<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 May 27, 2000
Commission file number 1-11250
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GTECH Holdings Corporation
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(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C>
Delaware 05-0450121
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
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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
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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 July 1, 2000 there were 34,806,389 shares of the registrant's Common Stock
outstanding.
<PAGE> 2
INDEX
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
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Page
PART I. FINANCIAL INFORMATION Number
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Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Income Statements 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 10-14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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EXHIBITS
--------
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<PAGE> 3
PART 1. FINANCIAL INFORMATION
-----------------------------
Item 1. FINANCIAL STATEMENTS
----------------------------
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES (Unaudited)
May 27, February 26,
ASSETS 2000 2000
-------------- --------------
(In thousands, except share amounts)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 12,679 $ 11,115
Trade accounts receivable 107,211 115,358
Sales-type lease receivables 10,119 10,110
Inventories 72,870 67,418
Deferred income taxes 15,853 15,853
Other current assets 24,651 19,346
-------------- --------------
TOTAL CURRENT ASSETS 243,383 239,200
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 1,251,221 1,231,755
Less: Accumulated Depreciation (884,026) (855,837)
------------- ------------
367,195 375,918
GOODWILL, net 129,100 130,710
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 36,111 25,898
OTHER ASSETS 128,644 119,297
-------------- --------------
$ 904,433 $ 891,023
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 41,782 $ 53,103
Accrued expenses 43,217 44,898
Employee compensation 19,487 30,057
Advance payments from customers 37,682 33,438
Income taxes payable 57,565 49,382
Current portion of long-term debt 17 69
-------------- --------------
TOTAL CURRENT LIABILITIES 199,750 210,947
LONG-TERM DEBT, less current portion 362,100 349,400
OTHER LIABILITIES 25,655 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 $.01 per share--150,000,000 shares authorized,
44,176,815 and 44,171,315 shares issued, 34,869,010 and 34,804,004 shares
outstanding at May 27, 2000 and February 26, 2000,
respectively 442 442
Additional paid-in capital 176,843 176,750
Equity carryover basis adjustment (7,008) (7,008)
Accumulated other comprehensive income (77,245) (69,493)
Retained earnings 457,567 437,830
-------------- --------------
550,599 538,521
Less cost of 9,307,805 and 9,367,311 shares in treasury at
May 27, 2000 and February 26, 2000, respectively (240,408) (241,945)
-------------- --------------
310,191 296,576
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$ 904,433 $ 891,023
============== ==============
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See Notes to Consolidated Financial Statements
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CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
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<CAPTION>
(Unaudited)
Three Months Ended
----------------------------------------
May 27, May 29,
2000 1999
------------------- -------------------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Revenues:
Services $ 222,631 $ 211,158
Sales of products 19,367 27,502
------------------- -------------------
241,998 238,660
Costs and expenses:
Costs of services 142,763 139,912
Costs of sales 15,811 18,118
------------------- -------------------
158,574 158,030
------------------- -------------------
Gross profit 83,424 80,630
Selling, general and administrative 32,561 30,438
Research and development 12,926 10,676
Goodwill amortization 1,609 1,563
------------------- -------------------
Operating expenses 47,096 42,677
------------------- -------------------
Operating income 36,328 37,953
Other income (expense):
Interest income 1,925 837
Equity in earnings of unconsolidated affiliates 1,256 1,143
Other income 687 (1,054)
Interest expense (7,035) (6,785)
------------------- -------------------
Income before income taxes 33,161 32,094
Income taxes 12,932 13,159
------------------- -------------------
Net income $ 20,229 $ 18,935
=================== ===================
Basic and diluted earnings per share $ .58 $ .50
=================== ===================
</TABLE>
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY-(Unaudited)
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
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<CAPTION>
Equity Accumulated
Additional Carryover Other
Outstanding Common Paid-in Basis Comprehensive
Shares Stock Capital Adjustment Income
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(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 income:
Net income - - - - -
Other comprehensive income, net of tax:
Foreign currency translation - - - - (8,099)
Net gain on derivative
instruments - - - - 347
Comprehensive income
Shares reissued under employee stock
purchase and stock award plans 59,506 - - - -
Shares issued upon exercise of stock
options 5,500 - 93 - -
------------- ------------- --------------- ------------- ---------------
Balance at May 27, 2000 34,869,010 $ 442 $ 176,843 $ (7,008) $ (77,245)
============= ============= =============== ============= ===============
<CAPTION>
Retained Treasury
Earnings Stock Total
-------------- --------------- --------------
(Dollars in thousands)
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Balance at February 26, 2000 $ 437,830 $ (241,945) $ 296,576
Comprehensive income:
Net income 20,229 - 20,229
Other comprehensive income, net of tax:
Foreign currency translation - - (8,099)
Net gain on derivative
instruments - - 347
-----------
Comprehensive income 12,477
Shares reissued under employee stock
