EX-99.1 3 y57721ex99-1.txt REPORT OF INDEPENDENT AUDITORS Report of Independent Auditors Board of Directors and Shareholders GTECH Holdings Corporation We have audited the accompanying consolidated balance sheets of GTECH Holdings Corporation and subsidiaries as of February 24, 2001 and February 26, 2000 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended February 24, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GTECH Holdings Corporation and subsidiaries at February 24, 2001 and February 26, 2000 and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 24, 2001, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Boston, Massachusetts March 27, 2001 except for Note S, as to which the date is December 18, 2001 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
February 24, February 26, 2001 2000 --------------------------- (Dollars in thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 46,948 $ 11,115 Trade accounts receivable 118,721 115,358 Sales-type lease receivables 8,722 10,110 Inventories 117,789 67,418 Deferred income taxes 26,850 15,853 Other current assets 18,798 19,346 --------- --------- TOTAL CURRENT ASSETS 337,828 239,200 SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 361,334 375,918 GOODWILL 122,325 130,710 OTHER ASSETS 116,673 145,195 --------- --------- TOTAL ASSETS $ 938,160 $ 891,023 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short term borrowings $ 2,316 $ 1,620 Accounts payable 49,267 53,103 Accrued expenses 55,140 43,278 Special charge 10,431 -- Employee compensation 31,898 30,057 Advance payments from customers 55,418 33,438 Income taxes payable 64,573 49,382 Current portion of long-term debt 3,512 69 --------- --------- TOTAL CURRENT LIABILITIES 272,555 210,947 LONG-TERM DEBT, less current portion 316,961 349,400 OTHER LIABILITIES 29,883 27,363 DEFERRED INCOME TAXES 4,399 6,737 COMMITMENTS AND CONTINGENCIES -- -- 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, 44,507,315 and 44,171,315 shares issued; 34,257,527 and 34,804,004 shares outstanding at February 24, 2001 and February 26, 2000, respectively 445 442 Additional paid-in capital 183,294 176,750 Equity carryover basis adjustment (7,008) (7,008) Accumulated other comprehensive loss (85,852) (69,493) Retained earnings 479,305 437,830 --------- --------- 570,184 538,521 Less cost of 10,249,788 and 9,367,311 shares in treasury at February 24, 2001 and February 26, 2000, respectively (255,822) (241,945) --------- --------- 314,362 296,576 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 938,160 $ 891,023 ========= =========
See Notes to Consolidated Financial Statements GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
Fiscal Year Ended ----------------------------------------------------- February 24, February 26, February 27, 2001 2000 1999 ---------------- ----------------- ----------------- (Dollars in thousands, except per share amounts) Revenues: Services $ 856,475 $ 860,419 $ 887,395 Sales of products 80,068 150,379 85,528 ---------------- ----------------- ----------------- 936,543 1,010,798 972,923 Costs and expenses: Costs of services 564,095 555,309 589,765 Costs of sales 74,844 101,953 59,825 ---------------- ----------------- ----------------- 638,939 657,262 649,590 ---------------- ----------------- ----------------- Gross profit 297,604 353,536 323,333 Selling, general and administrative 117,997 122,334 120,601 Research and development 49,267 46,053 40,158 Goodwill amortization 6,165 6,253 5,854 Special charges (credit) 42,270 (1,104) 15,000 ---------------- ----------------- ----------------- Operating income 81,905 180,000 141,720 Other income (expense): Interest income 5,596 3,509 4,079 Equity in earnings of unconsolidated affiliates 3,167 2,843 7,113 Other income (expense) 7,232 (1,343) 25,447 Interest expense (27,165) (29,032) (27,405) ---------------- ----------------- ----------------- Income before income taxes 70,735 155,977 150,954 Income taxes 27,587 62,392 61,891 ---------------- ----------------- ----------------- Net income $ 43,148 $ 93,585 $ 89,063 ================ ================= ================= ---------------- ----------------- ----------------- Basic earnings per share $ 1.25 $ 2.58 $ 2.17 ================ ================= ================= ---------------- ----------------- ----------------- Diluted earnings per share $ 1.25 $ 2.58 $ 2.16 ================ ================= =================
