1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 25, 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 September 28, 2001, there were 28,738,251 shares of the registrant's Common
Stock outstanding.
2
INDEX
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION Number
----------------------------------- ------
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Income Statements 4-5
Consolidated Statements of Cash Flows 6
Consolidated Statements of Shareholders' Equity 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial Condition 13-19
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
-------------------------------
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
----------
EXHIBITS
--------
3
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES (Unaudited)
August 25, February 24,
2001 2001
------------- -------------
ASSETS (Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 5,204 $ 46,948
Trade accounts receivable 111,894 118,721
Sales-type lease receivables 8,716 8,722
Inventories 113,811 117,789
Deferred income taxes 26,850 26,850
Other current assets 17,678 18,798
------------- -------------
TOTAL CURRENT ASSETS 284,153 337,828
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 1,331,808 1,283,414
Less: Accumulated Depreciation (939,059) (922,080)
------------- -------------
392,749 361,334
GOODWILL 119,814 122,325
OTHER ASSETS 95,027 116,673
------------- -------------
TOTAL ASSETS $ 891,743 $ 938,160
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings $ 2,903 $ 2,316
Accounts payable 46,046 49,267
Accrued expenses 67,030 65,571
Employee compensation 27,912 31,898
Advance payments from customers 89,883 55,418
Income taxes payable 67,386 64,573
Current portion of long-term debt 3,872 3,512
------------- -------------
TOTAL CURRENT LIABILITIES 305,032 272,555
LONG-TERM DEBT, less current portion 362,653 316,961
OTHER LIABILITIES 37,164 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,
45,731,140 and 44,507,315 shares issued, 28,992,608 and 34,257,527 shares
outstanding at August 25, 2001 and February 24, 2001, respectively 457 445
Additional paid-in capital 215,540 183,294
Equity carryover basis adjustment (7,008) (7,008)
Accumulated other comprehensive loss (101,351) (85,852)
Retained earnings 512,887 479,305
------------- -------------
620,525 570,184
Less cost of 16,738,532 and 10,249,788 shares in treasury at
August 25, 2001 and February 24, 2001, respectively (438,030) (255,822)
------------- -------------
182,495 314,362
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 891,743 $ 938,160
============= =============
See Notes to Consolidated Financial Statements
- 3 -
4
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended
---------------------------------------
August 25, August 26,
2001 2000
------------------- ------------------
(Dollars in thousands,
except per share amounts)
Revenues:
Services $ 209,619 $ 204,209
Sales of products 26,965 23,399
------------------ -----------------
236,584 227,608
Costs and expenses:
Costs of services 143,592 142,622
Costs of sales 23,663 29,615
------------------ -----------------
167,255 172,237
------------------ -----------------
Gross profit 69,329 55,371
Selling, general and administrative 27,081 32,237
Research and development 8,336 13,351
Goodwill amortization 1,590 1,609
Special charge - 40,018
------------------ -----------------
Operating expenses 37,007 87,215
------------------ -----------------
Operating income (loss) 32,322 (31,844)
Other income (expense):
Interest income 1,224 1,044
Equity in earnings of unconsolidated affiliates 1,400 838
Other income (expense) (1,685) 1,754
Interest expense (6,429) (6,653)
------------------ -----------------
Income (loss) before income taxes 26,832 (34,861)
Income taxes (benefit) 10,196 (13,595)
------------------ -----------------
Net income (loss) $ 16,636 $ (21,266)
================== ==================
Basic earnings (loss) per share $ .56 $ (.61)
================== ==================
Diluted earnings (loss) per share $ .55 $ (.61)
================== ==================
See Notes to Consolidated Financial Statements
- 4 -
5
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Six Months Ended
--------------------------------------
August 25, August 26,
2001 2000
------------------ -----------------
(Dollars in thousands,
except per share amounts)
Revenues:
Services $ 420,170 $ 426,840
Sales of products 51,379 42,766
------------------ -----------------
471,549 469,606
Costs and expenses:
Costs of services 288,084 285,385
Costs of sales 43,600 45,426
------------------ -----------------
331,684 330,811
------------------ -----------------
Gross profit 139,865 138,795
Selling, general and administrative 56,651 64,798
Research and development 15,969 26,277
Goodwill amortization 3,063 3,218
Special charge - 40,018
------------------ -----------------
Operating expenses 75,683 134,311
------------------ -----------------
Operating income 64,182 4,484
Other income (expense):
Interest income 3,254 2,969
Equity in earnings of unconsolidated affiliates 2,575 2,094
