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 31, 1997
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 July 5, 1997 there were 42,032,420 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
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 31, February 22,
1997 1997
------------ ------------
(In thousands, except
share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................ $ 15,139 $ 11,985
Trade accounts receivable ................................................ 97,978 110,707
Sales-type lease receivables ............................................. 11,142 15,231
Inventories .............................................................. 39,197 35,326
Deferred income taxes .................................................... 20,237 20,237
Other current assets ..................................................... 12,540 9,743
------------ ------------
TOTAL CURRENT ASSETS ................................................ 196,233 203,229
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS ...................... 1,155,851 1,063,651
Less: Accumulated Depreciation ................................................. (598,188) (561,350)
------------ ------------
557,663 502,301
GOODWILL, net .................................................................. 112,251 112,853
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES ....................... 62,646 56,693
OTHER ASSETS ................................................................... 81,196 81,465
------------ ------------
$ 1,009,989 $ 956,541
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings .................................................... $ 3,638 $ 1,395
Accounts payable ......................................................... 43,721 53,944
Accrued expenses ......................................................... 58,451 52,625
Advance payments from customers .......................................... 6,590 10,534
Employee compensation .................................................... 15,894 27,991
Income taxes payable ..................................................... 20,757 13,777
Current portion of long-term debt ........................................ 5,863 6,049
------------ ------------
TOTAL CURRENT LIABILITIES ........................................... 154,914 166,315
LONG-TERM DEBT, less current portion ........................................... 445,986 382,499
OTHER LIABILITIES .............................................................. 22,886 25,907
DEFERRED INCOME TAXES .......................................................... 23,687 23,687
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,
43,867,651 and 43,845,651 shares issued, 42,025,170 and 42,490,770
shares outstanding at May 31, 1997 and February 22, 1997, respectively 438 438
Additional paid-in capital ............................................... 170,162 169,705
Equity carryover basis adjustment ........................................ (7,008) (7,008)
Cumulative translation adjustment ........................................ 1,599 1,472
Retained earnings ........................................................ 248,061 228,741
------------ ------------
413,252 393,348
Less cost of 1,842,481 and 1,354,881 shares in treasury at May 31, 1997
and February 22, 1997, respectively .................................... (50,736) (35,215)
------------ ------------
362,516 358,133
------------ ------------
$ 1,009,989 $ 956,541
============ ============
See notes to consolidated financial statements
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended (1)
--------------------------
May 31, May 25,
1997 1996
----------- -----------
(Dollars in thousands,
except per share amounts)
Revenues:
Services ................................................................. $ 225,930 $ 194,986
Sales of products ........................................................ 19,241 16,187
----------- -----------
245,171 211,173
Costs and expenses:
Costs of services ........................................................ 156,715 131,715
Costs of sales ........................................................... 11,328 9,154
----------- -----------
168,043 140,869
----------- -----------
Gross profit ................................................................... 77,128 70,304
Selling, general and administrative ............................................ 35,914 29,952
Research and development ...................................................... 8,175 6,630
----------- -----------
Operating income ............................................................... 33,039 33,722
Other income (expenses):
Interest income .......................................................... 1,753 550
Equity in earnings of unconsolidated affiliates .......................... 3,714 3,217
Other income ............................................................. 370 46
Interest expense ......................................................... (6,676) (6,151)
----------- -----------
Income before income taxes ..................................................... 32,200 31,384
Income taxes ................................................................... (12,880) (13,181)
----------- -----------
Net income ..................................................................... $ 19,320 $ 18,203
=========== ===========
Earnings per common share ...................................................... $ .46 $ .42
=========== ===========
Weighted average common shares outstanding ..................................... 42,078,000 43,086,000
=========== ===========
(1) Fourteen weeks in the quarter ended May 31, 1997 and 13 weeks in the quarter
ended May 25, 1996
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 22, 1997 .... 43,845,651 $ 438 $ 169,705 $ (5,536) $ 228,741 $ (35,215) $ 358,133
Purchase of 487,600 shares of
common stock ................. --- --- --- --- --- (15,521) (15,521)
Common stock issued under stock
award plans .................. 22,000 --- 457 --- --- --- 457
