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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 29, 1999
Commission file number 1-11250
GTECH Holdings Corporation
(Exact name of registrant as specified in its charter)
Delaware 05-0450121
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
55 Technology Way, West Greenwich, Rhode Island 02817
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 392-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
At June 28, 1999 there were 37,604,345 shares of the registrant's Common Stock
outstanding.
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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 Statement of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 10-16
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBITS
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PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
May 29, February 27,
ASSETS 1999 1999
----------- -----------
(In thousands, except share amounts)
CURRENT ASSETS
Cash and cash equivalents $ 5,864 $ 7,733
Trade accounts receivable 91,446 106,693
Sales-type lease receivables 6,823 6,743
Inventories 55,875 61,893
Deferred income taxes 29,419 29,419
Other current assets 15,516 14,047
----------- -----------
TOTAL CURRENT ASSETS 204,943 226,528
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 1,204,173 1,157,683
Less: Accumulated Depreciation (797,628) (760,122)
----------- -----------
406,545 397,561
GOODWILL,net 134,099 135,662
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 16,074 10,801
OTHER ASSETS 107,683 103,663
----------- -----------
$ 869,344 $ 874,215
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 36,580 $ 43,402
Accrued expenses 48,891 55,609
Special charge 3,179 6,058
Employee compensation 15,433 27,379
Advance payments from customers 20,350 30,458
Income taxes payable 57,997 57,907
Current portion of long-term debt 1,389 1,960
----------- -----------
TOTAL CURRENT LIABILITIES 183,819 222,773
LONG-TERM DEBT, less current portion 347,174 319,078
OTHER LIABILITIES 27,500 29,908
DEFERRED INCOME TAXES 18,550 18,550
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.01 per share--20,000,000 shares authorized, none issued -- --
Common Stock, par value $.01 per share--150,000,000 shares authorized,
44,155,815 and 44,152,565 shares issued, 37,604,345 and 38,722,063 shares
outstanding at May 29, 1999 and February 27, 1999, respectively 442 442
Additional paid-in capital 176,489 176,434
Equity carryover basis adjustment (7,008) (7,008)
Accumulated other comprehensive income (68,595) (84,842)
Retained earnings 363,692 345,018
----------- -----------
465,020 430,044
Less cost of 6,551,470 and 5,430,502 shares in treasury at
May 29, 1999 and February 27, 1999, respectively (172,719) (146,138)
----------- -----------
292,301 283,906
----------- -----------
$ 869,344 $ 874,215
=========== ===========
See Notes to Consolidated Financial Statements
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CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended
--------------------------
May 29, May 30,
1999 1998
--------- ---------
(Dollars in thousands,
except per share amounts)
Revenues:
Services $ 211,158 $ 221,881
Sales of products 27,502 10,398
--------- ---------
238,660 232,279
Costs and expenses:
Costs of services 140,417 148,589
Costs of sales 18,118 8,011
--------- ---------
158,535 156,600
--------- ---------
Gross profit 80,125 75,679
Selling, general and administrative 31,496 30,197
Research and development 10,676 9,595
--------- ---------
Operating income 37,953 35,887
Other income (expense):
Interest income 837 745
Equity in earnings of unconsolidated affiliates 1,143 3,366
Other expense (1,054) (305)
Interest expense (6,785) (7,488)
--------- ---------
Income before income taxes 32,094 32,205
Income taxes 13,159 13,526
--------- ---------
Net income $ 18,935 $ 18,679
========= =========
Basic and diluted earnings per share $ .50 $ .45
========= =========
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY-(Unaudited)
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
Common Stock Equity
------------------------------- Additional Carryover
Issued Paid-in Basis
Shares Amount Capital Adjustment
----------- ----------- ----------- -----------
(Dollars in thousands)
Balance at February 27, 1999 44,152,565 $ 442 $ 176,434 $ (7,008)
Comprehensive income:
Net income -- -- -- --