Other income 493 2,441
Interest expense (12,851) (13,688)
------------------ -----------------
Income (loss) before income taxes 57,653 (1,700)
Income taxes (benefit) 21,908 (663)
------------------ -----------------
Net income (loss) $ 35,745 $ (1,037)
================== =================
Basic earnings (loss) per share $ 1.19 $ (.03)
================== =================
Diluted earnings (loss) per share $ 1.16 $ (.03)
================== =================
See Notes to Consolidated Financial Statements
- 5 -
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Six Months Ended
---------------------------------------
August 25, August 26,
2001 2000
---------------- ------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income (loss) $ 35,745 $ (1,037)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 81,277 81,248
Intangibles amortization 4,630 6,327
Goodwill amortization 3,063 3,218
Special charge - 40,018
Equity in losses of unconsolidated affiliates,
net of dividends received (442) (1,130)
Other 3,982 998
Changes in operating assets and liabilities:
Trade accounts receivable 20,119 12,087
Inventories 3,978 (5,541)
Special charge (4,850) (11,628)
Other assets and liabilities 39,729 (17,951)
---------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 187,231 106,609
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts (118,096) (66,641)
Investments in and advances to unconsolidated subsidiaries 3,187 (11,684)
Other (1,738) (7,597)
---------------- ------------------
NET CASH USED FOR INVESTING ACTIVITIES (116,647) (85,922)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 181,000 38,000
Principal payments on long-term debt (136,255) (56,466)
Purchases of treasury stock (186,293) (1,530)
Proceeds from stock options 32,258 203
Other (1,346) 1,066
---------------- ------------------
NET CASH USED FOR FINANCING ACTIVITIES (110,636) (18,727)
Effect of exchange rate changes on cash (1,692) (3,117)
---------------- ------------------
DECREASE IN CASH AND CASH EQUIVALENTS (41,744) (1,157)
Cash and cash equivalents at beginning of period 46,948 11,115
---------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,204 $ 9,958
================ ==================
See Notes to Consolidated Financial Statements
- 6 -
7
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 loss, net of tax:
Foreign currency translation - - - -
Net loss on derivative instruments - - - -
Unrealized loss on investments - - - -
Comprehensive income
Treasury shares repurchased (6,649,100) - - -
Shares reissued under employee
stock purchase and stock award plans 160,356 - - -
Shares issued upon exercise of stock options 1,223,825 12 32,246 -
----------- -------------- ---------------- -------------
Balance at August 25, 2001 28,992,608 $ 457 $ 215,540 $ (7,008)
=========== ============== ================ =============
Accumulated
Other
Comprehensive Retained Treasury
Income (Loss) Earnings Stock Total
-------------- --------------- ---------------- ---------------
(Dollars in thousands)
Balance at February 24, 2001 $ (85,852) $ 479,305 $ (255,822) $ 314,362
Comprehensive income:
Net income - 35,745 - 35,745
Other comprehensive loss, net of tax:
Foreign currency translation (13,331) - - (13,331)
Net loss on derivative instruments (2,132) - - (2,132)
Unrealized loss on investments (36) - - (36)
------------
Comprehensive income 20,246
Treasury shares repurchased - - (186,293) (186,293)
Shares reissued under employee
stock purchase and stock award plans - (2,163) 4,085 1,922
Shares issued upon exercise of stock options - - - 32,258
---------------- --------------- ---------------- --------------
Balance at August 25, 2001 $ (101,351) $ 512,887 $ (438,030) $ 182,495
================ =============== ================ ===============
See Notes to Consolidated Financial Statements
- 7 -
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of GTECH Holdings
Corporation (the "Company"), the parent of GTECH Corporation, have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended August 25, 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 August 25, February 24,
2001 2001
--------------- ---------------
(Dollars in thousands)
Inventories consist of:
Raw materials $ 17,827 $ 45,689
Work in progress 87,077 57,210
Finished goods 8,907 14,890
--------------- ---------------
$ 113,811 $ 117,789
=============== ===============
NOTE C -- LONG-TERM DEBT August 25, 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 48,000 ---
Deferred gain on interest rate swaps 11,773 12,810
Other 6,752 7,663
--------------- ---------------
366,525 320,473
Less current portion 3,872 3,512
--------------- ---------------
$ 362,653 $ 316,961
=============== ===============
On June 22, 2001, the Company refinanced its revolving credit facility with a
syndicate of nine banks led by The Bank of America, which provides for an
unsecured revolving line of credit of $300 million maturing in June 2006 (the
"Credit Facility"). At August 25, 2001, the weighted average interest rate for
outstanding borrowings under the Credit Facility was 4.7%.