Net income ..................... --- --- --- --- 19,320 --- 19,320
Foreign currency translation .... --- --- --- 127 --- --- 127
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at May 31, 1997 ......... 43,867,651 $ 438 $ 170,162 $ (5,409) $ 248,061 $ (50,736) $ 362,516
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended (1)
--------------------------
May 31, May 25,
1997 1996
----------- -----------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income ..................................................................... $ 19,320 $ 18,203
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................................ 48,759 39,553
Equity in earnings of unconsolidated affiliates .......................... (3,716) (3,217)
Other .................................................................... 3,764 849
Changes in operating assets and liabilities:
Trade accounts receivable ............................................. 12,765 (3,600)
Inventories ........................................................... (3,878) (3,386)
Other assets and liabilities .......................................... (15,310) 6,292
Other assets and liabilities of discontinued operations ............... (1,280) (1,907)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 60,424 52,787
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts ......... (100,043) (40,843)
Purchases of property plant and equipment ...................................... (3,186) (2,714)
Cash received from affiliates .................................................. 827 ---
Investments in and advances to affiliates ...................................... (5,058) (1,385)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES ......................................... (107,460) (44,942)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ....................................... 393,400 ---
Net borrowings under short-term borrowing arrangements ......................... 2,244 ---
Principal payments on long-term debt ........................................... (329,901) (8,496)
Purchases of treasury stock .................................................... (15,521) ---
Other .......................................................................... 122 349
----------- -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ........................... 50,344 (8,147)
Effect of exchange rate changes on cash ........................................ (154) 126
----------- -----------
INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS ................................. 3,154 (176)
Cash and cash equivalents at beginning of period ............................... 11,985 8,519
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 15,139 $ 8,343
=========== ===========
(1) Fourteen weeks in the quarter ended May 31, 1997 and 13 weeks in the quarter
ended May 25, 1996
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 ("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 31, 1997 are
not necessarily indicative of the results that may be expected for the full 1998
fiscal year ending February 28, 1998. The balance sheet at February 22, 1997 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 1997 Annual Report on Form 10-K.
The Company operates on a 52 to 53 week fiscal year ending on the last Saturday
in February. Fiscal 1998 is a 53 week year. The Company has included the extra
week in its first quarter ended May 31, 1997. Accordingly, there are fourteen
weeks in the quarter ended May 31, 1997, versus thirteen weeks in the quarter
ended May 25, 1996.
NOTE B--INVENTORIES
May 31, February 22,
1997 1997
----------- -----------
(Dollars in thousands)
Inventories consist of:
Purchased components $ 11,851 $ 11,483
Finished subassemblies 1,438 1,993
Work-in-process 16,883 16,106
Finished goods 9,025 5,744
----------- -----------
$ 39,197 $ 35,326
=========== ===========
NOTE C--LONG-TERM DEBT May 31, February 22,
1997 1997
----------- -----------
(Dollars in thousands)
Long-term debt consists of:
Revolving credit facility $ 137,000 $ 367,000
7.75% Series A Senior Notes due 2004 150,000 ---
7.87% Series B Senior Notes due 2007 150,000 ---
Other 14,849 21,548
----------- -----------
451,849 388,548
Less current maturities 5,863 6,049
----------- -----------
$ 445,986 $ 382,499
=========== ===========
The Company has an unsecured revolving credit facility of $500 million expiring
on September 15, 1999 (the "Credit Facility"). At May 31, 1997, the weighted
average interest rate for all outstanding borrowings under the Credit Facility
was 5.91%. On May 29, 1997, the Company issued in a private placement, $150
million of 7.75% Series A Senior Notes due 2004 and $150 million of 7.87% Series
B Senior Notes due 2007. Interest on each issue is payable semiannually in
arrears. The proceeds from the sale of these notes were used to pay down the
Credit Facility. On June 18, 1997, the Company amended and restated its Credit
Facility to extend the maturity date to June 2002 and to decrease the commitment
amount from $500 million to $400 million.
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 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I, Item 2
herein.
NOTE F--EARNINGS PER COMMON SHARE
Earnings per common share are calculated by dividing net income by weighted
average common shares outstanding during the period. The exercise of outstanding
stock options would not result in a material dilution of earnings per common
share.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", that is required to be adopted by the Company in the
fourth quarter of fiscal 1998. At that time, the Company will be required to
change the method currently used to calculate earnings per share and to restate
all prior periods presented. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded. Had
the provisions of Statement No. 128 been used to calculate earnings per share
for the first quarter of fiscal 1998 and 1997, earnings per share would not have
differed materially from the reported amounts.