See Notes to Consolidated Financial Statements GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Equity Additional Carryover Outstanding Common Paid-in Basis Shares Stock Capital Adjustment ---------------- ---------------- ------------------ --------------- (Dollars in thousands) Balance at February 28, 1998 41,284,146 $ 439 $ 171,302 $ (7,008) Comprehensive income: Net income - - - - Other comprehensive income (loss), net of tax: Foreign currency translation - - - - Net gain on derivative instruments - - - - Comprehensive income Treasury shares repurchased (2,794,100) - - - Shares issued under stock award plans 5,688 - 159 - Shares reissued under stock award plans 2,079 - - - Shares issued upon exercise of stock options 224,250 3 4,973 - ---------------- ---------------- ------------------ --------------- Balance at February 27, 1999 38,722,063 $ 442 $ 176,434 $ (7,008) Comprehensive income: Net income - - - - Other comprehensive income, net of tax: Foreign currency translation - - - - Net gain on derivative instruments - - - - Comprehensive income Treasury shares repurchased (4,049,100) - - - Shares reissued under employee stock purchase and stock award plans 112,291 - - - Shares issued upon exercise of stock options 18,750 - 316 - ---------------- ---------------- ------------------ --------------- Balance at February 26, 2000 34,804,004 $ 442 $ 176,750 $ (7,008) Comprehensive income: Net income - - - - Other comprehensive income (loss), net of tax: Foreign currency translation - - - - Net loss on derivative instruments - - - - Unrealized gain on investments - - - - Comprehensive income Director stock compensation - - 92 - Treasury shares repurchased (1,105,200) - - - Shares reissued under employee stock purchase and stock award plans 222,723 - - - Shares issued upon exercise of stock options 336,000 3 6,452 - ---------------- ---------------- ------------------ --------------- Balance at February 24, 2001 34,257,527 $ 445 $ 183,294 $ (7,008) ================ ================ ================== =============== Accumulated Other Comprehensive Retained Treasury Income (Loss) Earnings Stock Total ------------------ ----------------- ------------------ ----------------- (Dollars in thousands) Balance at February 28, 1998 $ (42) $ 255,955 $ (75,436) $ 345,210 Comprehensive income: Net income - 89,063 - 89,063 Other comprehensive income (loss), net of tax: Foreign currency translation (85,094) - - (85,094) Net gain on derivative instruments 294 - - 294 ----------------- Comprehensive income 4,263 Treasury shares repurchased - - (70,757) (70,757) Shares issued under stock award plans - - - 159 Shares reissued under stock award plans - - 55 55 Shares issued upon exercise of stock options - - - 4,976 ------------------ ----------------- ------------------ ----------------- Balance at February 27, 1999 $ (84,842) $ 345,018 $ (146,138) $ 283,906 Comprehensive income: Net income - 93,585 - 93,585 Other comprehensive income, net of tax: Foreign currency translation 15,223 - - 15,223 Net gain on derivative instruments 126 - - 126 ----------------- Comprehensive income 108,934 Treasury shares repurchased - - (98,747) (98,747) Shares reissued under employee stock purchase and stock award plans - (773) 2,940 2,167 Shares issued upon exercise of stock options - - - 316 ------------------ ----------------- ------------------ ----------------- Balance at February 26, 2000 $ (69,493) $ 437,830 $ (241,945) $ 296,576 Comprehensive income: Net income - 43,148 - 43,148 Other comprehensive income (loss), net of tax: Foreign currency translation (16,004) - - (16,004) Net loss on derivative instruments (447) - - (447) Unrealized gain on investments 92 - - 92 ----------------- Comprehensive income 26,789 Director stock compensation - - - 92 Treasury shares repurchased - - (19,587) (19,587) Shares reissued under employee stock purchase and stock award plans - (1,673) 5,710 4,037 Shares issued upon exercise of stock options - - - 6,455 ------------------ ----------------- ------------------ ----------------- Balance at February 24, 2001 $ (85,852) $ 479,305 $ (255,822) $ 314,362 ================== ================= ================== =================
See Notes to Consolidated Financial Statements GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ---------------------------------------- February 24, February 26, February 27, 2001 2000 1999 ------------ ------------ ------------ (Dollars in thousands) OPERATING ACTIVITIES Net income $ 43,148 $ 93,585 $ 89,063 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 156,262 168,284 184,748 Intangibles amortization 11,968 10,839 8,719 Goodwill amortization 6,165 6,253 5,854 Special charges (credit) 42,270 (1,104) 15,000 Deferred income taxes provision (benefit) (13,335) 1,753 9,868 Termination of interest rate swap 12,970 --- --- Equity in earnings (losses) of unconsolidated affiliates, net of dividends received 1,343 (376) (3,117) Foreign currency transaction losses (gains) (970) 900 (8,650) Other 1,408 954 2,405 Changes in operating assets and liabilities, net of effects of acquisitions: Trade accounts receivable 956 (10,006) (10,716) Inventories (50,369) (5,659) (33,479) Special charge (23,426) (4,954) (26,105) Other assets and liabilities 63,580 (29,687) 