Other comprehensive income, net of tax:
Foreign currency translation -- -- -- --
Net loss on derivative instruments -- -- -- --
Comprehensive income
Purchase of 1,171,000
shares of common stock -- -- -- --
Reissuance of 1,787 shares under
director stock election plan -- -- -- --
Reissuance of 48,245 shares under
employee stock purchase plan -- -- -- --
Common stock issued
under stock award plans 3,250 -- 55 --
----------- ----------- ----------- -----------
Balance at May 29, 1999 44,155,815 $ 442 $ 176,489 $ (7,008)
=========== =========== =========== ===========
Accumulated
Other
Comprehensive Retained Treasury
Income Earnings Stock Total
----------- ----------- ----------- -----------
Balance at February 27, 1999 $ (84,842) $ 345,018 $ (146,138) $ 283,906
Comprehensive income:
Net income -- 18,935 -- 18,935
Other comprehensive income, net of tax:
Foreign currency translation 16,342 -- -- 16,342
Net loss on derivative instruments (95) -- -- (95)
-----------
Comprehensive income 35,182
Purchase of 1,171,000
shares of common stock -- -- (27,900) (27,900)
Reissuance of 1,787 shares under
director stock election plan -- (7) 47 40
Reissuance of 48,245 shares under
employee stock purchase plan -- (254) 1,272 1,018
Common stock issued
under stock award plans -- -- -- 55
----------- ----------- ----------- -----------
Balance at May 29, 1999 $ (68,595) $ 363,692 $ (172,719) $ 292,301
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended
--------------------------
May 29, May 30,
1999 1998
-------- ---------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 18,935 $ 18,679
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 44,821 50,709
Equity in earnings of unconsolidated affiliates,
net of dividends received (11) (2,438)
Other (816) 861
Changes in operating assets and liabilities:
Trade accounts receivable 14,806 11,811
Inventories 6,018 2,556
Special charge (2,879) (15,384)
Other assets and liabilities (37,226) (15,298)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 43,648 51,496
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts (36,284) (47,107)
Investments in and advances to unconsolidated subsidiaries (5,361) 128
Cash proceeds from sale of equity investment -- 84,904
Other (5,881) (5,492)
-------- ---------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (47,526) 32,433
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 38,100 76,106
Principal payments on long-term debt (10,479) (156,933)
Purchases of treasury stock (27,900) (4,708)
Other (208) 4,504
-------- ---------
NET CASH USED FOR FINANCING ACTIVITIES (487) (81,031)
Effect of exchange rate changes on cash 2,496 (3,089)
-------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (1,869) (191)
Cash and cash equivalents at beginning of period 7,733 8,250
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,864 $ 8,059
======== =========
See Notes to Consolidated Financial Statements
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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 29, 1999 are
not necessarily indicative of the results that may be expected for the full
fiscal year ending February 26, 2000. The balance sheet at February 27, 1999 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 1999 Annual Report on Form 10-K.
NOTE B--INVENTORIES
May 29, February 27,
1999 1999
---------- -----------
(Dollars in thousands)
Inventories consist of:
Purchased components $ 20,565 $ 27,323
Finished subassemblies 1,812 2,922
Work-in-process 26,321 23,309
Finished goods 7,177 8,339
---------- -----------
$ 55,875 $ 61,893
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NOTE C--LONG-TERM DEBT
May 29, February 27,
1999 1999
---------- -----------
(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 46,100 18,000
Other 2,463 3,038
---------- -----------
348,563 321,038
Less current portion 1,389 1,960
---------- -----------
$ 347,174 $ 319,078
========== ===========
The Company has an unsecured revolving credit facility of $400 million expiring
in June 2002 (the "Credit Facility"). At May 29, 1999, the weighted average
interest rate for all outstanding borrowings under the Credit Facility was
5.13%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE D--INCOME TAXES
The Company's effective income tax rate is greater than the statutory rate due
primarily to state income taxes and certain expenses that are not deductible for
income tax purposes.