purchase and stock award plans (482) 1,492 1,010
Shares issued upon exercise of stock
options (10) 45 128
-------------- --------------- --------------
Balance at May 27, 2000 $ 457,567 $ (240,408) $ 310,191
============== =============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
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<CAPTION>
(Unaudited)
Three Months Ended
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May 27, May 29,
2000 1999
----------------- ------------------
(Dollars in thousands)
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OPERATING ACTIVITIES
Net income $ 20,229 $ 18,935
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and other intangibles amortization 44,089 43,258
Goodwill amortization 1,609 1,563
Equity in earnings of unconsolidated affiliates,
net of dividends received (525) (11)
Other 65 (816)
Changes in operating assets and liabilities:
Trade accounts receivable 8,147 14,806
Inventories (5,452) 6,018
Special charge - (2,879)
Other assets and liabilities (28,751) (37,226)
----------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 39,411 43,648
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts (33,834) (36,284)
Investments in and advances to unconsolidated subsidiaries (11,328) (5,361)
Other (3,694) (5,881)
----------------- ----------------
NET CASH USED FOR INVESTING ACTIVITIES (48,856) (47,526)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 37,700 38,100
Principal payments on long-term debt (25,049) (10,479)
Purchases of treasury stock - (27,900)
Other 1,052 (208)
----------------- ----------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 13,703 (487)
Effect of exchange rate changes on cash (2,694) 2,496
----------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,564 (1,869)
Cash and cash equivalents at beginning of period 11,115 7,733
----------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,679 $ 5,864
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 7
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 three-month period ended May 27, 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.
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NOTE B--INVENTORIES May 27, February 26,
2000 2000
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(Dollars in thousands)
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Inventories consist of:
Raw materials $ 25,061 $ 23,623
Work in progress 45,868 42,701
Finished goods 1,941 1,094
------------ -------------
$ 72,870 $ 67,418
============ =============
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NOTE C--LONG-TERM DEBT May 27, February 26,
2000 2000
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(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 46,200 45,000
Other 15,917 4,469
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362,117 349,469
Less current portion 17 69
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$ 362,100 $ 349,400
============ =============
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The Company has an unsecured revolving credit facility of $400 million expiring
in June 2002 (the "Credit Facility"). At May 27, 2000, the weighted average
interest rate for outstanding borrowings under the Credit Facility was 6.69%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE D--INCOME TAXES
The Company's effective income tax rate is greater than the statutory rate due
primarily to state income taxes and certain expenses that are not deductible for
income tax purposes.
NOTE E--COMMITMENTS AND CONTINGENCIES
See "Legal Proceedings" in Part II, Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I, Item 2
herein.
NOTE F--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
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May 27, May 29,
2000 1999
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(Dollars and shares in thousands,
except per share amounts)
<S> <C> <C>
Numerator:
Net income $ 20,229 $ 18,935
Denominator:
Weighted average shares-Basic 34,829 37,821
Effect of dilutive securities:
Employee stock options 28 104
------------ -------------
Weighted average shares-Diluted 34,857 37,925
============ =============
Basic and diluted earnings per share $ .58 $ .50
============ =============
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NOTE G--COMPREHENSIVE INCOME
For the three-month period ended May 27, 2000 and May 29, 1999, total
comprehensive income amounted to $12,477,000 and $35,182,000, respectively.
Foreign currency translation adjustments along with net gains or losses on
derivative instruments comprise the primary difference between comprehensive
income and net income.
-8-
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
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. 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:
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May 27, May 29,
2000 1999
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(Dollars in thousands)
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Revenues from external sources:
Lottery $ 223,344 $ 220,173
All other 18,654 18,487
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Consolidated $ 241,998 $ 238,660
============ =============
Net operating profit after income taxes:
Lottery $ 25,751 $ 24,876
All other (290) (905)
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Consolidated $ 25,461 $ 23,971
============ =============
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The following is a reconciliation of net operating profit after income taxes to
net income as reported on the consolidated income statements:
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<CAPTION>
May 27, May 29,
2000 1999
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(Dollars in thousands)
<S> <C> <C>
Net operating profit after income taxes $ 25,461 $ 23,971
Reconciling items, net of tax:
Interest expense (4,291) (4,003)
Other (941) (1,033)
------------- --------------
Net income $ 20,229 $ 18,935
============= ==============
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<PAGE> 10
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 and in the Company's press releases
and its subsequent Forms 10-K, 10-Q, and other reports and filings with the
Securities and Exchange Commission ("SEC").