52,692 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 251,970 230,782 286,282 INVESTING ACTIVITIES Purchases of systems, equipment and other assets relating to contracts (136,891) (128,618) (121,198) Acquisitions (net of cash acquired) -- (318) (19,687) Investments in and advances to unconsolidated affiliates (16,601) (16,209) (529) Cash received from affiliates 2,075 -- 1,906 Proceeds from sale of investments -- -- 84,904 Other (11,149) (19,198) (22,627) --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (162,566) (164,343) (77,231) FINANCING ACTIVITIES Net proceeds from issuance of long-term debt 95,908 221,500 117,706 Principal payments on long-term debt (138,737) (192,936) (254,768) Purchases of treasury stock (19,587) (98,747) (70,757) Proceeds from stock options 6,455 316 4,976 Other 5,236 2,114 (205) --------- --------- --------- NET CASH USED FOR FINANCING ACTIVITIES (50,725) (67,753) (203,048) Effect of exchange rate changes on cash (2,846) 4,696 (6,520) --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,833 3,382 (517) Cash and cash equivalents at beginning of year 11,115 7,733 8,250 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 46,948 $ 11,115 $ 7,733 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest payments (net of amounts capitalized) $ 26,937 $ 28,697 $ 27,574 Income tax payments 44,297 66,883 24,945 Income tax refunds (18,701) (662) (13,345)
See Notes to Consolidated Financial Statements GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: GTECH Holdings Corporation ("Holdings") conducts business through its consolidated subsidiaries and unconsolidated affiliates and has, as its only asset, an investment in GTECH Corporation ("GTECH"), its wholly owned subsidiary. The Consolidated Financial Statements include the accounts of Holdings, GTECH, all majority and wholly owned subsidiaries and other entities controlled by GTECH (collectively referred to herein as the "Company"). Significant intercompany accounts and transactions have been eliminated in preparing the Consolidated Financial Statements. Investments in 20% to 50% owned affiliates, investments in corporate joint ventures and other entities that are not controlled by GTECH are accounted for using the equity method and investments in less than 20% owned affiliates are accounted for using the cost method. Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. Goodwill amortization, that was included in cost of services and selling, general and administrative expense in prior periods has been presented as a single line item in the Consolidated Income Statements. Industry Segment and Nature of Operations: The Company operates in one reportable business segment that provides online, high speed, highly secured transaction processing systems to the worldwide lottery industry. The Company's lottery service contracts are generally subject to a new competitive procurement process after the expiration of the contract term and any extensions thereof. The Company's business is highly regulated, and the competition to secure new government contracts is often intense. Fiscal Year: The Company operates on a 52- to 53-week fiscal year ending on the last Saturday in February. Fiscal 2001, 2000 and 1999 were 52-week years. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition: Service revenues are recognized as the services are performed. Liquidated damages (as defined in Note F) are recorded as a reduction in revenue in the period in which it is determined that they are probable and estimable. Revenues from product sales or sales-type leases are recognized when installation is complete and the customer accepts the product, when acceptance is a stipulated contractual term. In those instances where the Company is not responsible for installation, revenue is recognized when the product is shipped. Product sales under long-term contracts are recorded under the percentage of completion method. Costs and estimated gross margins are recorded as sales as work is completed and accepted by the customer by utilizing the most recent estimates of cost to complete. Adjustments in estimates are made in the period in which the information necessary to make the adjustment becomes available. If the current contract estimate indicates a loss, provision is made for the estimated loss when it becomes known and quantifiable. Effective November 26, 2000, the Company adopted Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". SAB 101 summarizes the Securities and Exchange Commission's views regarding the application of generally accepted accounting principles to selected revenue recognition issues. The adoption and implementation of SAB 101 did not have a material effect on the results of operations or financial position of the Company. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED) Foreign Currency Translation: The functional currency for the majority of the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses resulting from such translation are reported in accumulated other comprehensive income, whereas gains or losses resulting from foreign currency transactions are included in results of operations. The Company recognized net foreign exchange gains (losses) of $434,000, $(6,683,000) and $15,268,000 in fiscal 2001, 2000 and 1999, respectively, which are included as a component of other income in the Company's Consolidated Income Statements. For those foreign subsidiaries operating in a highly inflationary economy or having the U.S. dollar as their functional currency, nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at current rates. Translation adjustments are included in the determination of net income. Research and Development: Research and development expenses are charged to operations as incurred. Stock-Based Compensation: The Company grants stock options for a fixed number of shares of the common stock of Holdings ("Common Stock") to employees and nonemployee directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. The Company has not recognized any compensation expense for stock option grants. Derivatives: The Company uses derivative financial instruments principally to manage the risk of foreign currency exchange rate and interest rate fluctuations and accounts for its derivative financial instruments in accordance with Financial Accounting Standards Board Statement 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). From time to time, the Company enters into foreign currency exchange and option contracts to reduce the exposure associated with certain firm commitments, variable service revenues and certain assets and liabilities denominated in foreign currencies. These contracts generally have maturities of 12 months or less, and are regularly renewed to provide continuing coverage throughout the year. The Company does not engage in currency speculation. The Company records certain contracts used to provide a degree of protection to the Company against foreign exchange risk on its variable service revenues at fair value in its Consolidated Balance Sheets. The related gains or losses on these contracts are either deferred in shareholders' equity (accumulated other comprehensive income) or immediately recognized in earnings dependent on whether the contract can be treated as a hedge. The deferred gains and losses are subsequently recognized in earnings in the period that the related items being hedged are received and recognized in earnings. Contracts used to hedge assets and liabilities denominated in foreign currencies are recorded in the Company's Consolidated Balance Sheets at fair value and the related gains or losses on these contracts are immediately recognized in earnings as a component of other income in the Company's Consolidated Income Statements. Income Taxes: Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted income tax rates and laws that will be in effect when the temporary differences are expected to reverse. Additionally, deferred tax assets and liabilities are separated into current and noncurrent amounts based on the classification of the related assets and liabilities for financial reporting purposes. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED) Cash Equivalents: The Company considers short-term, highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Trade Accounts Receivable: Trade accounts receivable are reflected net of allowances for doubtful accounts and liquidated damages of $7,373,000 and $3,187,000 at February 24, 2001 and February 26, 2000, respectively. Inventories: Inventories include amounts related to the Company's long-term service contracts and product sales contracts, including product sales under long-term contracts, and are stated at the lower of cost (first-in, first-out method) or market. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts. Inventory allowances were $6,708,000 and $5,142,000 at February 24, 2001 and February 26, 2000, respectively. Inventory manufactured or assembled by the Company for its long-term service contracts is transferred to systems, equipment and other assets relating to contracts upon shipment. Systems, Equipment and Other Assets Relating to Contracts: Systems, equipment and other assets relating to contracts are stated on the basis of cost. The cost less any salvage value is depreciated over the base contract term, not to exceed ten years, using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Capitalized Software Development Costs: Unamortized software development costs, included in systems, equipment and other assets relating to contracts and other assets in the Company's Consolidated Balance Sheets, were $36,393,000 and $44,291,000 at February 