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 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 which 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 herein and in the Company's press releases and filings with the
Securities and Exchange Commission.
General
The Company has derived substantially all of its revenues from the rendering of
services and the sale or supply of computerized on-line lottery systems and
components to government-authorized lotteries. Service revenues have been
derived primarily from service contracts, that are typically of at least five
years' duration, and are generally based upon a percentage of a lottery's gross
on-line lottery sales. Theses percentages typically fall 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 also has taken steps to broaden its offerings of high volume
transaction processing services outside of its core business of providing
on-line lottery services. The Company's Transactive subsidiary ("Transactive")
currently provides benefits delivery systems and services on behalf of
government authorities. The Company's Dreamport subsidiary ("Dreamport") pursues
gaming opportunities other than on-line lottery. In addition, the Company's
WorldServ subsidiary ("WorldServ") provides network communications services to
private sector clientele.
The Company's business is highly regulated, and the competition to secure new
government contracts is often intense. Awards of contracts to the Company are,
from time to time, challenged by competitors. Further, there have been and
continue to be investigations of various types, including grand jury
investigations, conducted by governmental authorities into possible
improprieties and wrongdoing in connection with efforts to obtain and/or the
awarding of lottery contracts and related matters. Although the Company does not
believe that it has engaged in any wrongdoing in connection with these matters,
certain investigations that are conducted largely in secret are still underway.
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. In
addition, continuing adverse publicity resulting from these investigations and
related matters could have such a material adverse effect. See "Legal
Proceedings" in Part II, Item 1 herein, Part I, Item 1 - "Factors Affecting
Future Performance - Maintenance of Business Relationships and Certain Legal
Matters" and Part I, Item 3 - "Legal Proceedings" of the Company's fiscal 1997
annual report on Form 10-K and see Note H to the Consolidated Financial
Statements in the Company's fiscal 1997 annual report on Form 10-K for further
information concerning these matters and other contingencies.
Results of Operations
The Company operates on a 52 to 53 week fiscal year ending on the last Saturday
in February. Fiscal 1998 is a 53 week year. The Company has included the extra
week in its first quarter ended May 31, 1997. Accordingly, there are fourteen
weeks in the quarter ended May 31, 1997, versus thirteen weeks in the quarter
ended May 25, 1996.
Revenues for the first quarter of fiscal 1998 were $245.2 million, representing
a $34.0 million, or 16.1%, increase over revenues of $211.2 million in the first
quarter of fiscal 1997.
Service revenues in the fiscal 1998 first quarter were $225.9 million,
representing a $30.9 million, or 15.9%, increase over the $195.0 million of
service revenues in the first quarter of fiscal 1997. This increase resulted
primarily from higher revenues of $22.5 million from the Company's existing
lottery customer base and $8.2 million of service revenues from new on-line
lottery systems operated by the Company that commenced operations since the
first quarter of fiscal 1997, including service revenues from the on-line
lottery system that the Company implemented for Caixa Economica Federal
("Caixa"), Latin America's largest financial institution that runs Brazil's
National Lottery.
Product sales in the first quarter of fiscal 1998 were $19.3 million,
representing a $3.1 million, or 18.9%, increase over the $16.2 million of
product sales in the first quarter of fiscal 1997. This increase resulted
primarily from higher revenues from central lottery system and instant ticket
validation system sales in the first quarter of fiscal 1998 than in the first
quarter of fiscal 1997, partially offset by lower revenue from terminal sales.
The Company sold one new central system and one new instant ticket validation
system in both the first quarter of fiscal 1998 and 1997. The Company sold
approximately 1,100 lottery terminals in both the first quarter of fiscal 1998
and 1997.
Gross margins on service revenues were 30.6% in the fiscal 1998 first quarter
compared to 32.4% in the first quarter of fiscal 1997. This decline was due
primarily to lower margins experienced on new lottery contracts in the early
stages of lottery operations, partially offset by improved margins on certain
existing lottery contracts.
Gross margins on product sales fluctuate depending primarily on the mix, volume
and timing of product sales contracts. Gross margins on product sales were 41.1%
in the first quarter of fiscal 1998 compared to 43.4% in the first quarter of
fiscal 1997. This decline was reflective of product mix.