General
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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 $175.0 million to $190.0 million,
which reflects the delays announced on July 6, 2000 of sales to certain
customers in Europe and Asia.
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. The Company's
Europrint subsidiary is among the world's largest providers of media promotional
games and the Company's IGI subsidiary has pioneered the development of
interactive, televised lottery games. Also, the Company's UWin! subsidiary
provides 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
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<PAGE> 11
related matters could have such a material adverse effect. See "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.
Results of Operations
---------------------
Revenues for the first quarter of fiscal 2001 were $242.0 million, representing
a $3.3 million, or 1.4%, increase over revenues of $238.7 million in the first
quarter of fiscal 2000.
Service revenues, including lottery and other services, in the fiscal 2001 first
quarter were $222.6 million, representing an $11.4 million, or 5.4%, increase
over service revenues of $211.2 million in the first quarter of fiscal 2000.
This increase reflects an 11.1% growth in international lottery service revenues
and a 2.2% increase in domestic lottery service revenues.
Lottery sales by the Company's international customers increased 12.5% in the
fiscal 2001 first quarter compared with the first quarter of fiscal 2000
primarily driven by growth in Brazil and the launch of the National Lottery in
South Africa. This increase was partially offset by the impact of the reduction
in the dollar value of foreign currencies, resulting in an 11.1% increase in the
Company's international lottery service revenues.
In the fiscal 2001 first quarter, lottery sales by the Company's domestic
customers increased almost 8% compared with the first quarter of fiscal 2000,
driven by higher jackpot activity and continued improvements in Texas. This
increase, partially offset by a contractual rate reduction in Texas and the loss
of two contracts, resulted in a 2.2% increase in the Company's domestic service
revenues.
As reported in the July 6, 2000 press releases, the Rhode Island State
Legislature passed their state budget on June 23, 2000, which included
reductions in the fees paid to vendors and suppliers to the state's two video
lottery operations at Lincoln Park and Newport Jai-Alai, including Dreamport.
The Rhode Island Legislature's decision to reduce Dreamport's compensation took
effect July 1, 2000. The reduction's impact on the Company's service revenues
is expected to be $3.0 to $3.5 million for the remainder of fiscal 2001.
Additionally, the scheduled start-up date for Colombia's National Lottery has
been postponed due to several unforeseen political, legal, and administrative
delays and while management believes these issues will be resolved, the system
start-up delay is expected to be at least four weeks. The delay's impact on
service revenues is expected to be $2.0 to $3.0 million in the second quarter
of fiscal 2001.
Product sales in the first quarter of fiscal 2001 were $19.4 million, a decrease
of $8.1 million from the $27.5 million of product sales in the first quarter of
fiscal 2000. Product sale volumes in the first quarter of fiscal 2001 were lower
than planned due to the timing of delivery and acceptance of certain shipments
to customers. The Company expects to record these sales during the second
quarter of fiscal 2001. The Company sold approximately 400 lottery terminals
during the first quarter of fiscal 2001, as compared to approximately 1,000
lottery terminals during the fiscal 2000 first quarter.
Gross margins on service revenues improved from 33.7% in the fiscal 2000 first
quarter to 35.9% in the first quarter of fiscal 2001 primarily due to unusually
high domestic jackpot activity in a number of jurisdictions resulting in
increased ticket sales.
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales in the first quarter
of fiscal 2001 were 18.4% compared to 34.1% in the first quarter of fiscal 2000,
primarily due to the inclusion of a low-margin central system conversion in the
overall product mix. Management is currently examining the possibility of cost
over-runs and their projected amounts on projects the Company is currently
implementing in certain jurisdictions. Management expects to accrue any such
cost over-runs once the amounts become probable and estimable. Any such
accruals would have a negative impact on product sale gross margins.
Operating expenses in the first quarter of fiscal 2001 were $47.1 million,
representing a $4.4 million, or 10.4%, increase over operating expenses of $42.7
million in the first quarter of fiscal 2000. This increase was driven by
increased efforts to enhance the Company's Internet offerings. As a percentage
of revenues, operating expenses were 19.5% and 17.9% during the first quarters
of fiscal 2001 and 2000, respectively.