24, 2001 and February 26, 2000, respectively. Related amortization expense amounted to $19,018,000, $17,167,000 and $12,821,000 in fiscal 2001, 2000 and 1999, respectively, and is included in cost of services or cost of sales in the Company's Consolidated Income Statements. Impairment of Long-Lived Assets: If facts and circumstances were to indicate that the Company's long-lived assets might be impaired, the estimated future undiscounted cash flows associated with the long-lived asset would be compared to its carrying amount to determine if a write-down to fair value is necessary. During fiscal 2001, 2000 and 1999, the Company recorded charges of $4,236,000, $1,000,000 and $18,165,000, respectively, relating to impairments of certain long-lived assets. Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized on a straight-line basis over periods ranging from seven to 40 years. As of February 24, 2001 and February 26, 2000, accumulated amortization was $40,850,000 and $36,271,000, respectively. Goodwill is periodically reviewed for impairment by comparing the carrying amount to the estimated future undiscounted cash flows of the businesses acquired. If this review indicates that goodwill is not recoverable, the carrying amount would be reduced to fair value. During fiscal 2001, the Company reduced goodwill by $2,220,000 to reflect impairment associated with a prior acquisition. Accumulated Other Comprehensive Income: Accumulated other comprehensive income as of February 24, 2001, included $(85,917,000), $(27,000) and $92,000 related to foreign currency translation, net loss on derivative instruments and unrealized gain on investments, respectively. Accumulated other comprehensive income as of February 26, 2000, included $(69,913,000) and $420,000 related to foreign currency translation and net gain on derivative instruments, respectively. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B - BUSINESS ACQUISITIONS On July 1, 1998, the Company acquired 80% of the equity of Europrint Holdings Ltd. ("Europrint") and its wholly owned subsidiaries, including Interactive Games International ("IGI"), for a net cash purchase price of $21,641,000, including related acquisition costs. Europrint is a provider of media promotional games and IGI has pioneered the development of interactive, televised lottery games. The Company has the option, and under certain circumstances the obligation, to acquire the remaining 20% of the equity of Europrint and IGI within five years from the date of acquisition. The acquisition was accounted for using the purchase method of accounting, whereby the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. Purchase price in excess of these fair values has been recorded as goodwill. The Company has included the operating results of Europrint and its wholly owned subsidiaries in its consolidated results since the date of acquisition. Pro forma information has not been provided because the acquisition was not material to the Company's operations. NOTE C - INVENTORIES Inventories consist of:
February 24, 2001 February 26, 2000 ----------------- ----------------- (Dollars in thousands) Raw materials $ 45,689 $ 23,623 Work in progress 57,210 42,701 Finished goods 14,890 1,094 -------------------- -------------------- $ 117,789 $ 67,418 ==================== ====================
NOTE D - SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS Systems, equipment and other assets relating to contracts consists of:
February 24, 2001 February 26, 2000 ----------------- ----------------- (Dollars in thousands) Land and buildings $ 5,259 $ 5,259 Computer terminals and systems 1,122,286 1,069,541 Furniture and equipment 116,098 110,734 Contracts in progress 39,771 46,221 -------------------- -------------------- 1,283,414 1,231,755 Less accumulated depreciation and amortization 922,080 855,837 -------------------- -------------------- $ 361,334 $ 375,918 ==================== ====================
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E - LONG-TERM DEBT Long-term debt consists of:
February 24, 2001 February 26, 2000 ----------------- ----------------- (Dollars in thousands) Revolving credit facility $ ---- $ 45,000 7.75% Series A Senior Notes due 2004 150,000 150,000 7.87% Series B Senior Notes due 2007 150,000 150,000 Deferred gain on interest rate swaps 12,810 ---- Other 7,663 4,469 -------------------- -------------------- 320,473 349,469 Less current portion 3,512 69 -------------------- -------------------- $ 316,961 $ 349,400 ==================== ====================