- 8 -
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE D -- INCOME TAXES
The Company's effective income tax rate is greater than the statutory rate
primarily due to state income taxes and certain expenses that are not deductible
for income tax purposes.
NOTE E -- COMMITMENTS AND CONTINGENCIES
See "Legal Proceedings" in Part II, Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I, Item 2
herein.
NOTE F--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three Months Ended Six Months Ended
-------------------------------- ------------------------------
August 25, August 26, August 25, August 26,
2001 2000 2001 2000
-------------- ---------------- ------------- ---------------
(Dollars and shares in thousands, except per share amounts)
Numerator:
Net income (loss) $ 16,636 $ (21,266) $ 35,745 $ (1,037)
Denominator:
Weighted average shares-Basic 29,538 34,840 30,149 34,835
Effect of dilutive securities:
Employee stock options and 703 --- 640 ---
unvested restricted shares
-------------- --------------- ------------- ---------------
Weighted average shares-Diluted 30,241 34,840 30,789 34,835
============== =============== ============= ===============
Basic earnings (loss) per share $ .56 $ (.61) $ 1.19 $ (.03)
============== =============== ============= ===============
Diluted earnings (loss) per share $ .55 $ (.61) $ 1.16 $ (.03)
============== =============== ============= ================
The diluted share base for the three months and six months ended August 26, 2000
excludes 64,000 and 85,000 shares, respectively, related to employee stock
options and unvested restricted shares. These shares are excluded due to their
antidilutive effect as a result of the Company's net loss during those periods.
- 9 -
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE G -- COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income (loss):
Three Months Ended Six Months Ended
-------------------------------- ----------------------------
August 25, August 26, August 25, August 26,
2001 2000 2001 2000
-------------- ---------------- ------------- -------------
(Dollars in thousands)
Net income (loss) $ 16,636 $ (21,266) $ 35,745 $ (1,037)
Other comprehensive income (loss), net of tax:
Foreign currency translation (3,567) 1,728 (13,331) (6,371)
Net gain (loss) on derivative instruments (1,716) (321) (2,132) 26
Unrealized loss on investments (36) --- (36) ---
-------------- --------------- ------------- -------------
Comprehensive income (loss) $ 11,317 $ (19,859) $ 20,246 $ (7,382)
============== ================ ============= ==============
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:
Three Months Ended Six Months Ended
------------------------------- ------------------------------
August 25, August 26, August 25, August 26,
2001 2000 2001 2000
-------------- ------------- ------------- -------------
(Dollars in thousands)
Revenues from external sources:
Lottery $ 231,032 $ 217,567 $ 458,939 $ 448,190
All other 5,552 10,041 12,610 21,416
-------------- ------------- ------------- -------------
Consolidated $ 236,584 $ 227,608 $ 471,549 $ 469,606
============== ============= ============= =============
Net operating profit after income taxes:
Lottery $ 22,821 $ 8,749 $ 47,504 $ 34,308
All other (585) (497) (1,154) (597)
-------------- ------------- ------------- -------------
Consolidated $ 22,236 $ 8,252 $ 46,350 $ 33,711
============== ============= ============= =============
- 10 -
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
A reconciliation of net operating profit after income taxes to net income (loss)
as reported on the Consolidated Income Statements is as follows:
Three Months Ended Six Months Ended
------------------------------- ------------------------------
August 25, August 26, August 25, August 26,
2001 2000 2001 2000
-------------- ------------- ------------- -------------
(Dollars in thousands)
Net operating profit after income taxes $ 22,236 $ 8,252 $ 46,350 $ 33,711
Reconciling items, net of tax:
Special charge --- (24,411) --- (24,411)
Interest expense (3,986) (4,058) (7,968) (8,350)
Other (1,614) (1,049) (2,637) (1,987)
-------------- ------------- ------------- -------------
Net income (loss) $ 16,636 $ (21,266) $ 35,745 $ (1,037)
============== ============= ============= =============
NOTE I -- SPECIAL CHARGES