Other income was $.7 million in the first quarter of fiscal 2001 versus a net
expense of $1.1 million in the first quarter of fiscal 2000, principally due to
lower net foreign exchange losses associated with the Company's global asset
protection and foreign exchange management programs.
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<PAGE> 12
The Company's effective income tax rate decreased from 41% in the first quarter
of fiscal 2000 to 39% in the first quarter of fiscal 2001 principally due to
lower state taxes and increased research and development tax credits.
Recent Developments
-------------------
On July 6, 2000, the Company issued press releases announcing certain changes
in its top management. Additionally, these press releases set forth certain
unfavorable developments that had recently come to light. As a result, the
Company announced that it expects lower than anticipated earnings for the
fiscal 2001 second quarter and full fiscal year, and further, that a value
assessment of the Company's operations will be conducted by the Board of
Directors over the next 45 to 60 days. The severance payments relating to the
management changes will result, and the outcome of the value assessment is
likely to result, in a special charge to earnings. These special charges will
be recorded at such time as they become probable and estimable. (Reference is
made to the two July 6, 2000 press releases attached as Exhibit 99 to this
report.)
Changes in Financial Position, Liquidity and Capital Resources
--------------------------------------------------------------
During the first quarter of fiscal 2001, the Company generated $39.4 million of
cash from operations. This cash was primarily used to fund the purchase of $33.8
million of systems, equipment and other assets relating to contracts.
Trade accounts receivable decreased by $8.2 million, from $115.4 million at
February 26, 2000 to $107.2 million at May 27, 2000, primarily due to the lower
level of product sales in the first quarter of fiscal 2001 compared to the
fourth quarter of fiscal 2000.
Inventories increased by $5.5 million, from $67.4 million at February 26, 2000
to $72.9 million at May 27, 2000, primarily due to spending related to product
sales expected to be delivered during the remainder of fiscal 2001.
Other current assets increased by $5.4 million, from $19.3 million at February
26, 2000 to $24.7 million at May 27, 2000, primarily due to the timing of
spending related to prepaid software license and maintenance fees.
The cost of systems, equipment and other assets relating to contracts increased
by $19.4 million, from $1,231.8 million at February 26, 2000 to $1,251.2 million
at May 27, 2000. This increase reflects the continuing installation of new
lottery systems in Illinois and Columbia and the expansion of lottery systems in
several domestic and international locations.
Investments in and advances to unconsolidated affiliates increased by $10.2
million, from $25.9 million at February 26, 2000 to $36.1 million at May 27,
2000, primarily due to the Company's previously announced investment in Indicii
Salus, a leading internet security company.
Other assets increased by $9.3 million, from $119.3 million at February 26, 2000
to $128.6 million at May 27, 2000, primarily due to deposits on fixed assets
that will be returned to the Company in the second quarter of fiscal 2001 when
permanent financing is obtained.
Accounts payable decreased by $11.3 million, from $53.1 million at February 26,
2000 to $41.8 million at May 27, 2000, primarily due to the timing of payments
relating to ongoing lottery system installations.
Employee compensation decreased by $10.6 million, from $30.1 million at February
26, 2000 to $19.5 million at May 27, 2000, primarily due to the payment of
fiscal 2000 management incentive compensation and employee profit sharing.
Income taxes payable (which are reported net of income tax refunds receivable)
increased by $8.2 million, from $49.4 million at February 26, 2000 to $57.6
million at May 27, 2000. This increase is primarily due to the timing of income
tax payments.
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 $160.0 million to $180.0 million. The principal sources of liquidity
for the Company are expected to be cash generated from operations and borrowings
under the Company's Credit Facility. As of May 27, 2000 the Company had utilized
approximately $46 million of its $400 million Credit Facility. The
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<PAGE> 13
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 quarter 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 May 27, 2000, the estimated fair value
of the Company's fixed rate debt, as determined by an independent investment
banker, approximated $286.2 million. After taking into consideration $150.0
million of interest rate swaps in effect at May 27, 2000, a hypothetical 10%
increase in interest rates would change the estimated fair value of the
Company's fixed rate debt to $285.6 million and a hypothetical 10% decrease in
interest rates would change the estimated fair value of the Company's fixed rate
debt to $291.3 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 adjust the risk associated with future
changes in interest rates, including entering into interest rate swaps and the
private placement of seven- and 10-year 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 May 27, 2000, a hypothetical 10%
adverse change in foreign exchange rates would result in a translation loss of
$15.4 million that would be recorded in the equity section of the Company's
balance sheet.