Selling, general and administrative expenses in the first quarter of fiscal 1998
were $35.9 million, representing a $5.9 million, or 19.9%, increase from the
$30.0 million incurred in the first quarter of fiscal 1997. This increase was
primarily attributable to higher legal costs relating in large part to
investigations and legal proceedings along with higher administrative, selling
and government relations costs that were necessary to support expanded
operations. As a percentage of revenues, selling, general and administrative
expenses were 14.6% and 14.2% during the first quarter of fiscal 1998 and 1997,
respectively.
Research and development expenses in the first quarter of fiscal 1998 were $8.2
million, representing a $1.6 million, or 23.3%, increase over research and
development expenses of $6.6 million in the first quarter of fiscal 1997. This
increase reflects increased development activity for standard software product
offerings along with new lottery game design. As a percentage of revenues,
research and development expenses were 3.3% and 3.1% during the first quarter of
fiscal 1998 and 1997, respectively.
Interest income in the first quarter of fiscal 1998 was $1.8 million, an
increase of $1.2 million over interest income of $.6 million earned during the
first quarter of fiscal 1997. This increase reflects higher dollar denominated
cash balances in Brazil to fund the on-line lottery system implementation
underway for the Caixa.
Equity in earnings of unconsolidated affiliates in the first quarter of fiscal
1998 was $3.7 million, an increase of $.5 million over the $3.2 million earned
during the first quarter of fiscal 1997. This increase was due primarily to
higher equity income from Dreamport investments.
The Company's effective income tax rate decreased from 42% in the first quarter
of fiscal 1997 to 40% in the first quarter of fiscal 1998 due principally to a
reduction in nondeductible expenditures and the restructuring of financing of
the Company's investments in Brazil. 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.
The Texas Lottery Commission directed its staff to prepare and circulate by July
31, 1997 a request for proposals with respect to the entire Texas Lottery
contract currently held by GTECH, as well as requests for proposals for various
portions of that contract. The Chairman of the Commission has declared that this
action is not and should not be deemed an exercise by the Texas Lottery of the
termination provision of GTECH's contract, without cause, upon 30 days prior
notice. Nevertheless, the Texas Lottery Commission has further asserted that it
has no obligation to deal with GTECH in good faith with respect to the
termination of its contract with the Company, a position with which GTECH
strongly disagrees. (See Legal Proceedings in Part II, Item 1.) Pursuant to the
amendment to GTECH's contract executed in April 1996 which extended the term of
the contract for five years, the Company is making major capital investments of
more than $20.0 million and has incurred significant related expenses. A
substantial portion of such investment, along with a substantial portion of the
Company's existing investment in its Texas lottery contract ($42.6 million at
May 31, 1997) may be required to be written off should the Company lose all or a
portion of the Texas lottery contract. The Company is pursuing all available
options to ensure that its contract, amended to extend through August 2002 and
negotiated in good faith with the Texas Lottery, is honored. In fiscal 1997,
1996 and 1995, the aggregate revenues from the State of Texas (including lottery
and electronic benefits transfer) represented 18.6%, 19.6% and 16.1%,
respectively, of the Company's consolidated revenues. No other customer
accounted for as much 10% of the Company's consolidated revenues in such
periods, although the Company's lottery contracts in a number of jurisdictions,
including California, Georgia, New York and the United Kingdom, are important
sources of revenues and earnings for the Company. Reference is also made to
Items 1 and 3 of, and Note H of Notes to Consolidated Financial Statements
included in, the Company's fiscal 1997 Annual Report on Form 10-K concerning
various legal proceedings involving the Company.
Changes in Financial Position, Liquidity and Capital Resources
During the first quarter of fiscal 1998, the Company generated $60.4 million of
cash from operations. This cash, along with $65.7 million of net borrowings was
used primarily to fund the purchase of $100.0 million of systems, equipment and
other assets relating to contracts and the repurchase of $15.5 million of the
Company' common stock.
The cost of systems, equipment and other assets relating to contracts increased
by $92.2 million from $1,063.7 million at February 22, 1997 to $1,155.9 million
at May 31, 1997. This increase reflects the installation of a portion of the new
lottery system for the Caixa and the continuing installation of new lottery
systems for lotteries in Wisconsin, Kansas, Oregon and Ohio.