NOTE E--COMMITMENTS AND CONTINGENCIES
See "Legal Proceedings" in Part II, Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I, Item 2
herein.
NOTE F--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
May 29, May 30,
1999 1998
---------- -----------
(Dollars and shares in thousands,
except per share amounts)
Numerator:
Net income $ 18,935 $ 18,679
Denominator:
Weighted average shares-Basic 37,821 41,409
Effect of dilutive securities:
Employee stock options 104 367
---------- -----------
Weighted average shares-Diluted 37,925 41,776
========== ===========
Basic and diluted earnings per share $ .50 $ .45
=========== ============
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
NOTE G -- SEGMENT INFORMATION
The Company presently has one reportable segment. The Lottery segment 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. All other
revenues (as reported below) are comprised principally of revenues from the
Company's Transactive, Dreamport and Europrint subsidiaries.
The Company's business segment data is summarized below:
Lottery All Other Consolidated
------- --------- ------------
(Dollars in thousands)
May 29, 1999
Revenues from external sources $220,173 $ 18,487 $238,660
Net operating profit after income taxes 24,890 (896) 23,994
May 30, 1998
Revenues from external sources $216,868 $ 15,411 $232,279
Net operating profit after income taxes 25,398 (1,338) 24,060
The following is a reconciliation of net operating profit after income taxes to
net income as reported on the consolidated income statements:
May 29, May 30,
1999 1998
----------- ------------
(Dollars in thousands)
Net operating profit after income taxes $ 23,994 $ 24,060
Reconciling items, net of tax:
Interest expense (4,003) (4,343)
Other (1,056) (1,038)
----------- ------------
Net income $ 18,935 $ 18,679
=========== ============
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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 that the Company is
engaged in or expects to engage in, (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, (iv) the Company's program to
address potential issues relating to the change of date to January 1, 2000
("Year 2000"), and (v) the results and effects of legal proceedings and
investigations. Such forward-looking statements reflect management's assessment
based on information currently available, but are not guarantees and are subject
to risks and uncertainties that could cause actual results to differ materially
from those contemplated in the forward-looking statements. These risks and
uncertainties include, but are not limited to, those set forth below and
elsewhere in this report and in the Company's press releases and its Forms 10-K,
10-Q, 8-K and other reports and filings with the Securities and Exchange
Commission (the "SEC").
General
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 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 purchases by lotteries
during fiscal 2000 will return to approximately fiscal 1998 levels.
The Company has taken steps to broaden its offerings of high-volume transaction
processing services outside of its core business of providing online lottery
services. For example, the Company's Dreamport subsidiary ("Dreamport") provides
gaming technology and a comprehensive array of management, development and
strategic services to the gaming and entertainment markets. Also, in the second
quarter of fiscal 1999, the Company acquired 80% of the equity of Europrint
Holdings Ltd. ("Europrint") and its wholly owned subsidiaries, including
Interactive Games International ("IGI"). Europrint is among the world's largest
providers of media promotional games and IGI has pioneered the development of
interactive, televised lottery 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. 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 may still be under
way. 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
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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 - "Certain Factors That
May Affect Future Performance - Maintenance of Business Relationships and
Certain Legal Matters" and Part I, Item 3 - "Legal Proceedings" in the Company's
fiscal 1999 annual report on Form 10-K; and Note G to the Consolidated Financial
Statements in the Company's fiscal 1999 annual report on Form 10-K for further
information concerning these matters and other contingencies.
The Company operates on a 52- to 53-week fiscal year ending on the last Saturday
in February. Fiscal 2000 and fiscal 1999 are 52-week years.
Results of Operations
Revenues for the first quarter of fiscal 2000 were $238.7 million, representing
a $6.4 million, or 2.7%, increase over revenues of $232.3 million in the first
quarter of fiscal 1999.
