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 25, 1996
Commission file number 1-11250
GTECH Holdings Corporation
(Exact name of registrant as specified in its charter)
Delaware 05-0450121
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
55 Technology Way, West Greenwich, Rhode Island 02817
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 392-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At June 30, 1996 there were 43,054,212 shares of the registrant's Common Stock
outstanding.
INDEX
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statement of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBITS
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
May 25, February 24,
1996 1996
------------ ------------
ASSETS (In thousands, except
share amounts)
CURRENT ASSETS
Cash and cash equivalents ................................................ $ 8,343 $ 8,519
Trade accounts receivable ................................................ 77,355 73,755
Inventories .............................................................. 47,055 43,669
Deferred income taxes .................................................... 25,661 25,661
Other current assets ..................................................... 11,696 12,601
------------ -------------
TOTAL CURRENT ASSETS ................................................ 170,110 164,205
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS ...................... 930,771 887,194
Less: Accumulated Depreciation ................................................. (457,211) (417,948)
------------- -------------
473,560 469,246
PROPERTY, PLANT & EQUIPMENT .................................................... 70,175 67,707
Less: Accumulated Depreciation ................................................. (36,579) (34,299)
------------ -------------
33,596 33,408
GOODWILL, net .................................................................. 113,847 114,843
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES ....................... 53,206 49,068
OTHER ASSETS ................................................................... 27,755 28,610
------------ -------------
$ 872,074 $ 859,380
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings .................................................... $ 468 $ 951
Accounts payable ......................................................... 40,143 46,343
Accrued expenses ......................................................... 53,071 54,465
Advance payments from customers .......................................... 11,146 12,110
Employee compensation .................................................... 17,267 24,929
Income taxes payable ..................................................... 19,764 --
Current portion of long-term debt ........................................ 4,021 3,993
------------ -------------
TOTAL CURRENT LIABILITIES 145,880 142,791
LONG-TERM DEBT, less current portion ........................................... 375,014 382,930
OTHER LIABILITIES .............................................................. 29,579 30,264
DEFERRED INCOME TAXES .......................................................... 6,670 6,670
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.01 per share--20,000,000 shares authorized,
none issued ......... ......... ....................................... -- --
Common Stock, par value $.01 per share--150,000,000 shares authorized,
43,771,893 and 43,739,520 shares issued at May 25, 1996 and February
24, 1996, respectively; 43,054,212 and 43,021,839 shares
outstanding at May 25, 1996 and February 24, 1996, respectively ....... 438 437
Additional paid-in capital ............................................... 168,370 167,758
Equity carryover basis adjustment ........................................ (7,008) (7,008)
Translation adjustment ................................................... (1,073) (463)
Retained earnings ........................................................ 169,141 150,938
------------ -------------
329,868 311,662
Less cost of 717,681 shares in treasury .................................. (14,937) (14,937)
------------- -------------
314,931 296,725
------------- -------------
$ 872,074 $ 859,380
============= =============
See notes to consolidated financial statements
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months
Ended
----------------------------
May 25, May 27,
1996 1995
------------ ------------
(Dollars in thousands,
except per share amounts)
Revenues:
Services ................................................................. $ 194,986 $ 165,327
Sales of products ........................................................ 16,187 14,102
------------ ------------
211,173 179,429
Costs and expenses:
Costs of services ........................................................ 131,715 102,777
Costs of sales ........................................................... 9,154 10,304
------------ ------------
140,869 113,081
------------ ------------
Gross profit ................................................................... 70,304 66,348
Selling, general and administrative ............................................ 29,952 25,595
Research and development ....................................................... 6,630 7,531
------------ ------------
Operating income ............................................................... 33,722 33,222
Other income (expenses):
Interest income .......................................................... 550 2,061
Equity in earnings of unconsolidated affiliates .......................... 3,217 2,272
Other income ............................................................. 46 164
Interest expense ......................................................... (6,151) (6,150)
------------ ------------
Income before income taxes ..................................................... 31,384 31,569
Income taxes ................................................................... (13,181) (13,259)