Trade accounts receivable decreased by $12.7 million from $110.7 million at
February 22, 1997 to $98.0 million at May 31, 1997, due primarily to scheduled
collections of accounts receivable relating to the high level of product sales
recorded in the fourth quarter of fiscal 1997.
Accounts payable decreased by $10.2 million from $53.9 million at February 22,
1997 to $43.7 million at May 31, 1997, due primarily to the timing of payments
relating to ongoing lottery system installations.
Accrued employee compensation decreased by $12.1 million from $28.0 million at
February 22, 1997 to $15.9 million at May 31, 1997, due primarily to the payment
of fiscal 1997 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 systems, equipment and
other assets relating to contracts required during fiscal 1998 will be in a
range of $300.0 million to $350.0 million. Approximately $120.0 million of such
spending will be required to implement the on-line lottery system for the Caixa.
In addition, the Company currently anticipates that the level of capital
expenditures for property, plant and equipment in fiscal 1998 will approximate
$19.3 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. On July 5, 1997 there was approximately $138.4 million of borrowings
outstanding and an additional $261.6 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 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. On May 29, 1997 the Company issued, in a private placement,
$150 million of 7.75% Series A Senior Notes due 2004 and $150 million of 7.87%
Series B Senior Notes due 2007. The proceeds from the sale of these notes were
used to pay down the Credit Facility.
On June 18, 1997, the Company announced that it had signed a letter of intent to
acquire, NTN Communications, Inc. ("NTN") for cash consideration of
approximately $140 million. In connection with the letter of intent, the
Company loaned NTN $3.7 million in order to enable NTN to fulfill its obligation
to Symphony IWN Investment LLC. The Company currently intends to finance this
acquisition with its existing Credit Facility.
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 techniques to reduce the risk associated with future
increases in interest rates on its floating rate long-term debt including
utilization of interest rate hedging instruments. In January 1996, the Company
entered into three interest rate swaps with an aggregate notional amount of
$125.0 million that provided interest rate protection over the period January
26, 1996 to April 28, 1997. The swaps effectively entitled the Company to
receive payments from the financial institutions that were counterparties to the
swaps should the three-month London Interbank Offered Rates ("LIBOR") exceed
approximately 5.05%. On April 28, 1997, the Company received approximately $.2
million in connection with the settlement of these swaps. In addition, as
discussed earlier, the Company issued seven and ten year fixed rate debt on May
29, 1997, in a private placement.
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 foreign currency 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 the risk associated with certain firm sales commitments, anticipated
revenue streams and certain assets and liabilities denominated in foreign
currencies. 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 July 5, 1997, the Company had approximately
$81.7 million of outstanding foreign currency exchange contracts to purchase
foreign currencies (primarily Japanese Yen) and approximately $134.4 million of
outstanding foreign currency exchange contracts to sell foreign currencies
(primarily Japanese Yen and Pounds Sterling).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As widely reported in the Texas media and as previously reported, the Texas
Lottery Commission is inquiring of GTECH regarding its business relationships
relating to the Texas Lottery and GTECH has cooperated with that inquiry. The
Texas Lottery is also inquiring about several other matters which could have
material negative implications with respect to GTECH's business in Texas,
including the following:
- GTECH's consulting contracts with Ben Barnes, former Lieutenant Governor
of Texas, which contracts were entered into in 1991 and were bought out
and terminated by the Company in February 1997;
- GTECH's retention in October 1992 of Michael Moeller, a friend of Nora
Linares, the then Executive Director of the Texas Lottery, as a
consultant regarding New Mexico;
- Mr. Barnes' gift in December 1992 of a $100 paperweight to then Governor
of Texas, Ann Richards; and
- Any other instances in which GTECH entertained or gave a gift to a state
official (without reimbursement).
In addition, the Texas State Auditor has issued to GTECH a Request for
Information, and, in response, GTECH has provided information and documents to
the Texas State Auditor.