Service revenues, including lottery and other services, in the fiscal 2000
first quarter were $211.2 million, representing a $10.7 million, or 4.8%,
decrease from the $221.9 million of service revenues in the first quarter of
fiscal 1999. This decrease resulted primarily from the impact of the reduction
in the dollar value of foreign currencies, lower domestic service revenues and
lower lottery jackpot activity, partially offset by higher international
service revenues.
In the fiscal 2000 first quarter, lottery sales by the Company's domestic
customers declined approximately 4.6% compared with the first quarter of fiscal
1999, primarily reflecting the continued decline in sales in Texas, the
suspension of Quick Draw in New York and lower jackpot activity. This decline,
coupled with contractual rate reductions in Texas and California, resulted in a
decline in the Company's domestic service revenues of 8.4%.
Lottery sales by the Company's international customers increased approximately
14.1% in the fiscal 2000 first quarter compared with the first quarter of fiscal
1999, driven primarily by growth in Brazil, the Czech Republic, Germany and
Poland. This increase, coupled with contractual rate increases in Brazil and
partially offset by the impact of the reduction in the dollar value of foreign
currencies, resulted in an increase of approximately 1% in the Company's
international lottery service revenues.
Worldwide sales by the Company's lottery customers in the fiscal 2000 first
quarter were approximately the same as the first quarter of fiscal 1999. The
Company's total lottery service revenues decreased approximately 5.0% as a
result of contractual rate changes and the impact of the reduction in the dollar
value of foreign currencies.
On April 1, 1999, Quick Draw, the keno-style game operated in New York on a
lottery system provided by the Company, terminated due to the failure of the New
York State Legislature to extend the legislation authorizing the game. Quick
Draw was authorized by the New York State Legislature, and implemented by the
New York State Lottery on September 5, 1995, to increase revenue for New York
public schools. The termination of the Quick Draw game in New York did not have
a material impact on the Company's results of operations for the first quarter
of fiscal 2000.
Product sales in the first quarter of fiscal 2000 were $27.5 million, an
increase of $17.1 million over the $10.4 million of product sales in the first
quarter of fiscal 1999. This increase was driven by the sale of a
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new PRO:SYS central system, including instant ticket validation capabilities,
sales of Europrint and higher terminal sales. The Company acquired Europrint
during the second quarter of fiscal 1999. The Company sold approximately 1,000
lottery terminals during the first quarter of fiscal 2000, as compared to
approximately 200 lottery terminals during the fiscal 1999 first quarter.
Gross margins on service revenues increased to 33.5% in the fiscal 2000 first
quarter, up from 33.0% in the first quarter of fiscal 1999, primarily due to the
benefit of the Company's restructuring program implemented in fiscal 1999,
partially offset by lower sales in Texas and lower lottery jackpot activity in
the first quarter of fiscal 2000 than in the comparable quarter of the prior
year.
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales increased from 23.0%
in the first quarter of fiscal 1999 to 34.1% in the first quarter of fiscal
2000, primarily due to the change in product mix.
Selling, general and administrative expenses in the first quarter of fiscal 2000
were $31.5 million, representing a $1.3 million, or 4.3%, increase over the
$30.2 million incurred in the first quarter of fiscal 1999. This increase was
primarily attributable to selling, general and administrative expenses of
Europrint and IGI. As a percentage of revenues, selling, general and
administrative expenses were 13.2% and 13.0% during the first quarters of fiscal
2000 and 1999, respectively.
Research and development expenses in the first quarter of fiscal 2000 were $10.7
million, representing a $1.1 million, or 11.3%, increase over research and
development expenses of $9.6 million in the first quarter of fiscal 1999. This
increase reflects costs associated with the increase in activities related to
new products nearing release to market. As a percentage of revenues, research
and development expenses were 4.5% and 4.1% during the first quarters of fiscal
2000 and 1999, respectively.