------------ ------------
Net income ..................................................................... $ 18,203 $ 18,310
============ ============
Earnings per common share: ..................................................... $ .42 $ .42
============ ============
Weighted average common shares outstanding ..................................... 43,086,000 43,321,000
============ ============
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY-(Unaudited)
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Common Stock Additional
---------------------- Paid-in Retained Treasury
Shares Amount Capital Other Earnings Stock Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Balance at February 24, 1996 .... 43,739,520 $ 437 $ 167,758 $ (7,471) $ 150,938 $ (14,937) $ 296,725
Common stock issued under
stock award plans .......... 32,373 1 612 -- -- -- 613
Net income ...................... -- -- -- -- 18,203 -- 18,203
Foreign currency translation .... -- -- -- (610) -- -- (610)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at May 25, 1996 ......... 43,771,893 $ 438 $ 168,370 $ (8,081) $ 169,141 $ (14,937) $ 314,931
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended
---------------------
May 25, May 27,
1996 1995
-------- --------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income ..................................................................... $ 18,203 $ 18,310
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................................ 39,553 29,939
Equity in earnings of unconsolidated affiliates .......................... (3,217) (2,272)
Other .................................................................... 669 1,481
Changes in operating assets and liabilities:
Trade accounts receivable ............................................. (3,600) 5,908
Inventories ........................................................... (3,386) (916)
Other assets and liabilities .......................................... 4,565 441
Other assets and liabilities of discontinued operations ............... -- 20
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 52,787 52,911
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts ......... (40,843) (29,067)
Purchases of property plant and equipment ...................................... (2,714) (1,787)
Investments in and advances to affiliates ...................................... (1,385) (12,190)
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES ......................................... (44,942) (43,044)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ....................................... -- 3,343
Principal payments on long-term debt ........................................... (8,496) (3,866)
Other .......................................................................... 349 (28)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES .......................................... (8,147) (551)
Effect of exchange rate changes on cash ........................................ 126 (2,187)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... (176) 7,129
Cash and cash equivalents at beginning of period ............................... 8,519 3,432
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 8,343 $ 10,561
======== ========
See notes to consolidated financial statements
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
three-month period ended May 25, 1996 are not necessarily indicative of the
results that may be expected for the full 1997 fiscal year ending February 22,
1997. The balance sheet at February 24, 1996 has been derived from the audited
financial statements at that date. For further information refer to the
consolidated financial statements and footnotes thereto included in GTECH
Holdings Corporation's fiscal 1996 Annual Report on Form 10-K.
NOTE B--INVENTORIES
May 25, February 24,
1996 1996
---------- ----------
(Dollars in thousands)
Inventories consist of:
Purchased components $ 16,722 $ 20,341
Finished subassemblies 5,395 3,526
Work-in-process 14,429 17,936
Finished goods 10,509 1,866
----------- ----------
$ 47,055 $ 43,669
=========== ==========
NOTE C--LONG-TERM DEBT
May 25, February 24,
1996 1996
----------- ----------
(Dollars in thousands)
Long-term debt consists of:
Revolving credit facility $ 364,000 $ 366,500
Other 15,035 20,423
----------- ----------
379,035 386,923
Less current maturities 4,021 3,993
----------- ----------
$ 375,014 $ 382,930
=========== ==========
The Company has an unsecured revolving credit facility of $500 million expiring
on September 15, 1999 (the "Credit Facility"). At May 25, 1996, the weighted
average interest rate for all outstanding borrowings under the Credit Facility
was 5.79%. On May 29, 1996, the Company amended its Credit Facility to provide
for lower interest rates and less restrictive loan covenants.
NOTE D--INCOME TAXES
The Company's effective income tax rate was greater than the statutory rate due
primarily to state income taxes and certain expenses that are not deductible for
income tax purposes.
NOTE--E COMMITMENTS AND CONTINGENCIES
See Legal Proceedings in Part II Item 1 herein.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company has derived substantially all of its revenues from the rendering of
services and the sale or supply of computerized on-line lottery systems and
components to government-authorized lotteries. Service revenues have been
derived primarily from service contracts, which are typically of at least five
years' duration, and are generally based upon a percentage of a lottery's gross
on-line lottery sales, which typically falls within a range of 1.5% to 5.0%.
Product sales revenues have been derived primarily from the installation of new
on-line lottery systems and sales of lottery terminals and equipment in
connection with the expansion of existing lottery systems. The size and timing
of these transactions have resulted in variability in product sales revenues
from period to period.