As previously reported, the Texas Lottery Commission directed its staff to
prepare and circulate by July 31, 1997 a request for proposals with respect to
the entire Texas Lottery contract currently held by GTECH, as well as requests
for proposals for various portions of that contract. However, the Chairman of
the Commission has declared that this action is not and should not be deemed an
exercise by the Texas Lottery of the termination provision of GTECH's contract,
without cause, upon 30 days prior notice. The Texas Lottery Commission has
further asserted that it has no obligation to deal with GTECH in good faith with
respect to the termination of its contract with the Company, a position with
which GTECH strongly disagrees. Pursuant to the amendment to GTECH's contract
executed in April 1996 which extended the term of the contract for five years,
the Company is making major capital investments of more than $20 million and has
incurred significant related expenses (See Part I, Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations). The
Texas Lottery contract is GTECH's largest, accounting for approximately 16% of
GTECH's total revenues in fiscal 1997 and a significant percentage of operating
income. GTECH is pursuing all available options to ensure that its contract,
amended to extend through August 2002 and negotiated in good faith with the
Texas Lottery, is honored.
As previously reported, in April 1997, Nora Linares, the former Executive
Director of the Texas Lottery Commission, filed suit against GTECH and James
Hosker, the Company's Texas Site Director (captioned Nora Alicia Linares v.
GTECH Corporation and James Hosker, et al.), in the District Court of Travis
County, Texas (261st Judicial District). Ms. Linares, who had been terminated as
Executive Director of the Texas Lottery Commission in January 1997, alleges that
GTECH, in violation of Texas State Law and its lottery contract with the State
of Texas, tortiously interfered with her employment relationship with her former
employer by, among other things, hiring Michael Moeller as a consultant, and
intentionally inflicted emotional distress upon her. Ms. Linares seeks both a
declaratory judgment setting forth the rights, duties and responsibilities which
GTECH owes to public officials such as Ms. Linares, as well as actual and
exemplary damages from GTECH. GTECH believes that this lawsuit is without merit
and is defending itself (and Mr. Hosker) vigorously. On May 2, 1997, GTECH filed
a notice of removal in the Austin Division of the United States District Court
for the Western District of Texas, seeking to have the case transferred from the
state court to the federal court, and on June 2, 1997 Ms. Linares filed a motion
to remand, opposing GTECH's attempt to transfer the case to federal court from
state court.
As previously reported, in September 1996, Jack M. Janis and Linda Janis, both
individually and on behalf of a class of persons similarly situated, filed suit
against the California State Lottery Commission, Southland Corporation and the
Company in the Supreme Court of the State of California (County of Los Angeles).
This suit alleges, in light of the June 1996 decision of the California Supreme
Court, Western Telcon, Inc. et. al. v. California State Lottery (which held that
the California State Lottery's keno game as then structured was not a lottery
game and therefore was not authorized by California lottery law), that the
defendants were unjustly enriched and were guilty of unfair business practices
and misleading advertising in connection with the sale of keno tickets from
January 1, 1992 through suspension of the keno game in June 1996. The suit seeks
restitution of all amounts realized by the defendants through the sale of keno
tickets less funds paid to public schools pursuant to relevant California law
and proceeds paid to holders of winning keno tickets, together with costs,
disbursements and prejudgment interest. The Company has responded with a
vigorous defense. In February 1997, the Court granted the Company summary
judgment but granted the plaintiffs limited leave to amend their complaint
alleging alternative theories of recovery. The plaintiffs filed an amended
complaint in March 1997. In June 1997, the Court granted the Company's motion to
strike and for summary judgment as to the amended complaint, this time without
leave to amend. The Company believes that these claims are without merit and
intends to continue to defend itself vigorously in any appeal of these
proceedings.
For information respecting certain other legal proceedings, refer to Items 1 and
3 of, and Note H to Consolidated Financial Statements included in, the Company's
fiscal 1997 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 2. CHANGES IN SECURITIES
(c) During the quarter, 3,500 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:
4.1 Amended and Restated Credit Agreement, dated as of June 18, 1997,
among GTECH, certain lenders and Bank of Montreal, Banque
Paribas, Fleet National Bank, The Bank of Nova Scotia and
BankBoston, N.A., as Co-Agents; The Bank of New York, as
Documentation Agent and NationsBank, as Administrative Agent
4.2 Note and Guarantee Agreement, dated as of May 15, 1997, among
GTECH, the Company and certain financial institutions
10.1 1994 Stock Option Plan of the Company (as amended and restated
through June 1, 1997)
10.2 1996 Non-Employee Directors' Stock Option Plan of the Company
(as amended through June 1, 1997)
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.
GTECH HOLDINGS CORPORATION
By /s/ Thomas J. Sauser
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Thomas J. Sauser, Senior Vice President & 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)