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At May 27, 2000, a hypothetical 10% adverse change in foreign exchange rates
would result in a net transaction loss of $2.8 million, which would be recorded
in current earnings after considering the effects of foreign exchange contracts
currently in place.
At May 27, 2000, a hypothetical 10% adverse change in foreign exchange rates
would result in a net reduction of cash flows from anticipatory transactions in
fiscal 2001 by $8.3 million after considering the effects of foreign exchange
contracts currently in place. The percentage of fiscal 2001 anticipatory cash
flows that were hedged varied throughout the first quarter of fiscal 2001, but
averaged 20%.
As of May 27, 2000, the Company had contracts for the sale of foreign currency
of approximately $79.5 million (primarily South African rand, Spanish pesetas,
and pounds sterling) and contracts for the purchase of foreign currency of
approximately $59.7 million (primarily pounds sterling).
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<PAGE> 15
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
-----------------
In May 2000, Sazka, a.s., a lottery customer of the Company in the Czech
Republic ("Sazka"), filed a Request for Arbitration with the International
Arbitral Centre of the Austrian Federal Economic Chamber of Commerce in Vienna,
Austria, seeking to arbitrate certain business and contractual issues under the
Company's online lottery contract with Sazka. Sazka seeks damages valued at
approximately US $2.6 million in connection with alleged delays in the recent
extensive expansion of the lottery sales network. Sazka also seeks a
determination that its online contract with the Company expires approximately
two years earlier than the date on which the Company maintains its contract
terminates. The Company, believing the claims made by Sazka to be without merit,
has filed a Memorandum in Reply and Counterclaim disputing such claims and
raising counterclaims for breach of contract by Sazka. The Company will continue
to vigorously defend itself and to press its counterclaims in these proceedings.
In May 2000, the National Lottery Commission, the United Kingdom lottery
regulatory authority, 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 Company first
identified this software malfunction in the United Kingdom in June 1998 and
corrected the malfunction in July 1998, but without notifying Camelot, the
operator of the United Kingdom National Lottery, as it should have done. The
Company is fully cooperating with the National Lottery Commission's
investigation. There can be no assurance, however, that the Commission's
investigation will not result in action by the Commission that could have
material adverse consequences to the Company. Among other things, it could
adversely impact the chances of Camelot to win a renewal license to operate the
United Kingdom's National Lottery commencing in October 2001. The Company has
entered into a contract with Camelot to supply lottery goods and services to
Camelot during the renewal license period in the event that Camelot is awarded
the renewal license. The National Lottery Commission is expected to announce an
award for the successor license period by August 31, 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 2000 Annual Report on Form 10-K; and note G
to Consolidated Financial Statements included in the Company's fiscal 2000
Annual Report on Form 10-K.
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<PAGE> 16
Item 5. OTHER INFORMATION
-----------------
On July 6, 2000, the Company issued press releases announcing: the appointment
of W. Bruce Turner as the non-executive Chairman of the Company's Board of
Directors; the acceptance by the Board of the resignations of William Y.
O'Connor as Chairman, Chief Executive Officer and a Director of the Company,
and of Steven P. Nowick as President and Chief Operating Officer of the
Company; the Company's expectation of lower than anticipated earnings for the
fiscal 2001 second quarter and full year; and a planned value assessment of the
Company's operations. (Reference is made to the two July 6, 2000 press releases
attached as Exhibit 99 to this report.)
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits - The exhibits to this report are as follows:
27 Financial Data Schedule
99 Press Releases of the Company, dated July 6, 2000, reporting
the appointment of W. Bruce Turner as Non-Executive Chairman of
the Board of Directors, the resignations of William Y. O'Connor
and Steven P. Nowick, and lower than anticipated Company
earnings
(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> 17
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.
<TABLE>
<CAPTION>
<S> <C>
GTECH HOLDINGS CORPORATION
Date: July 11, 2000 By /s/ Jaymin B. Patel
---------------------------------------------------
Jaymin B. Patel, Senior Vice President and Chief
Financial Officer (Principal Financial Officer)
Date: July 11, 2000 By /s/ Robert J. Plourde
---------------------------------------------------
Robert J. Plourde, Vice President and Corporate
Controller (Principal Accounting Officer)
</TABLE>
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