functions
and software development processes in the wake of the investigation and is
scheduled to review with the NLC in November 2000 the adequacy, and the status
of implementation, of its undertakings. The Company has also agreed to reimburse
players and retailers for any financial losses incurred by virtue of the
software malfunction. Payment by the Company of these reimbursement amounts will
not have a material adverse effect on the Company.
In late July 2000, the NLC sent a letter to the Company advising the Company
that, in light of the undertakings and other materials which it had received
from the Company and Camelot, the NLC had decided not to proceed with a possible
determination that the Company was not a "fit and proper person" to manage part
of the business of running the National Lottery. The statute governing operation
of the National Lottery provides that the NLC may not grant a license to run the
National Lottery if any person who would manage any part of the business of
running the National Lottery in connection with such license is not a "fit and
proper person". Moreover, the NLC has discretion to revoke any license granted
to run the National Lottery should any person involved in managing the Lottery,
or some part of it, be not fit and proper.
On August 23, 2000, the NLC announced that it had decided that: (i) neither
Camelot's bid nor the bid submitted by TPL was acceptable, and that,
accordingly, the competitive procedure for the new license was at an end; and
(ii) the NLC would proceed on the basis of a new procedure under which it would
negotiate exclusively with TPL for one month. In the Statement of Reasons which
accompanied the NLC's August 23, 2000 announcement, the NLC expressed its
unresolved concerns about the Company, largely as a result of the Company's
actions with respect to the software malfunction and its aftermath, and stated
that it is separately considering the issue of breaches by Camelot of the terms
of its existing license arising from the software incident. The NLC also pointed
out in the Statement of Reasons concerns that it had with TPL's bid, but noted
that TPL's bid might well have generated better returns for good causes than
Camelot's bid. Promptly after the NLC's announcement, Camelot initiated legal
proceedings in the United Kingdom challenging the legality of the NLC's decision
to initiate a new procedure of negotiation with TPL to the exclusion of Camelot.
On September 21, 2000, the High Court of Justice (Queen's Bench Division)
overturned the NLC's August 23, 2000 decision to negotiate exclusively with TPL
on the grounds that
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<PAGE> 20
the procedure decided on by the NLC was "conspicuously unfair" to Camelot and
directed that the Commission enter into an exclusive thirty-day negotiation
period commencing September 25, 2000 so as to afford Camelot the same
opportunity granted to TPL to improve its bid to address the Commission's
concerns. The Court's judgment makes clear that it is up to the NLC to decide
which bidder is to receive the new license at the end of the NLC's one-month
negotiation with Camelot. On October 4, 2000, Dame Helena Shovelton resigned as
chairman of the NLC in the wake of media coverage critical of her handling of
the competitive procedure for the new license.
It is uncertain whether Camelot or TPL will receive the award of the new
license. Moreover, the NLC is expected to issue a report respecting the software
incident, and it is uncertain what this report will contain or what actions, if
any, the NLC may take. In light of these uncertainties, there can be no
assurance that Camelot will not seek to assert claims against the Company with
respect to the software incident and the ultimate outcome of the new license
procedure. Nor can there be any assurance that the Company's ability to retain
existing contracts and to obtain new or renewal contracts will be unaffected by
these developments.
In August 2000, a shareholder class action lawsuit was brought against the
Company, the Company's former Chairman and Chief Executive Officer, William Y.
O'Connor, and the Company's current Chairman, W. Bruce Turner, in the U.S.
District Court of Rhode Island relating to various Company announcements made
between April 11, 2000 and July 25, 2000. The complaint filed in the case,
Sandra Kafenbaum, individually and on behalf of all others similarly situated,
v. GTECH Holdings Corporation, William Y. O'Connor and W. Bruce Turner,
generally alleges that the defendants violated federal securities laws
(including Section 10(b) of the Securities Exchange Act of 1934) by making
allegedly false and misleading statements (including statements alleged to be
overly optimistic respecting certain lottery contract awards to the Company and
respecting the Company's prospects in certain non-lottery business lines and
investments) while failing to disclose in a timely manner certain allegedly
material adverse information that it purportedly had a duty to disclose
(including as to an alleged inability to close certain contract awards and as to
certain alleged cost overruns). The complaint seeks to recover monetary damages
from the Company and the individual defendants. The Company believes that this
lawsuit is without merit and intends to vigorously defend itself and the other
defendants in this matter.
In September 2000, the Company's Brazilian subsidiary ("GTECH Brasil") received
a notice from the lottery authority of the Brazilian state of Minas Gerais
assessing penalties of approximately $16,000,000 stemming from certain alleged
breaches by GTECH Brasil of its contract with the Minas Gerais lottery
authority. GTECH Brasil has denied the substantive allegations of, and has
raised certain procedural objections to, the assessment notice. The Company
believes that the allegations made by the Minas Gerais lottery authority are
without merit and intends to defend itself in any proceedings resulting from
this notice.
The case captioned Rumsey Indian Rancheria v. Wilson, involving a suit by
several California Indian tribes against the State and Governor of California
under the federal Indian Gaming Regulatory Act in which the Company was
considering intervening, has now been remanded to the District Court, which has
vacated its former judgment and has entered a judgment declaring that Indian
tribes are authorized to operate slot machines, lotteries and certain other
forms of gaming on Indian lands in California. This effectively eliminates any
need for the Company to intervene in the case. See Part I, Item 3 - "Legal
Proceedings" and Note G to the consolidated financial statements, included in
the Company's fiscal 2000 Annual Report on Form 10-K for a description of the
background to this case.
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 2000 Annual Report on Form 10-K; and Note G
to the consolidated financial statements included in the Company's fiscal 2000
Annual Report on Form 10-K; and Part II, Item 1 - "Legal Proceedings" included
in the Company's Quarterly Report on Form 10-Q for the quarterly period ended
May 27, 2000.
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<PAGE> 21
Item 2. CHANGES IN SECURITIES
(c)For the six months ended August 26, 2000, 1,730 shares of the Company's
unregistered common stock vested under stock award plans. Pursuant to the
terms of these plans the shares were issued with no cash consideration to the
Company. Registration of such shares was not required because the transaction
did not constitute a "sale" under Section 2 (3) of the Securities Act of 1933
or, alternatively, the transaction was exempt pursuant to the private
offering provisions of the Act and the rules thereunder.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits to this report are as follows:
3 Amended and Restated By-Laws of the Company
10.1 Severance Agreement and Release, dated as of July 5, 2000,
by and among the Company, GTECH Corporation and William Y.
O'Connor
10.2 Resignation and Acceptance, dated as of July 5, 2000, by and
between Steven P. Nowick and the Company
10.3 Agreement, dated as of August 9, 2000, by and between the
Company and W. Bruce Turner
10.4 The Company's 2000 Restricted Stock Plan, and form of
Executive Restricted Stock Agreement
27 Financial Data Schedule
(b) The Company did not file any reports on form 8-K during the
quarter to which this report relates
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<PAGE> 22
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 6, 2000 By /s/ Jaymin B. Patel
------------------------------------------
Jaymin B. Patel, Senior Vice President
and Chief Financial Officer (Principal
Financial Officer)
Date: October 6, 2000 By /s/ Robert J. Plourde
------------------------------------------
Robert J. Plourde, Vice President and
Corporate Controller (Principal Accounting
Officer)
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