The Company has an unsecured revolving credit facility of $400,000,000 expiring in June 2002 (the "Credit Facility"). At February 24, 2001, there were no outstanding borrowings under the Credit Facility. The Company is required to pay a facility fee of .125% per annum on the total revolving credit commitment. The restrictive provisions of the Credit Facility include, among other things, requirements relating to the maintenance of certain financial ratios, restrictions on additional indebtedness and restrictions on the ability of the Company to make cash distributions on its Common Stock under certain circumstances. At February 24, 2001, under the most restrictive covenants, the Company had available $141,476,000 of retained earnings for the payment of dividends. The Company has never paid cash dividends on its Common Stock and does not plan to do so in the foreseeable future. The current policy of the Company's Board of Directors is to reinvest earnings in the operation and expansion of the Company and to repurchase shares of the Company's Common Stock, from time to time, under the Company's open market share repurchase program. The Company's 7.75% Series A Senior Notes due 2004 and 7.87% Series B Senior Notes due 2007 (collectively, the "Senior Notes") are unsecured. Interest on each issue is payable semiannually in arrears. Up to $100,000,000 of the Credit Facility may be used for the issuance of letters of credit. The Company had, at February 24, 2001, $12,117,000 of letters of credit issued and outstanding under the Credit Facility and $65,512,000 of letters of credit issued and outstanding outside of the Credit Facility. The total weighted average annual cost for all letters of credit was 0.6%. At February 24, 2001, long-term debt matures as follows:
Fiscal Year (Dollars in thousands) ----------- 2002 3,512 2003 3,991 2004 3,991 2005 153,991 2006 2,553 2007 2,075 2008 150,360
Long-term debt includes a deferred gain on the sale of interest rate swaps. (See Note O for additional information.) GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F - COMMITMENTS AND CONTINGENCIES Contracts Contracts generally contain time schedules for, among other things, commencement of system operations and the installation of terminals, as well as detailed performance standards. The Company is typically required to furnish substantial bonds to secure its performance under these contracts. In addition to other possible consequences, including contract termination, failure to meet specified deadlines or performance standards could trigger substantial penalties in the form of liquidated damage assessments. Many of the Company's contracts permit the customer to terminate the contract at will and do not specify the compensation, if any, that the Company would be entitled were such a termination to occur. Legal Matters As publicly reported in February 1999, a witness appearing before the Moriarty Tribunal, an investigative body convened by the Irish Parliament and chaired by Mr. Justice Moriarty to investigate the business affairs generally of the former Taoiseach (Prime Minister) of Ireland, Charles Haughey, testified that in February 1993 Guy B. Snowden, then Chief Executive Officer of the Company, had invested pounds sterling 67,000 (approximately $100,000) of his personal funds in a company owned by Mr. Haughey's son. Mr. Haughey had resigned as Taoiseach in February 1992. In July 1992, the An Post Irish National Lottery Company, the Irish lottery authority (the "Irish NLC"), issued a Request for Proposals respecting online and instant ticket lottery goods and services, and in September 1992 the Company, which was then the incumbent provider of lottery goods and services to the Irish NLC under an agreement awarded to the Company in 1987, submitted a Proposal to the Irish NLC in response to the Irish NLC's Request for Proposals. In November 1992, the Irish NLC selected the Company to provide online and instant ticket goods and services to the Irish NLC under the terms of the competitive procurement and, following negotiations, a definitive agreement was entered into between the Irish NLC and the Company in March 1993. In calendar 1999, the Tribunal requested that the Company provide various documents regarding the Company's business in Ireland, which the Company has done, and the Company has been cooperating with the Tribunal. In addition, the Company has made its own inquiry into the facts surrounding Mr. Snowden's investment and the extent, if any, of the Company's involvement in or knowledge of that investment. The Company's investigation has determined that no Company funds were used to make Mr. Snowden's investment, and there is no information to suggest that Mr. Snowden ever sought reimbursement for the investment from the Company. Further, there is no information to suggest that Mr. Snowden informed anyone else at the Company of his investment at the time or that his investment was related in any way to the renewal of the Company's contract to supply systems and support to the Irish NLC. Mr. Snowden has advised the Company through his counsel that (i) his investment