Equity in earnings of unconsolidated affiliates in the first quarter of fiscal
2000 was $1.1 million, a decrease of $2.3 million from the $3.4 million of such
earnings during the first quarter of fiscal 1999. This decrease resulted
principally from the Company's sale, in April 1998, of its 22.5% equity interest
in Camelot Group plc ("Camelot").
Other expense in the first quarter of fiscal 2000 was $1.1 million, representing
a $.8 million increase over the $.3 million incurred in the first quarter of
fiscal 1999. This increase was primarily attributable to net foreign exchange
losses associated with the Company's global asset protection and foreign
exchange management programs designed to protect future cash flows, partially
offset by the amortization of the gain on the sale of the Camelot investment.
The Company's effective income tax rate decreased from 42% in the first quarter
of fiscal 1999 to 41% in the first quarter of fiscal 2000 due principally to the
congressional extension of the Research and Development tax credit. The
Company's effective income tax rate was greater than the statutory rate
primarily due to state income taxes and certain expenses that are not deductible
for income tax purposes.
Changes in Financial Position, Liquidity and Capital Resources
During the first quarter of fiscal 2000, the Company generated $43.6 million of
cash from operations. This cash, together with $27.6 million of net borrowings,
was primarily used to fund the purchase of $36.3 million of systems, equipment
and other assets relating to contracts and to repurchase $27.9 million of the
Company's common stock.
Trade accounts receivable decreased by $15.3 million, from $106.7 million at
February 27, 1999 to $91.4 million at May 29, 1999, primarily due to the lower
level of product sales in the first quarter of fiscal 2000 compared to the
fourth quarter of fiscal 1999.
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Inventories decreased by $6.0 million, from $61.9 million at February 27, 1999
to $55.9 million at May 29, 1999, primarily due to the sale of the new PRO:SYS
central system in the first quarter of fiscal 2000.
The cost of systems, equipment and other assets relating to contracts increased
by $46.5 million, from $1,157.7 million at February 27, 1999 to $1,204.2 million
at May 29, 1999. This increase reflects the completion of a new lottery system
in Michigan, the continuing installation of new lottery systems in Puerto Rico
and Arizona and the expansion of lottery systems in several domestic and
international locations, along with $24.6 million relating to the partial
recovery of the dollar value of the Brazilian currency in the first quarter of
fiscal 2000 compared to fiscal 1999.
Investments in and advances to unconsolidated affiliates increased by $5.3
million, from $10.8 million at February 27, 1999 to $16.1 million at May 29,
1999, primarily due to the March 1999 purchase by Dreamport of a one-third
interest in Turfway Park racetrack ("Turfway") for $6.0 million. Turfway has
operated for years as a traditional racetrack with thoroughbred racing and
simulcast wagering. The Company intends to make Turfway a major, year-round
venue by complementing its racing heritage with newer technologies and
aggressive marketing strategies.
Advance payments from customers decreased by $10.1 million, from $30.5 million
at February 27, 1999 to $20.4 million at May 29, 1999. This decrease is
primarily due to the sale of the new PRO:SYS central system discussed above.
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 2000 will be in a
range of $200.0 million to $220.0 million. The principal sources of liquidity
for the Company are cash generated from operations and borrowings under the
Company's Credit Facility. As of May 29, 1999 the Company had utilized
approximately $46.1 million of its $400 million Credit Facility. The Company
currently expects that its cash flow from operations and available borrowings
under its Credit Facility will be sufficient to fund its anticipated working
capital and ordinary capital expenditure needs, to service its debt obligations
and to fund anticipated internal growth in the foreseeable future.
Market Risk Disclosures
The primary market risk inherent in the Company's financial instruments and
exposures is the potential loss arising from adverse changes in interest rates
and foreign currency rates. The Company's exposure to commodity price changes is
not considered material and is managed through its procurement and sales
practices. The Company did not own any marketable equity securities during the
first quarter of fiscal 2000.
