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 26, 2001
Commission file number 1-11250
--------
GTECH Holdings Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0450121
- -------------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
55 Technology Way, West Greenwich, Rhode Island 02817
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 392-1000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ---
At June 14, 2001, there were 29,921,154 shares of the registrant's Common Stock
outstanding.
INDEX
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION Number
- ------------------------------ ------
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Income Statements 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Shareholders' Equity 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial 11-16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 17
Market Risk
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
- ----------
EXHIBITS
- --------
PART 1. FINANCIAL INFORMATION
- -----------------------------
Item 1. FINANCIAL STATEMENTS
- ----------------------------
CONSOLIDATED BALANCE SHEETS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
May 26, February 24,
2001 2001
----------- -----------
ASSETS (Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 10,320 $ 46,948
Trade accounts receivable 90,233 118,721
Sales-type lease receivables 8,753 8,722
Inventories 106,871 117,789
Deferred income taxes 26,850 26,850
Other current assets 18,834 18,798
----------- -----------
TOTAL CURRENT ASSETS 261,861 337,828
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 1,317,135 1,283,414
Less: Accumulated Depreciation (930,772) (922,080)
----------- -----------
386,363 361,334
GOODWILL 120,852 122,325
OTHER ASSETS 108,431 116,673
----------- -----------
TOTAL ASSETS $ 877,507 $ 938,160
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings $ 2,564 $ 2,316
Accounts payable 44,608 49,267
Accrued expenses 58,954 65,571
Employee compensation 18,708 31,898
Advance payments from customers 58,068 55,418
Income taxes payable 69,150 64,573
Current portion of long-term debt 3,961 3,512
----------- -----------
TOTAL CURRENT LIABILITIES 256,013 272,555
LONG-TERM DEBT, less current portion 376,975 316,961
OTHER LIABILITIES 33,705 29,883
DEFERRED INCOME TAXES 4,399 4,399
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, 45,069,190
and 44,507,315 shares issued, 29,862,779 and 34,257,527 shares outstanding at
May 26, 2001 and February 24, 2001, respectively 451 445
Additional paid-in capital 196,936 183,294
Equity carryover basis adjustment (7,008) (7,008)
Accumulated other comprehensive loss (96,032) (85,852)
Retained earnings 497,364 479,305
----------- -----------
591,711 570,184
Less cost of 15,206,411 and 10,249,788 shares in treasury at May 26, 2001
and February 24, 2001, respectively
(385,296) (255,822)
----------- -----------
206,415 314,362
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 877,507 $ 938,160
=========== ===========
See Notes to Consolidated Financial Statements
-3-
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended
---------------------
May 26, May 27,
2001 2000
--------- ---------
(Dollars in thousands,
except per share amounts)
Revenues:
Services $ 210,551 $ 222,631
Sales of products 24,414 19,367
--------- ---------
234,965 241,998
Costs and expenses:
Costs of services 144,492 142,763
Costs of sales 19,937 15,811
--------- ---------
164,429 158,574
--------- ---------
Gross profit 70,536 83,424
Selling, general and administrative 29,570 32,561
Research and development 7,633 12,926
Goodwill amortization 1,473 1,609
--------- ---------
Operating expenses 38,676 47,096
--------- ---------
Operating income 31,860 36,328
Other income (expense):
Interest income 2,030 1,925
Equity in earnings of unconsolidated affiliates 1,175 1,256
Other income 2,178 687
Interest expense (6,422) (7,035)
--------- ---------
Income before income taxes 30,821 33,161
Income taxes 11,712 12,932
--------- ---------
Net income $ 19,109 $ 20,229
========= =========
Basic earnings per share $ .62 $ .58
========= =========
Diluted earnings per share $ .61 $ .58
========= =========
See Notes to Consolidated Financial Statements
-4-
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended
----------------------
May 26, May 27,
2001 2000
--------- ---------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 19,109 $ 20,229
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 41,098 40,924
Intangibles amortization 2,343 3,165
Goodwill amortization 1,473 1,609
Equity in losses of unconsolidated affiliates, net of dividends received (9) (525)
Other (699) 65