was a strictly personal one, (ii) the investment was made from his personal funds, (iii) he never sought reimbursement for any portion of his investment from the Company or any other entity, and (iv) his investment was not related to the Irish NLC and was not intended to and did not influence the Irish NLC's decision to renew the Company's contract. No charges of wrongdoing have been brought against the Company in connection with the Moriarty investigation, and the Company does not believe that it has engaged in any wrongdoing in connection with this matter. However, since this investigation is or may still be underway, and investigations of this type customarily are conducted in whole or in part in secret, the Company lacks sufficient information to determine with certainty its ultimate scope and whether the government authorities will assert claims resulting from this investigation 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 governmental agencies, if a government authority were to make an allegation, or if there were to be a finding, of improper conduct on the part of or attributable to the Company in any matter, including in respect of the Moriarty investigation, 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 this investigation and related matters could have such a material adverse effect. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F - COMMITMENTS AND CONTINGENCIES-(CONTINUED) Since July 1994, the United Kingdom National Lottery has been operated under a license held by Camelot Group plc ("Camelot"), and the Company has been a supplier of lottery goods and services to Camelot for the lottery. As publicly reported, in or around April or May 2000, the United Kingdom National Lottery Commission (the "NLC"), the regulator of the United Kingdom National Lottery, commenced an investigation into a lottery terminal software malfunction in the United Kingdom in which, under certain rare circumstances, a duplicate transaction was recorded on the Company's central system while only one ticket was presented to the retailer. The software malfunction resulted in a relatively small amount of overcharges to lottery retailers with respect to the duplicate transactions and a relatively small amount of overpayments or underpayments to certain prizewinners. The Company first identified this software malfunction in the United Kingdom in June 1998 and corrected the malfunction in July 1998, but without notifying Camelot or the NLC, as it should have done. The Company fully cooperated with the NLC's investigation and undertook to implement a number of measures respecting its corporate compliance and governance functions and software development processes in the wake of the investigation. The Company has also agreed to reimburse United Kingdom lottery players and retailers for any financial losses incurred by virtue of the software malfunction. As has also been publicly reported, the developments described above took place in the context of a competitive procurement respecting the award by the NLC of a new license to operate the National Lottery with effect from October 1, 2001. In 1999, the NLC established a competitive procedure for the award of the new license, and two bidders, Camelot and The People's Lottery ("TPL"), subsequently submitted bids for the new license. Camelot's bid was supported by agreements with the Company pursuant to which the Company had contracted to continue to supply lottery goods and services to Camelot during the term of the new license in the event that Camelot was awarded the new license. In August 2000, the NLC announced that it had decided that the NLC would proceed on the basis of a new procedure under which it would negotiate exclusively with TPL for one month. Promptly after the NLC's announcement, Camelot initiated legal proceedings in the United Kingdom challenging the legality of the NLC's decision to initiate a new procedure of negotiation with TPL to the exclusion of Camelot. In September 2000, the High Court of Justice (Queen's Bench Division) overturned the NLC's August 2000 decision to negotiate exclusively with TPL and directed that the NLC enter into an exclusive negotiation period with Camelot so as to afford Camelot the same opportunity granted to TPL to improve its bid to address the NLC's concerns. As part of the improved Camelot proposal for the new license, the Company entered into technology transfer and training arrangements with Camelot providing for the transfer to Camelot of the Company's National Lottery equipment, facilities and U.K. technology employees, a technology transfer to Camelot (after a period of training), and a grant to Camelot exclusive rights to operate the Company's gaming system software in the U.K. for the term of the new license. Under these new arrangements, the Company will license its