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 29, 1999, the estimated fair value
of the Company's fixed rate debt, as determined by an independent investment
banker, approximated $312.5 million. A hypothetical 10% increase in interest
rates would change the estimated fair value of the Company's fixed rate debt to
$320.9 million. A hypothetical 10% decrease in interest rates would change the
estimated fair value of the Company's fixed rate debt to $303.5 million.
A hypothetical 10% adverse or favorable change in interest rates applied to
variable rate debt would not have a material affect on current earnings.
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The Company uses various techniques to reduce the risk associated with future
increases in interest rates, the most significant being the private placement of
seven- and 10-year fixed rate debt on May 29, 1997.
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 U.S. 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 May 29, 1999, a hypothetical 10%
adverse change in foreign exchange rates would result in a translation loss of
$16.4 million that would be recorded in the equity section of the Company's
balance sheet.
At May 29, 1999, a hypothetical 10% adverse change in foreign exchange rates
would result in a net transaction loss of $1.8 million recorded in current
earnings after considering the effects of foreign exchange contracts currently
in place.
At May 29, 1999, a hypothetical 10% adverse change in foreign exchange rates
would result in a net reduction of cash flows from anticipatory transactions in
fiscal 2000 by $6.0 million after considering the effects of foreign exchange
contracts currently in place. The percentage of fiscal 2000 anticipatory cash
flows that were hedged varied throughout the first quarter of fiscal 2000, but
averaged 47%.
As of May 29, 1999, the Company had approximately $102.4 million of outstanding
foreign currency exchange contracts to sell foreign currencies (primarily
Spanish pesetas, pounds sterling and Mexican pesos) and approximately $79.7
million of outstanding foreign currency exchange contracts to purchase foreign
currencies (primarily pounds sterling).
IMPACT OF YEAR 2000
The Year 2000 computer issue creates potentially significant risks for the
Company. If lottery, gaming or electronic benefits transfer ("EBT") systems that
the Company supplies to customers or management information systems that the
Company uses internally do not correctly recognize and process date information
beyond the year 1999, there could be an adverse impact on customers' and/or the
Company's operations. The Company is actively managing its program to assess the
capability of its lottery, gaming and EBT products and its interfaces to
customer systems to handle the Year 2000. With respect to customer systems, the
major challenge for the Company in remediating the Year 2000 issue is the
multinational nature of the Company's business and the high degree of global
coordination that is required with customers, suppliers and employees.
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The Company has established a Year 2000 project team and a program office at its
corporate headquarters, made up of dedicated and shared resources, to provide
the guidance and support necessary to accomplish the Year 2000 initiative. The
status of the Company's six-phase program as of June 30, 1999 is as follows:
- - The inventory phase consists of compiling a comprehensive list of software
and hardware technologies that the Company supplies to customers and
management information systems that the Company uses internally. This
phase is complete.
- - The assessment phase consists of determining the compliance status of each
technology identified in the inventory phase. This phase is complete.
- - The planning phase consists of developing plans to upgrade hardware and/or
software to Year 2000 compliance. This phase is complete.
- - The implementation phase consists of executing the tasks identified in the
planning phase. This phase is approximately 70% complete and is expected
to be completed by September 1, 1999.
- - The quality assurance phase consists of testing and validating systems
replaced or modified as part of the implementation phase. This phase is
approximately 40% complete and is expected to be completed by September 1,
1999.
- - The special case phase consists of developing and implementing specific
plans for any Year 2000 issues that cannot be handled by the previous
phases. This phase will include monitoring each site for change control,
contingency planning, monitoring vendor compliance issues and other
matters that may arise. This phase will commence in September 1999.
The Company is actively working with and seeking to enlist the cooperation of
its customers to ensure integration with their systems and telecommunications
networks. The Company is also actively working with critical suppliers of
products and services to determine that the suppliers' operations and the
products and services they provide are Year 2000 capable. The Company will
continue to monitor their progress toward Year 2000 capability.