In fiscal 2001, the Company recorded special charges of $42.3 million 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 $14.0 million for a workforce reduction that eliminated
approximately 255 Company positions worldwide, $11.5 million for contractual
obligations in connection with the departures in July 2000 of the Company's
former Chairman and Chief Executive Officer and former President and Chief
Operating Officer, $8.5 million for costs associated with the exit of certain
business strategies and product lines and $8.3 million 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
Change in estimate (209) (55) --- 264 ---
Cash expenditures (3,329) (329) --- (1,192) (4,850)
-------------- -------------- ---------------- ------------ ------------
Balance at August 25, 2001 $ 4,388 $ 1,169 $ --- $ 24 $ 5,581
============== ============== ================ ============ ============
The Company also recorded $5.1 million ($3.1 million after-tax, or $0.09 per
share) of additional charges in the second quarter of fiscal 2001 principally
associated with the Company's Restricted Stock Plan. These charges are included
in selling, general & administrative expenses in the Company's Consolidated
Income Statements.
- 11 -
12
NOTE J -- STOCK REPURCHASE
During the first six months of fiscal 2002, the Company repurchased 6,649,100
shares of its Common Stock for $186.3 million.
NOTE K - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company will apply the new accounting rules
beginning in the first quarter of fiscal 2003 (the quarter ended May 25, 2002).
The Company is currently evaluating the effect these new standards will have on
the earnings and financial position of the Company.
NOTE L - ASSET IMPAIRMENT
During the second quarter of fiscal 2002, the Company wrote-off its $9.3 million
cost method investment in the common stock of an Internet security developer.
This amount is included in the other income (expense) line item in the Company's
Consolidated Income Statements.
- 12 -
13
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.
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
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
- 13 -
14
"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. The Texas Lottery solicited bids for the new Texas
lottery contract, and during the second quarter of fiscal 2002, the Company was
selected to enter into negotiations for a new lottery operations and services
contract for the Texas Lottery's integrated online and instant-ticket games. 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.
Effect of New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company will apply the new accounting rules
beginning in the first quarter of fiscal 2003 (the quarter ended May 25, 2002).
The Company is currently evaluating the effect these new standards will have on
the earnings and financial position of the Company.
Prior Year Special and Additional Charges
In the second quarter of fiscal 2001, the Company estimated and recorded a $40.0
million special charge, or $0.70 per diluted share, in connection with certain
contractual obligations and a value assessment of the Company's business
operations. The Company also recorded as part of selling, general &
administrative expenses, additional charges of $5.1 million, or $0.09 per
diluted share, in the fiscal 2001 second quarter, primarily attributable to the
implementation of the Company's restricted stock plan.
- 14 -
15
Results of Operations
Second Quarter
Revenues for the second quarter of fiscal 2002 were $236.6 million, representing
a $9.0 million, or 3.9%, increase over revenues of $227.6 million in the second
quarter of fiscal 2001.
Service revenues, including lottery and other services, in the fiscal 2002
second quarter were $209.6 million, representing a $5.4 million, or 2.6%,
increase over service revenues of $204.2 million in the second quarter of fiscal
2001. This increase reflected higher domestic lottery service revenues,
partially offset by lower international service revenues and the expiration of
certain electronic benefit transfer contracts that the Company is in the process
of winding down.
The Company's domestic lottery service revenues were $126.1 million in the
second quarter of fiscal 2002, an increase of 15.6% over the $109.1 million
recorded in the same period of fiscal 2001. This increase was primarily driven
by higher same store sales, along with higher multi-state jackpot activity.