The Company's business is highly regulated, and the competition to secure new
government contracts is often intense. Awards of contracts to the Company also,
from time to time, are challenged by competitors. Further, there have been and
continue to be investigations of various types, including federal grand jury
investigations, conducted by governmental authorities into possible
improprieties and wrongdoing in connection with efforts to obtain and/or the
awarding of lottery contracts and related matters. Although the Company does not
believe that it has engaged in any wrongdoing in connection with these matters,
certain investigations are still underway and are conducted largely in secret.
Accordingly, the Company lacks sufficient information to determine with
certainty their ultimate scope and whether the government authorities will
assert claims resulting from these or other investigations that could implicate
or reflect adversely upon the Company. Because the Company's reputation for
integrity is an important factor in its business dealings with lottery and other
government agencies, if government authorities were to make an allegation of, or
if there were to be a finding of, improper conduct on the part of or
attributable to the Company in any matter, such an allegation or finding could
have a material adverse effect on the Company's business, including its ability
to retain existing contracts and to obtain new or renewal contracts. See "Legal
Proceedings" in Part II, Item 1 herein and in Item 3 of the Company's fiscal
1996 annual report on Form 10-K and see Note H to the Consolidated Financial
Statements in the Company's fiscal 1996 annual report on Form 10-K for further
information concerning these matters and other contingencies.
The following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. See Item 1 "Business" and
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's fiscal 1996 Form 10-K.
Results of Operations
Revenues for the first quarter of fiscal 1997 were $211.2 million, representing
a $31.8 million, or 17.7%, increase over revenues of $179.4 million in the first
quarter of fiscal 1996.
Service revenues in the first quarter of fiscal 1997 were $195 million,
representing a $29.7 million, or 17.9%, increase over the $165.3 million of
service revenues in the first quarter of fiscal 1996. The increase in service
revenues resulted primarily from $13.7 million of service revenues from Racimec
(the Company's subsidiary in Brazil), higher revenues of $10.7 million from the
Company's existing customer base, $5 million of service revenues from
Transactive (the Company's electronic benefits delivery subsidiary) and $.3
million of service revenues from new on-line lottery systems operated by the
Company that commenced operations since the first quarter of fiscal 1996. The
results of Racimec for the first quarter of fiscal 1996 were included on the
equity method of accounting, while its results for the first quarter of fiscal
1997 have been consolidated.
Product sales in the first quarter of fiscal 1997 were $16.2 million,
representing a $2.1 million, or 14.8%, increase from the $14.1 million of
product sales in the first quarter of fiscal 1996. The increase in product sales
resulted primarily from the sale of one new central system and one new instant
ticket validation system in the first quarter of fiscal 1997 as compared with no
such sales in the first quarter of fiscal 1996. In addition, the Company had
higher lottery terminal sales in the first quarter of fiscal 1997 than the first
quarter of fiscal 1996. These increases were partially offset by lower sales of
component parts and equipment in connection with the United Kingdom operations.
The Company sold approximately 1,100 lottery terminals during the first quarter
of fiscal 1997, as compared to approximately 700 lottery terminals during the
first quarter of fiscal 1996.
Gross margins on service revenues decreased to 32.4% in the first quarter of
fiscal 1997 from 37.8% in the first quarter of fiscal 1996 due principally to
operating losses incurred at Racimec during the first quarter of fiscal 1997
relating to the start-up of new on-line state lottery networks that began
operations during fiscal 1996. In addition, the Company incurred higher service
costs, particularly in Europe, by adding additional resources to improve
customer satisfaction and to better position the Company to support expected new
business opportunities. There was no significant jackpot activity in the first
quarter of fiscal 1997 as compared to a relatively high level of jackpot
activity in the first quarter of fiscal 1996. The high service margins
experienced during the first quarter of fiscal 1996 from jackpot activity were
substantially replaced with margins earned from expanded services and new
lottery games (such as keno) introduced during fiscal 1996.
In line with management's expectations, Racimec and Transactive incurred
operating losses in the quarter due to the start-up nature of these businesses.
A revenue enhancement and cost reduction plan for Racimec was implemented during
the fourth quarter of fiscal 1996, and management continues to expect that
Racimec's pre-tax operating results for fiscal 1997 will substantially improve
over fiscal 1996. During the second half of fiscal 1996, the Company implemented
a plan for Transactive to enhance its existing revenue streams, reduce operating
costs, leverage its infrastructure within existing states with new applications
and win business with new states. The Company has confidence in this plan and
continues to monitor its progress carefully. In addition, the Company may
consider alternatives to increase the value of Transactive, including joint
venturing with another entity. However, there can be no assurance that these
efforts will be successful, and if they are not successful, the Company may be
required to recognize a loss on a portion of its investment in these businesses.