Changes in operating assets and liabilities:
Trade accounts receivable 33,545 8,147
Inventories 10,918 (5,452)
Special charge (3,207) --
Other assets and liabilities (11,260) (28,751)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 93,311 39,411
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts (72,142) (33,834)
Investments in and advances to unconsolidated subsidiaries (37) (11,328)
Other 209 (3,694)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (71,970) (48,856)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 61,100 37,700
Principal payments on long-term debt (1,145) (25,049)
Purchases of treasury stock (132,094) --
Proceeds from stock options 13,648 --
Other 739 1,052
--------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (57,752) 13,703
Effect of exchange rate changes on cash (217) (2,694)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (36,628) 1,564
Cash and cash equivalents at beginning of period 46,948 11,115
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,320 $ 12,679
========= =========
See Notes to Consolidated Financial Statements
-5-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - (Unaudited)
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Equity
Additional Carryover
Outstanding Common Paid-in Basis
Shares Stock Capital Adjustment
--------- --------- --------- ---------
(Dollars in thousands)
Balance at February 24, 2001 34,257,527 $ 445 $ 183,294 $ (7,008)
Comprehensive income:
Net income -- -- -- --
Other comprehensive income (loss), net of tax:
Foreign currency translation -- -- -- --
Net loss on derivative instruments -- -- -- --
Comprehensive income
Treasury shares repurchased (5,060,100) -- -- --
Shares reissued under employee stock purchase and stock award plans 103,477 -- -- --
Shares issued upon exercise of stock options 561,875 6 13,642 --
---------- --------- --------- ---------
Balance at May 26, 2001 29,862,779 $ 451 $ 196,936 $ (7,008)
========== ========= ========= =========
Accumulated
Other
Comprehensive
Income Retained Treasury
(Loss) Earnings Stock Total
---------- --------- --------- ---------
(Dollars in thousands)
Balance at February 24, 2001 $ (85,852) $ 479,305 $(255,822) $ 314,362
Comprehensive income:
Net income -- 19,109 -- 19,109
Other comprehensive income (loss), net of tax:
Foreign currency translation (9,764) -- -- (9,764)
Net loss on derivative instruments (416) -- -- (416)
---------
Comprehensive income 8,929
Treasury shares repurchased -- -- (132,094) (132,094)
Shares reissued under employee stock purchase and stock award plans -- (1,050) 2,620 1,570
Shares issued upon exercise of stock options -- -- -- 13,648
---------- --------- --------- ---------
Balance at May 26, 2001 $ (96,032) $ 497,364 $(385,296) $ 206,415
========== ========= ========= =========
See Notes to Consolidated Financial Statements
-6-
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 26, 2001 are not necessarily indicative of the
results that may be expected for the full fiscal year ending February 23, 2002.
The balance sheet at February 24, 2001 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 2001 Annual Report on Form 10-K.
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
NOTE B -- INVENTORIES May 26, February 24,
2001 2001
--------------- ---------------
(Dollars in thousands)
Inventories consist of:
Raw materials $ 29,902 $ 45,689
Work in progress 67,976 57,210
Finished goods 8,993 14,890
--------------- ---------------
$ 106,871 $ 117,789
=============== ===============
NOTE C -- LONG-TERM DEBT May 26, February 24,
2001 2001
--------------- ---------------
(Dollars in thousands)
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 61,100 ---
Deferred gain on interest rate swaps 12,291 12,810
Other 7,545 7,663
--------------- ---------------
380,936 320,473
Less current portion 3,961 3,512
--------------- ---------------
$ 376,975 $ 316,961
=============== ===============
Through June 21, 2001, the Company had an unsecured revolving credit facility of
$400,000,000 expiring in June 2002 (the "Credit Facility"). At May 26, 2001, the
weighted average interest rate for outstanding borrowings under the Credit
Facility was 4.3%. On June 22, 2001, the Company refinanced its Credit Facility
with a syndicate of nine banks led by The Bank of America. The new credit
facility provides for an unsecured revolving line of credit of $300,000,000 and
matures in June 2006.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE D -- INCOME TAXES
The Company's effective income tax rate is greater than the statutory rate
primarily due to state income taxes and certain expenses that are not deductible
for income tax purposes.