The Company's international lottery service revenues in the second quarter of
fiscal 2002 were $80.8 million, a 7.9% decrease from the $87.7 million recorded
in the second quarter of fiscal 2001, primarily due to the combined effect of
contractual rate changes and the impact of the reduction in the dollar value of
foreign currencies, primarily in Brazil. This decrease was partially offset by
an increase in sales by several of the Company's international lottery customers
and the launch of the national lottery in Colombia. Had average foreign exchange
rates in the second quarter of the prior year prevailed in the second quarter of
this year, the Company estimates that international service revenues for the
fiscal 2002 second quarter would have been $91.3 million, or approximately 4%
higher than reported in the second quarter of last year.
Product sales in the second quarter of fiscal 2002 were $27.0 million, an
increase of $3.6 million over the $23.4 million of product sales in the second
quarter of fiscal 2001. Product sales in the fiscal 2002 second quarter included
sales of terminals and software to our customer in the United Kingdom, and the
sale of terminals to our customer in New South Wales, Australia. Product sales
in the second quarter of fiscal 2001 were principally comprised of the sale of a
new online lottery system to our customer in New South Wales, Australia, along
with equipment sales to South Africa.
Gross margins on service revenues improved from 30.2% in the second quarter of
fiscal 2001 to 31.5% in the second quarter of fiscal 2002, primarily driven by
higher multi-state jackpot activity, partially offset by start-up losses on new
lottery system installations in Ukraine and Colombia.
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales in the second quarter
of fiscal 2002 were 12.2% compared to negative (26.6%) in the same period last
year. During the second quarter of the prior year, the Company experienced cost
over-runs on system installations in New South Wales, Australia and Israel.
Operating expenses in the second quarter of fiscal 2002 were $37.0 million,
representing a $5.1 million, or 12.1%, decrease, when compared to the $42.1
million of operating expenses incurred in the second quarter of fiscal 2001,
excluding the special and additional charges in the prior year quarter. This
decrease was primarily attributable to cost reductions driven by the continued
execution of the value assessment initiatives implemented in fiscal 2001 and the
Company's increased emphasis on improving productivity and efficiency. As a
percentage of revenues, exclusive of the prior year special and additional
charges, operating expenses were 15.6% and 18.5% during the second quarters of
fiscal 2002 and 2001, respectively.
- 15 -
16
Other expense of $1.7 million in the second quarter of fiscal 2002 was primarily
comprised of the write-off of the Company's $9.3 million cost method investment
in the common stock of an Internet security developer, partially offset by a
$3.9 million gain on the sale of a majority interest in the Company's subsidiary
in the Czech Republic, which owns certain lottery assets, along with $2.1
million of the amortization of the gain on the Company's April 1998 sale of its
22.5% interest in Camelot Group plc ("Camelot"), which is being amortized over
the remaining period of Camelot's first operating license, due to expire in
September 2001, and $1.6 million of foreign exchange gains from hedging
contracts. Other income in the second quarter of fiscal 2001 of $1.8 million was
comprised principally of the amortization of the gain on the sale of the
Company's interest in Camelot.
The Company's effective income tax rate decreased from 39% in the second quarter
of fiscal 2001 to 38% in the second quarter of fiscal 2002 principally due to
lower state taxes and a reduction in non-deductible expenses.
Year to Date
Revenues for the first six months of fiscal 2002 were $471.5 million,
representing a $1.9 million, or 0.4%, increase over revenues of $469.6 million
in the first six months of fiscal 2001.
Service revenues, including lottery and other services, in the first six months
of fiscal 2002 were $420.2 million, representing a $6.6 million, or 1.6%,
decrease from service revenues of $426.8 million in the first six months of
fiscal 2001. This decrease reflected a decline in international lottery service
revenues and the expiration of certain electronic benefit transfer contracts,
partially offset by higher domestic lottery service revenues.
The Company's international lottery service revenues in the first six months of
fiscal 2002 were $168.1 million, a 4.4% decrease from the $175.8 million
recorded in the first six months of fiscal 2001, primarily due to the combined
effect of contractual rate changes and the impact of the reduction in the dollar
value of foreign currencies. This decrease was partially offset by an increase
in sales by several of the Company's international lottery customers and the
launch of the national lottery in Colombia in the fourth quarter of the prior
year. Had average foreign exchange rates in the first six months of the prior
year prevailed in the first six months of this year, the Company estimates that
international service revenues for the first six months of fiscal 2002 would
have been $187.0 million, or approximately 6.3% higher, than reported in the
first six months of last year.