Gross margins on product sales fluctuate depending primarily on the mix and
timing of product sales contracts. Gross margins on product sales increased to
43.4% in the first quarter of fiscal 1997 from 26.9% in the first quarter of
fiscal 1996 due primarily to higher margins from central system and instant
ticket validation system sales, along with higher margins on terminal sales.
Selling, general and administrative expenses in the first quarter of fiscal 1997
were $30 million, representing a $4.4 million, or 17%, increase from the $25.6
million incurred in the first quarter of fiscal 1996. This increase was
primarily attributable to higher administrative costs that were necessary to
support expanded operations (including two of the Company's newly formed
ventures, Dreamport and WorldServ) and increased sales and marketing activity.
As a percentage of revenues, selling, general and administrative expenses were
14.2% and 14.3% during the first quarter of fiscal 1997 and 1996, respectively.
Research and development expenses in the first quarter of fiscal 1997 were $6.6
million, representing a $.9 million, or 12%, decrease from research and
development expenses of $7.5 million in the first quarter of fiscal 1996. The
decrease in expenses reflects a higher level of software engineering cost
capitalized for new on-line lottery system projects. As a percentage of
revenues, research and development expenses were 3.1% and 4.2% during the first
quarter of fiscal 1997 and 1996, respectively.
Interest income in the first quarter of fiscal 1997 was $.6 million, a decrease
of $1.5 million over interest income of $2.1 million earned during the first
quarter of fiscal 1996. The Company earned approximately $1.4 million of
interest income on loans to Racimec during the first quarter of fiscal 1996.
Equity in earnings of unconsolidated affiliates in the first quarter of fiscal
1997 was $3.2 million, an increase of $.9 million over the $2.3 million earned
during the first quarter of fiscal 1996. The increase was due primarily to the
consolidation of Racimec and the resulting absence of equity losses from Racimec
for the first quarter of fiscal 1997, partially offset by lower equity income
from the United Kingdom operations.
The Company's effective income tax rate of 42% for both the first quarter of
fiscal 1997 and first quarter of fiscal 1996 was greater than the statutory rate
due primarily to state income taxes and certain expenses that are not deductible
for income tax purposes.
In May 1996, the Company and the Texas lottery authority extended the term of
their agreement for five years (from September 1, 1997 through August 2002) and
amended it to provide for the Company to furnish the Texas lottery authority
with a new central system, additional terminals and other lottery equipment and
services. The amendment also annually reduces over its five-year term the
percentage rate of the Texas lottery's revenues which the Company is to receive
as compensation under its agreement with the Texas lottery authority. However,
the Company believes that the effect of the reduction in the percentage rate
will be more than offset by the addition of more terminals along with
anticipated new games, but there can be no assurance that this will be the case.
As previously announced, on June 24, 1996 the California Supreme Court, in the
case of Western Telcon, Inc. et. al. v. California State Lottery, decided that
the California State Lottery's keno game is not a lottery game and therefore is
not authorized by California lottery law. The Supreme Court reversed the trial
court and appellate court decisions and found keno to be a banked game rather
than a lottery because it provides for a fixed prize which is not dependent upon
the size of the prize pool. Consequently, the California State Lottery suspended
operation of the keno game on June 24, 1996. The Company has formulated, and is
discussing with the California State Lottery, a plan to modify the keno game
and, on the basis of such discussions, does not believe that the interruption of
the keno game will have a material adverse effect on the Company's fiscal 1997
operating results.
In August 1995, the suit Donald J. Trump v. Jeffrey S. Perlee et. al. was filed
in the New York County Supreme Court against the New York State Lottery seeking
declaratory and injunctive relief to prohibit the Lottery's Quick-Draw Game.
Recently, the New York Supreme Court Appellate Division affirmed the trial
court's denial of Mr. Trump's motion for a preliminary injunction in this case.
Changes in Financial Position, Liquidity and Capital Resources
During the first quarter of fiscal 1997, the Company generated $52.8 million of
cash from operations. This cash was used primarily to fund the purchase of $40.8
million of systems, equipment and other assets relating to contracts, the
purchase of $2.7 million of property, plant and equipment and the repayment of
$8.5 million of long-term debt.