NOTE E -- COMMITMENTS AND CONTINGENCIES
See "Legal Proceedings" in Part II, Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I, Item 2
herein.
NOTE F -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
May 26, May 27,
2001 2000
--------------- ---------------
(Dollars and shares in thousands,
except per share amounts)
Numerator:
Net income $ 19,109 $ 20,229
Denominator:
Weighted average shares-Basic 30,760 34,829
Effect of dilutive securities:
Employee stock options and
unvested restricted shares 576 28
--------------- ---------------
Weighted average shares-Diluted 31,336 34,857
=============== ===============
Basic earnings per share $ .62 $ .58
=============== ===============
Diluted earnings per share $ .61 $ .58
=============== ===============
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE G -- COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income:
May 26, May 27,
2001 2000
--------------- ---------------
(Dollars in thousands)
Net income $ 19,109 $ 20,229
Other comprehensive (loss) income,
net of tax:
Foreign currency translation (9,764) (8,099)
Net (loss) gain on derivative instruments (416) 347
--------------- ---------------
Comprehensive income $ 8,929 $ 12,477
=============== ===============
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 "All
Other" category (as reported below) is comprised of the Company's Transactive
and IGI/Europrint subsidiaries.
The Company's business segment data is summarized below:
May 26, May 27,
2001 2000
--------------- ---------------
(Dollars in thousands)
Revenues from external sources:
Lottery $ 227,907 $ 230,623
All other 7,058 11,375
--------------- ---------------
Consolidated $ 234,965 $ 241,998
=============== ===============
Net operating profit after income taxes:
Lottery $ 24,671 $ 25,561
All other (557) (100)
--------------- --------------
Consolidated $ 24,114 $ 25,461
=============== ===============
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
The following is a reconciliation of net operating profit after income taxes to
net income as reported on the Consolidated Income Statements:
May 26, May 27,
2001 2000
--------------- ---------------
(Dollars in thousands)
Net operating profit after income taxes $ 24,114 $ 25,461
Reconciling items, net of tax:
Interest expense (3,982) (4,291)
Other (1,023) (941)
--------------- ---------------
Net income $ 19,109 $ 20,229
=============== ===============
NOTE I -- SPECIAL CHARGES
In fiscal 2001, the Company recorded special charges of $42,270,000 in
connection with certain contractual obligations and a value assessment of the
Company's business operations. The major components of the special charges
consisted of $13,958,000 for a workforce reduction that eliminated approximately
255 Company positions worldwide, $11,518,000 for contractual obligations in
connection with the departures in July 2000 of the Company's former Chairman and
Chief Executive Officer and former President and Chief Operating Officer,
$8,536,000 for costs associated with the exit of certain business strategies and
product lines and $8,258,000 for the termination of consulting agreements and
facility exit costs, net of gains on the disposition of Company aircraft.
A summary of the special charge activity, which is included in accrued expenses
in the Company's Consolidated Balance Sheets, is as follows:
Exit of Certain
Worldwide Executive Business
Workforce Contractual Strategies and
Reduction Obligations Product Lines Other Total
-------------- -------------- ---------------- ------------ ------------
(Dollars in thousands)
Special charges $ 13,958 $ 11,518 $ 8,536 $ 8,258 $ 42,270
Cash expenditures (6,032) (9,965) (4,140) (3,289) (23,426)
Noncash charges --- --- (4,396) (4,017) (8,413)
-------------- -------------- ---------------- ------------ ------------
Balance at February 24, 2001 7,926 1,553 --- 952 10,431
Cash expenditures (1,886) (129) --- (1,192) (3,207)
-------------- -------------- ---------------- ------------ -----------
Balance at May 26, 2001 $ 6,040 $ 1,424 $ --- $ (240) $ 7,224
============== ============== ================ ============ ============
NOTE J -- STOCK REPURCHASE
In the first quarter of fiscal 2002, the Company repurchased 5,060,100 shares of
its Common Stock for $132,094,000, including 5,000,000 shares from its then
largest shareholder for $130,000,000.