The Company's domestic lottery service revenues were $245.4 million in the first
six months of fiscal 2002, an increase of 4.0% over the $235.9 million recorded
in the same period of fiscal 2001. This increase was primarily due to higher
multi-state jackpot activity.
Product sales in the first six months of fiscal 2002 were $51.4 million, an
increase of $8.6 million over the $42.8 million of product sales in the first
six months of fiscal 2001. This increase was driven by sales of terminals and
software to our customer in the United Kingdom.
Gross margins on service revenues were 31.4% in the first six months of fiscal
2002 compared to 33.1% in the first six months of fiscal 2001, primarily driven
by contractual rate changes in Texas, along with start-up losses on new lottery
system installations in Colombia and Ukraine.
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales in the first six
months of fiscal 2002 were 15.1% compared to
- 16 -
17
negative (6.2%) in the same period last year. This increase was primarily due to
the incurrence in the fiscal 2001 first half of cost over-runs on system
installations in New South Wales, Australia and Israel.
Operating expenses in the first six months of fiscal 2002 were $75.7 million,
representing a $13.5 million, or 15.1%, decrease, when compared to the $89.2
million of operating expenses incurred in the first six months of fiscal 2001,
excluding the special and additional charges in the prior year first half. This
decrease was primarily attributable to cost reductions driven by the continued
execution of the value assessment initiatives implemented in fiscal 2001 and the
Company's increased emphasis on improving productivity and efficiency. As a
percentage of revenues, exclusive of the prior year special and additional
charges, operating expenses were 16.0% and 19.0 % during the first six months of
fiscal 2002 and 2001, respectively.
Other income of $0.5 million in the first six months of fiscal 2002 was
comprised primarily of a $3.9 million gain on the sale of a majority interest in
the Company's subsidiary in the Czech Republic, which owns certain lottery
assets, the amortization of the gain on the sale of the Company's interest in
Camelot, and $1.8 million of foreign exchange gains from hedging contracts. This
was partially offset by the write-off of the Company's $9.3 million cost method
investment in the common stock of an Internet security developer. Other income
in the first six months of fiscal 2001 of $2.4 million was principally comprised
of the amortization of the gain on the sale of the Company's interest in
Camelot, partially offset by minority interest 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 six
months of fiscal 2001 to 38% in the first six months of fiscal 2002 principally
due to lower state taxes and a reduction in non-deductible expenses.
Changes in Financial Position, Liquidity and Capital Resources
During the first six months of fiscal 2002, the Company generated $187.2 million
of cash from operations. This cash, together with $181.0 million of borrowings
under the Company's Credit Facility, was primarily used to fund the purchase of
$118.1 million of systems, equipment and other assets relating to contracts and
to repurchase $186.3 million of the Company's common stock.
Trade accounts receivable decreased by $6.8 million, from $118.7 million at
February 24, 2001 to $111.9 million at August 25, 2001, primarily due to
collections of receivables related to product sales recorded in the fourth
quarter of fiscal 2001, partially offset by progress billings on new system
installations.
Other assets decreased by $21.7 million, from $116.7 million at February 24,
2001 to $95.0 million at August 25, 2001, primarily due to the write-off of the
Company's cost method investment in the common stock of an Internet security
developer, along with scheduled payments received on long-term sales type leases
and payments received on loans to Uthingo, the consortium that operates the
South Africa National Lottery. Included in other assets at August 25, 2001 were
investments in and advances to unconsolidated affiliates totaling $14.5 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 August 25, 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.
- 17 -
18
Advance payments from customers increased by $34.5 million, from $55.4 million
at February 24, 2001 to $89.9 million at August 25, 2001, primarily due to
advances received from customers related to product sales expected to be
delivered during the second half of fiscal 2002 and the first half of fiscal
2003.
Other liabilities increased by $7.3 million, from $29.9 million at February 24,
2001 to $37.2 million at August 25, 2001, primarily due to cash collected in
excess of revenue recognized and minority interest payable related to the sale
of a majority interest in the Company's subsidiary in the Czech Republic.
At August 25, 2001, the Company's current liabilites exceeded its current
assets by $20.9 million, principally due to the $89.9 million of advance
payments from customers.