The cost of systems, equipment and other assets relating to contracts increased
by $43.6 million from $887.2 million at February 24, 1996 to $930.8 million at
May 25, 1996. This increase reflects the continuing installation of new lottery
networks in the States of Washington and Missouri and the expansion of lottery
systems in several domestic and international locations.
Trade accounts receivable increased by $3.6 million from $73.8 million at
February 24, 1996 to $77.4 million at May 25, 1996, due primarily to the
increase in product sales in the first quarter of fiscal 1997 as compared to the
fourth quarter of fiscal 1996.
Inventories increased by $3.4 million from $43.7 million at February 24, 1996 to
$47.1 million at May 25, 1996, in anticipation of the award of a new contract
with the State of New Jersey. The Company on relatively infrequent occasions,
begins to manufacture terminals prior to the actual award of a contract in order
to enable the Company to perform promptly under the contract in the event it is
awarded to the Company. In this instance, should the Company not be awarded the
contract, it is expected that the terminals manufactured would be used in
connection with other contracts.
Accounts payable decreased by $6.2 million from $46.3 million at February 24,
1996 to $40.1 million at May 25, 1996, due primarily to timing of payments.
Accrued employee compensation decreased by $7.6 million from $24.9 million at
February 24, 1996 to $17.3 million at May 25, 1996, due primarily to the payment
of fiscal 1996 management bonuses.
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 lottery and government
services contracts required during fiscal 1997 will be lower than that expended
in fiscal 1996. The Company currently anticipates that capital expenditures for
property, plant and equipment in fiscal 1997 will approximate the fiscal 1996
levels. The principal sources of liquidity for the Company are expected to be
cash generated from operations and borrowings under the Company's $500 million
Credit Facility. On June 25, 1996 there was approximately $359 million of
borrowing outstanding and an additional $141 million available for borrowing
under the Credit Facility. The Company currently expects that its cash flow from
operations and available borrowings under its Credit Facility, together, if
necessary, with other sources of capital believed to be available, will be
sufficient to permit it to meet its anticipated working capital and ordinary
capital expenditure needs, to service its debt obligations and to permit it to
fund anticipated internal growth. However, the Company is currently reviewing
its debt structure and is considering refunding and/or increasing its debt
capacity.
Inflation, Interest Rates and Foreign Exchange Fluctuation
The impact of inflation on the Company's operations has not been significant to
date. While the Company believes that its business is not highly sensitive to
inflation, there can be no assurance that a high rate of inflation in the future
would not have an adverse effect on the Company's operations.
The Company uses various interest rate hedging instruments to reduce the risk
associated with future increases in interest rates on its floating rate
long-term debt. On November 8, 1994, the Company entered into two interest rate
corridors with an aggregate notional amount of $165.0 million that provide
interest rate protection to November 8, 1996. The corridors effectively entitle
the Company to receive payments from the financial institutions that are
counterparties to the corridors should the three-month London Interbank Offered
Rates ("LIBOR") be between 6.75% and 8.75%. Should LIBOR exceed 8.75%, the
Company will receive a payment up to the 8.75% ceiling but not above. At May 25,
1996, LIBOR was approximately 5.5%.
On January 24, 1996, the Company entered into three interest rate swaps with an
aggregate notional amount of $125.0 million that provide interest rate
protection over the period January 26, 1996 to April 28, 1997. The swaps
effectively entitle the Company to receive payments from the financial
institutions that are counterparties to the swaps should LIBOR exceed
approximately 5.05%.
The Company attempts to manage its foreign exchange risk by securing payment
from its customers in U.S. dollars, by sharing risk with its customers, by
utilizing foreign currency borrowings, by leading and lagging receipts and
payments and by entering into forward foreign exchange contracts. In addition, a
significant portion of the costs attributable to the Company's foreign currency
revenues are incurred in the local currencies.
The Company, from time to time, enters into foreign currency exchange contracts
to hedge certain firm sales commitments, anticipated revenue streams and certain
assets and liabilities denominated in foreign currencies. The effect of this
practice is to minimize the impact of foreign exchange rate movements on the
Company's operating income. The Company does not engage in currency speculation.
Gains and losses on contracts that hedge specific foreign currency commitments
are deferred and accounted for as part of the transaction being hedged.
Contracts used to hedge anticipated revenue streams and certain assets and
liabilities are marked to market, and the resulting transaction gain or loss is
included in the determination of net income. As of May 25, 1996, the Company had
approximately $15.8 million of forward foreign exchange contracts, primarily
denominated in Deutschemarks, Irish pounds and British pounds.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As previously publicly reported, in October 1994, it was announced by the U.S.