-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 may
include, without limitation, statements relating to (i) the future prospects for
and stability of the lottery industry and other businesses in which the Company
is engaged or expects to be engaged, (ii) the future operating and financial
performance of the Company, (iii) the ability of the Company to retain existing
business and to obtain and retain new business, and (iv) the results and effects
of legal proceedings and investigations. Such forward-looking statements reflect
management's assessment based on information currently available, but are not
guarantees and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in the forward-looking
statements. These risks and uncertainties include, but are not limited to, those
set forth below and elsewhere in this report, in the Company's fiscal 2001 Form
10-K, and in the Company's subsequent press releases and Form 10-Q's and other
reports and filings with the Securities and Exchange Commission.
General
The Company operates on a 52- to 53-week fiscal year ending on the last Saturday
in February and fiscal 2002 ends on February 23, 2002.
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 2002 will be in a range of $165 million to $175 million.
The Company has taken steps to broaden its offerings of high-volume transaction
processing services outside of its core business of providing online lottery
services. For example, the Company has entered into agreements which permit bill
payments over its Brazilian and Chilean lottery networks. In addition, the
Company continues to develop, and where permitted, market, its UWin! internet
based platform through which international providers of government-sponsored
lottery products and services may offer interactive games.
The Company's business is highly regulated, and the competition to secure new
government contracts is often intense. Awards of contracts to the Company are,
from time to time, challenged by competitors. Further, there have been and may
continue to be investigations of various types, including grand jury
investigations, conducted by governmental authorities into possible
improprieties and wrongdoing in connection with efforts to obtain and/or the
awarding of lottery contracts and related matters. 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 that 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
-11-
and to obtain new or renewal contracts. In addition, continuing adverse
publicity resulting from these investigations and related matters could have
such a material adverse effect. See "Legal Proceedings" in Part II, Item 1
herein; and Part I, Item 1 - "Certain Factors That May Affect Future Performance
- - Maintenance of Business Relationships and Certain Legal Matters", Part I, Item
3 - "Legal Proceedings" and Note F to the Consolidated Financial Statements in
the Company's fiscal 2001 Annual Report on Form 10-K, for further information
concerning these matters and other contingencies.
Upcoming Significant Contract Rebids
A significant portion of the Company's revenues and cash flow is derived from
its portfolio of long-term online lottery service contracts, each of which in
the ordinary course of the Company's business periodically is the subject of
competitive procurement or renegotiation. Through fiscal 2003 (which ends in
February 2003), several of the Company's larger contracts, as measured by annual
revenues, (including the National Lottery of Brazil, California and Georgia) are
expected to be the subject of competitive procurements to select contractors to
supply lottery goods and services upon the termination of the Company's current
contracts. In addition, the Texas lottery contract, which was the Company's
second largest contract (based on annual revenues) in fiscal 2001, expires in
August 2002, and the Texas Lottery recently solicited bids for the new Texas
lottery contract. It is the Company's understanding that it was the sole bidder
for the new Texas lottery contract. See Part I, Item 1 -- "Certain Factors That
May Affect Future Performance -Strengthening of Competition" and "Lottery
Contract Awards and Related Significant Developments" in the Company's fiscal
2001 Annual Report on Form 10-K for further information concerning these
matters.
Results of Operations
Revenues for the first quarter of fiscal 2002 were $235.0 million, representing
a $7.0 million, or 2.9%, decrease from revenues of $242.0 million in the first
quarter of fiscal 2001.