The Company's business is capital-intensive. Although it is not possible to
estimate precisely, 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 $210 million to $220 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
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 million and matures in June 2006. As
of August 25, 2001 the Company had utilized approximately $48.0 million of its
$300 million Credit Facility. The Company currently expects that its cash flow
from operations and available borrowings under its 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.
Market Risk Disclosures
The primary market risk inherent in the Company's financial instruments and
exposures is the potential loss arising from adverse changes in interest rates
and foreign currency rates. The Company's exposure to commodity price changes is
not considered material and is managed through its procurement and sales
practices. The Company did not own any marketable equity securities during the
first six months of fiscal 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 August 25, 2001, after taking into
consideration $150.0 million of interest rate swaps, the estimated fair value of
the Company's $300.0 million of fixed rate debt approximated $307.6 million. At
August 25, 2001, a hypothetical 10% increase in interest rates would increase
the estimated fair value of the Company's fixed rate debt to $308.5 million and
a hypothetical 10% decrease in interest rates would reduce the estimated fair
value of the Company's fixed rate debt to $306.5 million. An independent
investment banker determined the estimated fair value amounts.
A hypothetical 10% adverse or favorable change in interest rates applied to
variable rate debt would not have a material effect on current earnings.
- 18 -
19
The Company uses various techniques to mitigate the risk associated with future
changes in interest rates, including entering into interest rate swaps. During
the second quarter of fiscal 2002, 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 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
does not engage in currency speculation. At August 25, 2001, a hypothetical 10%
adverse change in foreign exchange rates would result in a translation loss of
$13.2 million that would be recorded in the equity section of the Company's
balance sheet.
At August 25, 2001, a hypothetical 10% adverse change in foreign exchange rates
would result in a net transaction loss of $3.5 million that would be recorded in
current earnings after considering the effects of foreign exchange contracts
currently in place.
At August 25, 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 $3.5 million. The percentage of fiscal 2002 anticipatory cash
flows that were hedged varied throughout the second quarter of fiscal 2002, but
averaged 71%.
As of August 25, 2001, the Company had contracts for the sale of foreign
currency of approximately $140.4 million (primarily pounds sterling, Australian
dollars, Euro, Brazilian reals and Moroccan Dirhams) and the purchase of foreign
currency of approximately $29.8 million (primarily pounds sterling and Mexican
pesos).
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See "Market Risk Disclosures" above.
- 19 -
20
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For information respecting certain legal proceedings relating to the Company,
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, and Part II, Item 1 - "Legal
Proceedings" included in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) and (c)
The Company's Annual Meeting of Shareholders was held on July 9, 2001 and in
connection therewith, proxies were solicited by management pursuant to
Regulation 14 under the Securities Exchange Act of 1934. An aggregate of
29,833,301 shares of the Company's common stock ("Shares") were outstanding and
entitled to vote at the meeting. At the meeting, the following matters (not
including ordinary procedural matters) were submitted to a vote of the holders
of Shares, with the results indicated below:
1. Election of three directors to serve until the 2004 Annual Meeting
------------------------------------------------------------------
The following incumbent directors were reelected. There was no
solicitation in opposition to such nominees. The tabulation of votes
was as follows:
Nominee For Withheld
---------------------- ----------------- ---------------
Howard S. Cohen 26,273,351 Shares 229,035 Shares
Robert M. Dewey, Jr. 26,297,375 Shares 201,011 Shares
Philip R. Lochner, Jr. 26,298,127 Shares 204,259 Shares
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits to this report are as follows:
10.1 Business Services Agreement, dated May 24, 2001, by and
between GTECH Corporation and Donald Stanford.
10.2 Severance Agreement and Release, dated as of May 24, 2001, by
and between GTECH Corporation and Donald Stanford.
(b) The Company filed a report on form 8-K with the Securities and Exchange
Commission on July 3, 2001 concerning the Company's press release
issued June 19, 2001 respecting fiscal 2002 first quarter results and
financial guidance for fiscal 2002
- 20 -
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GTECH HOLDINGS CORPORATION
Date: October 1, 2001 By /s/ Jaymin B. Patel
----------------------------------------
Jaymin B. Patel, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: October 1, 2001 By /s/ Robert J. Plourde
----------------------------------------
Robert J. Plourde, Vice President and
Corporate Controller
(Principal Accounting Officer)
- 21 -