The majority of the internal management information systems in use by the
Company (including SAP's R/3 system, System Union's SUN accounting system and
Hyperion's Pillar software) are Year 2000 compliant. The Company has a time
tracking system and an accounting system in Brazil that are not Year 2000
compliant. The Company is executing its plan to replace these two systems with
SAP's R/3 system by September 1999. The Company has a limited number of non-IT
systems that are primarily in use by the engineering and manufacturing
departments of the Company. As of June 30, 1999, the remediation of these
systems is 50% complete and is expected to be completed by September 1, 1999.
The Company's contingency planning involves using already established problem
resolution processes to resolve any problems encountered during the Year 2000
timeframe. As a standard practice, the Company provides 24 hour a day
operational support. This support provides focused individuals in all
disciplines that respond in real time to operational issues. The Company's
contingency planning will include the expansion of the Year 2000 help desk team
and the creation of eight to 10 command centers worldwide to provide the
necessary response to issues that may arise as January 1, 2000 approaches.
The Company currently expects that the total cost of the Year 2000 program will
not exceed $25 million, including $5 million for the purchase of software and
hardware that will be capitalized and $20 million that will be expensed. As of
June 30, 1999 the Company had spent approximately $11.7 million on the program.
The total cost estimate does not include possible costs related to any customer
or other claims or the cost of internal software and hardware replaced in the
normal course of business but does include
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the cost to install new software and hardware that is being accelerated to
provide a solution to Year 2000 issues. The total cost estimate is based on the
Company's current assessment of the program and is subject to change as the
program progresses.
Year 2000 issues could have a significant impact on the Company's operations and
its financial condition and results if modifications cannot be completed on a
timely basis, unforeseen needs or problems arise, or systems operated by third
parties are not Year 2000 compliant. In addition to the potential for a
significant loss of revenues and possible damage claims by third parties
associated with Year 2000 issues, certain of the Company's United States lottery
contracts provide for up to $10,000 or more in liquidated damages per minute for
system downtime in excess of a stipulated grace period and certain of the
Company's international customers reserve the right to assess substantial
liquidated damages in the event that system downtime does occur. Based on
currently available information, management does not believe that the Year 2000
matters discussed above will cause significant operational or financial problems
for the Company; however there can be no assurance that this will be the case.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk Disclosures" in Part I, Item 2 herein.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As publicly reported, on June 24, 1999, TransAct Technologies Incorporated and
its wholly-owned subsidiary Magnatec Corporation filed suit against GTECH
Corporation in the United States District Court for the District of Rhode
Island. The suit was dismissed and refiled in Superior Court for Kent County,
Rhode Island, on June 28, 1999. The plaintiffs seek temporary, preliminary and
permanent injunctive relief and damages. Magnatec, which contracted with the
Company to design and manufacture printer modules on behalf of the Company,
alleges breach of contract, misappropriation of trade secrets, and related
claims in connection with the Company's efforts to manufacture its own printer.
The Company intends to vigorously defend this action, which it believes is
unfounded.
For information respecting certain other legal proceedings, refer to Part I,
Item 1 - "Certain Factors That May Affect Future Performance - Maintenance of
Business Relationships and Certain Legal Matters" and Part I, Item 3 - "Legal
Proceedings" in the Company's fiscal 1999 Annual Report on Form 10-K; and Note
G to Consolidated Financial Statements included in the Company's fiscal 1999
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 Employment Transition Agreement and Release with Michael R.
Chanbrello, dated July 7, 1998
27 Financial Data Schedule
(b) The Company did not file any reports on form 8-K during the quarter
to which this report relates
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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: June 30, 1999 By /s/ Thomas J. Sauser
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Thomas J. Sauser, Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: June 30, 1999 By /s/ Robert J. Plourde
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Robert J. Plourde, Vice President and Corporate
Controller (Principal Accounting Officer)
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