Service revenues, including lottery and other services, in the fiscal 2002 first
quarter were $210.6 million, representing a $12.0 million, or 5.4%, decrease
from service revenues of $222.6 million in the first quarter of fiscal 2001.
This decrease reflects a decline in domestic lottery service revenues, the
adverse impact of foreign exchange rates, lower multi-state jackpot activity and
the expiration of the Company's electronic benefit transfer contract in Texas.
The Company's domestic lottery service revenues were $119.3 million in the first
quarter of fiscal 2002, a decrease of 5.9% from the $126.8 million recorded in
the same period of fiscal 2001. This decrease was primarily due to lower jackpot
activity in the Big Game and Powerball states, the loss of online lottery
contracts in West Virginia, Vermont and New Hampshire and the loss of an instant
ticket validation contract in New York. These decreases were partially offset by
higher jackpot activity in Texas and California in the first quarter of fiscal
2002 than in the first quarter of the prior year.
The Company's international lottery service revenues in the first quarter of
fiscal 2002 were $87.3 million, a 1% decrease from the $88.1 million recorded in
the first quarter of fiscal 2001, primarily due to agreed upon contractual rate
changes, along with the impact of the reduction in the dollar value of foreign
currencies. This decrease was partially offset by an increase in sales by
international lotteries, which grew 14.9% in the fiscal 2002 first quarter,
primarily driven by sales growth in Brazil and Morocco and the launch of the
national lotteries in Ukraine and Colombia.
Product sales in the first quarter of fiscal 2002 were $24.4 million, an
increase of $5.0 million over the $19.4 million of product sales in the first
quarter of fiscal 2001. This increase was primarily driven by the sale of an
instant ticket system to our customer in Israel. The Company did not sell any
lottery terminals during the first quarter of fiscal 2002, as compared to the
sale of approximately 400 lottery terminals during the fiscal 2001 first
quarter.
-12-
Gross margins on service revenues were 31.4% in the fiscal 2002 first quarter
compared to 35.9% in the first quarter of fiscal 2001, primarily driven by lower
jackpot activity, contractual rate changes and start-up losses on new lottery
system installations in Colombia and the Ukraine.
Had average foreign exchange rates in the fiscal 2002 first quarter been the
same as those in the first quarter of fiscal 2001, the Company's service
revenues and gross profit for the fiscal 2002 first quarter would have been
higher by approximately $8.2 million and $2.7 million, respectively, than
reported for the fiscal 2002 first quarter.
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales of 18.3% in the first
quarter of fiscal 2002 were comparable to the same period last year.
Selling, general and administrative expenses in the first quarter of fiscal 2002
were $29.6 million, representing a $3.0 million, or 9.2%, decrease from the
$32.6 million incurred in the first quarter of fiscal 2001. This decrease was
primarily attributable to cost reductions driven by the continued execution of
the value assessment initiatives implemented in fiscal 2001. As a percentage of
revenues, selling, general and administrative expenses were 12.6% and 13.5%
during the first quarters of fiscal 2002 and 2001, respectively.
Research and development expenses in the first quarter of fiscal 2002 were $7.6
million, representing a $5.3 million, or 40.9%, decrease from research and
development expenses of $12.9 million in the first quarter of fiscal 2001. This
decrease again reflects the effect of cost reductions driven by the continued
execution of the value assessment initiatives implemented in fiscal 2001. As a
percentage of revenues, research and development expenses were 3.2% and 5.3%
during the first quarters of fiscal 2002 and 2001, respectively.
Other income of $2.2 million in the first quarter of fiscal 2002 was comprised
principally of the amortization of the gain on the sale of the Company's 22.5%
equity interest in Camelot Group plc ("Camelot"), which the Company sold in
April 1998, and which is being amortized over the remaining period of Camelot's
first operating license, due to expire in September 2001. Other income in the
first quarter of fiscal 2001 of $.7 million was comprised of the amortization of
the gain on the sale of the Company's interest in Camelot, partially offset by
minority interest expense associated with the Company's 40% equity interest in a
South African telecommunications company.