Attorney's Offices for the Western District of Kentucky and for the District of
New Jersey that separate indictments had been returned by federal grand juries
in those jurisdictions against J. David Smith, the former sales manager of the
Company (who resigned in early 1994 for reasons unrelated to the indictments),
and several other individuals who served as consultants or suppliers to the
Company. The indictments alleged essentially that, unbeknownst to the Company,
Mr. Smith received kickbacks from the consultants and suppliers, which charges,
if true, make the Company a victim. The indictments do not charge the Company
with any wrongdoing, and the actions complained of did not affect the Company's
Kentucky or New Jersey lottery operations. On January 9, 1995 the trial of Mr.
Smith commenced in Kentucky and on January 12, 1995, the U.S. District Court for
the Western District of Kentucky granted the defendant's motion for judgment of
acquittal and dismissed all charges against Mr. Smith and the other defendant, a
GTECH supplier, at the conclusion of the Government's case. The Company
understands that the New Jersey trial of Mr. Smith is scheduled to commence in
September 1996. The Company has cooperated and continues to cooperate with the
U.S. Attorney's Office by providing documents in response to subpoenas issued to
it.
On March 8, 1996, Automated Wagering International, Inc. ("AWI") filed an
administrative protest of the intended award of the New Jersey lottery contract
to the Company. AWI alleged that: (i) there are questions regarding the
Company's integrity which will impair public confidence in the lottery and (ii)
the Company's proposal materially deviated from the requirements of the request
for proposals and, therefore, the Company's bid should be rejected. On May 31,
1996, the hearing officer issued his Findings and Decision respecting this
administrative protest to the Director of the New Jersey Department of Treasury
Division of Purchase and Property, finding, in essence, no merit to AWI's
protest. By letter dated June 14, 1996, the Director advised the Company of her
award of the contract to the Company. On June 17, 1996, AWI requested that the
Director stay the signing and implementation of the contract to afford AWI the
opportunity to consider an appeal of the award, and the Director granted a
temporary stay through June 21, 1996. On June 21, 1996, the Director lifted the
stay and made final award of the contract to the Company.
At the end of May 1994, several shareholder class action lawsuits were brought
against the Company and various of its executive officers (Messrs. Snowden,
Markowicz and Breakstone) in the U.S. District Court of Rhode Island relating to
the Company's May 25, 1994 announcement that earnings for its 1995 fiscal year
could be at or below fiscal 1994 levels. On September 23, 1994, the plaintiffs
in these actions filed an Amended Consolidated Class Action Complaint which
generally alleged that the defendants violated federal securities laws in
disseminating materially false and misleading statements about the Company's
prospects and failing to disclose on a timely basis the fact that fiscal 1995
earnings were expected to be less than allegedly anticipated by the public. The
complaint sought to recover monetary damages from the Company and the individual
defendants. This complaint was eventually dismissed for failing sufficiently to
state a meritorious claim; and on May 23, 1995, the plaintiffs filed a Second
Consolidated Amended Class Action Complaint making essentially similar
allegations. On June 9, 1995, the Company announced that, in order to avoid the
costs and disruptions of further proceedings, it had reached a settlement of
this lawsuit. Under the terms of the settlement, the Company and its insurer
have agreed to pay an aggregate of $1,250,000 in full settlement of all claims
against the Company and the other defendants. On June 21, 1996, the Federal
District Court of Rhode Island approved the terms of the settlement.
For information respecting other legal proceedings, refer to Items 1 and 3
of, and Note H of Notes to Consolidated Financial Statements included in, the
Company's fiscal 1996 Annual Report on Form 10-K and to Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, of
this report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits to this report are as follows:
4. Amendment No. 1 to Credit Agreement dated May 29, 1996
10. Amendment to the Contract for the Texas Lottery Operator
for the State of Texas dated June 1, 1994
11. Computations of Earnings per Share
27. Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
quarter to which this report relates.
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 on July 9, 1996.
GTECH HOLDINGS CORPORATION
By /s/ Thomas J. Sauser
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Thomas J. Sauser, Senior Vice President, Treasurer &
Chief Financial Officer (Principal Financial Officer)
By /s/ Robert J. Plourde
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Robert J. Plourde, Vice President and Corporate
Controller (Principal Accounting Officer)