The Company's effective income tax rate decreased from 39% in the first quarter
of fiscal 2001 to 38% in the first quarter of fiscal 2002 principally due to
lower state taxes and a reduction in non-deductible expenses.
-13-
Changes in Financial Position, Liquidity and Capital Resources
During the first quarter of fiscal 2002, the Company generated $93.3 million of
cash from operations. This cash, together with $61.1 million of net proceeds
from the issuance of long-term debt and available cash on hand, was primarily
used to fund the purchase of $72.1 million of systems, equipment and other
assets relating to contracts and to repurchase $132.1 million of the Company's
common stock.
Trade accounts receivable decreased by $28.5 million, from $118.7 million at
February 24, 2001 to $90.2 million at May 26, 2001, primarily due to collections
of receivables related to product sales recorded in the fourth quarter of fiscal
2001, along with the collection of amounts due from our customer in the Czech
Republic resulting from the successful resolution of contractual issues.
Inventories decreased by $10.9 million, from $117.8 million at February 24, 2001
to $106.9 million at May 26, 2001, primarily due to the shipment of inventory
for new system installations in New York and Ohio, along with the sale of an
instant ticket system to our customer in Israel. This decrease was partially
offset by increased inventory related to a new system installation in Portugal.
Other assets decreased by $8.3 million, from $116.7 million at February 24, 2001
to $108.4 million at May 26, 2001, primarily due to scheduled payments received
on long-term sales type leases, along with the sale in March 2001 of the
Company's interest in three of the four joint ventures with Full House Resorts,
Inc. Included in other assets at May 26, 2001 were investments in and advances
to unconsolidated affiliates totaling $27.4 million. The Company periodically
evaluates the net realizable value of these investments to determine if a
permanent impairment exists and, in the opinion of management, no such
impairment existed at May 26, 2001. However, should future events and
circumstances indicate a permanent impairment has occurred with regard to one or
more of these investments, a charge to expense would be recorded at that time to
reflect the adjustment in the net realizable value of the underlying investment.
Accounts payable decreased by $4.7 million, from $49.3 million at February 24,
2001 to $44.6 million at May 26, 2001, primarily due to the timing of payments
relating to ongoing lottery system installations.
Accrued expenses decreased by $6.6 million, from $65.6 million at February 24,
2001 to $59.0 million at May 26, 2001, primarily due to payments made related to
the special charge recorded in fiscal 2001, along with the payment of
semi-annual interest on the Company's Senior Notes.
Employee compensation decreased by $13.2 million, from $31.9 million at February
24, 2001 to $18.7 million at May 26, 2001, primarily due to the payment of
fiscal 2001 management incentive compensation and employee profit sharing.
Income taxes payable, which are reported net of income tax refunds receivable,
increased by $4.6 million, from $64.6 million at February 24, 2001 to $69.2
million at May 26, 2001. This increase was primarily due to the timing of income
tax payments.
Long-term debt, less current portion increased by $60.0 million, from $317.0
million at February 24, 2001 to $377.0 million at May 26, 2001, primarily due to
borrowings under the Company's Credit Facility to partially finance the
repurchase in March 2001 of 5 million shares of Common Stock from the Company's
then largest shareholder.
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 2002 will be in a
range of $220 million to $240 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 26, 2001 the Company had utilized
approximately $61.1 million of its $400 million Credit Facility. On June 22,
2001, the Company refinanced its Credit Facility with a syndicate of nine banks
led by The Bank of America. The new credit facility provides for an unsecured
revolving line of credit of $300,000,000 and matures in June 2006. The Company
currently expects that its cash flow from operations and available borrowings
under its new Credit Facility will be sufficient for the foreseeable future to
fund its anticipated working capital and ordinary capital expenditure needs, to
service its debt obligations, to fund anticipated internal growth and to
repurchase shares of the Company's Common Stock, from time to time, under the
Company's open market share repurchase program.
-14-
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 2002.
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 26, 2001, the estimated fair value
of the Company's fixed rate debt, as determined by an independent investment
banker, approximated $303.6 million. At May 26, 2001, a hypothetical 10%
increase in interest rates would reduce the estimated fair value of the
Company's fixed rate debt to $298.3 million and a hypothetical 10% decrease in
interest rates would increase the estimated fair value of the Company's fixed
rate debt to $309.0 million.
A hypothetical 10% adverse or favorable change in interest rates applied to
variable rate debt would not have a material effect on current earnings.
The Company uses various techniques to mitigate the risk associated with future
changes in interest rates, including entering into interest rate swaps and the
private placement of fixed rate debt. In June 2001, after the close of the
fiscal 2002 first quarter, the Company entered into two interest rate swaps for
an aggregate amount of $150.0 million which effectively entitle the Company to
exchange fixed rate payments for variable rate payments from the period June 6,
2001 to August 15, 2007.
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 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 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
-15-
does not engage in currency speculation. At May 26, 2001, a hypothetical 10%
adverse change in foreign exchange rates would result in a translation loss of
$14.4 million that would be recorded in the equity section of the Company's
balance sheet.
At May 26, 2001, a hypothetical 10% adverse change in foreign exchange rates
would result in a net transaction loss of $2.9 million that would be recorded in
current earnings after considering the effects of foreign exchange contracts
currently in place.
At May 26, 2001, a hypothetical 10% adverse change in foreign exchange rates
would result in a net reduction of cash flows from anticipatory transactions in
fiscal 2002 of $16.0 million. The percentage of fiscal 2002 anticipatory cash
flows that were hedged varied throughout the first quarter of fiscal 2002, but
averaged 15%.
As of May 26, 2001, the Company had contracts for the sale of foreign currency
of approximately $98.3 million (primarily Australian dollars, Euro and Moroccan
Dirhams) and the purchase of foreign currency of approximately $49.6 million
(primarily pounds sterling).
-16-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See "Market Risk Disclosures" above.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As previously reported, the Company, W. Bruce Turner, the Company's former
Chairman and Chief Executive Officer, and its former Chief Operating Officer
have been named as defendants in a shareholder class action suit, Sandra
Kafenbaum, v. GTECH Holdings Corporation, et al, brought in the U.S. District
Court of Rhode Island. In April 2001, the Company and the other defendants moved
to dismiss the amended complaint in this lawsuit on the grounds that the
allegations made in the amended complaint are unsupported by fact and fail, in
any event, to state a cause of action under the federal securities laws. This
motion is pending. While the Company believes that it has good defenses to the
claims made in this lawsuit, at the present time the Company is unable to
predict the outcome, or the financial statement impact, if any, of this lawsuit.
For information respecting this and 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", Part I, Item 3
- - "Legal Proceedings" and Note F to Consolidated Financial Statements, in the
Company's fiscal 2001 Annual Report on Form 10-K.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits - The exhibits to this report are as follows:
10.1 Credit Agreement, dated June 22, 2001, by and among GTECH
Corporation, as Borrower, Bank of America, N.A., as
Administrative Agent and as Lender, and the Lenders party
thereto from time-to-time.
10.2 Amendment, dated May 4, 2001, to the Agreement dated March 5,
2001, as amended, by and between the Company and Howard C.
Cohen.
10.3 Amendment, dated as of June 1, 2001, to the Agreement, dated
as of August 9, 2000, by and between the Company and W. Bruce
Turner.
(b) The Company did not file any reports on form 8-K during the quarter to which
this report relates.
-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.
GTECH HOLDINGS CORPORATION
Date: July 3, 2001 By /s/ Jaymin B. Patel
---------------------------------------------------------
Jaymin B. Patel, Senior Vice President and Chief Financial
Officer (Principal Financial Officer)
Date: July 3, 2001 By /s/ Robert J. Plourde
------------------------------------------------
Robert J. Plourde, Vice President and Corporate
Controller (Principal Accounting Officer)
-18-