software and provide a range of support services to Camelot for which the Company expects to receive compensation during the term of the new license in the range of $40,000,000 to $45,000,000 per year commencing in fiscal year 2003. The Company also anticipates receiving revenues of approximately $65,000,000 with respect to the sale to Camelot of new terminals prior to the commencement of the new license term. The Company further agreed to negotiate a technology transfer and a related software license for the exclusive use by Camelot under the new license of the internet gaming applications of the Company's UWin! subsidiary. In December 2000, the NLC announced its decision to award a new seven-year license to operate the National Lottery to Camelot and that it will grant Camelot an interim license to cover the period from October 1, 2001 through January 30, 2002 in order to provide a twelve-month conversion period prior to the beginning of the new license. TPL has not protested the NLC's decision to award the new license to Camelot and the period in which a protest must be made has since lapsed. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F - COMMITMENTS AND CONTINGENCIES-(CONTINUED) In April 2001, the NLC issued a report of its investigation into the above described lottery software terminal malfunction. The NLC report states that its investigation of the lottery software incident had established breaches of Camelot's license, including in respect of the failure of the Company to give proper notification before rectifying the software fault. The report further states that Camelot has agreed to pay pounds sterling 115,000 (approximately $175,000) into the National Lottery prize fund as compensation for underpayments to players resulting from the software malfunction, and that Camelot has undertaken to identify the amounts by which individual retailers have been overcharged. The NLC has declined, however, to fine Camelot with respect to breaches of its license resulting from (or revealed by the NLC investigation of) the software incident. The NLC report summarizes the steps taken and to be undertaken by the Company in the wake of investigation of the lottery software malfunction (including the measures implemented by the Company with respect to its corporate compliance and governance functions and software development processes and the technology transfer arrangements, as described above) and concludes, in light of these steps, that the Company sufficiently addressed the NLC's ongoing concerns about whether it is a "fit and proper" body for purposes of involvement in the operation of the National Lottery. Payment by the Company of amounts: (i) to reimburse Camelot for payments with respect to underpayments to United Kingdom players and overcharges of retailers, as described above, (ii) to reimburse Camelot with respect to any other out-of-pocket costs incurred by Camelot with respect to the lottery terminal software malfunction, and (iii) to reimburse other customers of the Company with respect to effects of the lottery terminal software malfunction outside the United Kingdom, which amounts have been accrued in the accompanying financial statements, are not expected to have a material adverse effect on the Company's consolidated financial position or results of operation. As publicly reported, in August 2000, a shareholder class action lawsuit on behalf of all persons who purchased Company stock during the period from April 11, 2000 to July 25, 2000, was brought against the Company, the Company's former Chairman and Chief Executive Officer, William Y. O'Connor, and the Company's current Chairman, W. Bruce Turner, in the U.S. District Court of Rhode Island relating to various Company announcements made between April 11, 2000 and July 25, 2000. The complaint filed in the case, Sandra Kafenbaum, individually and on behalf of all others similarly situated, v. GTECH Holdings Corporation, William Y. O'Connor and W. Bruce Turner, generally alleges that the defendants violated federal securities laws (including Section 10(b) of the Securities Exchange Act of 1934) by making allegedly false and misleading statements (including statements alleged to be overly optimistic respecting certain lottery contract awards to the Company and respecting the Company's prospects in certain non-lottery business lines and investments), while failing to disclose in a timely manner certain allegedly material adverse information that it purportedly had a duty to disclose (including an alleged inability to close certain contract awards and as to certain alleged cost overruns). The complaint seeks to recover monetary damages from the Company and the individual defendants. In February 2001, the plaintiffs filed an amended complaint which added Steven P. Nowick, the Company's former President and Chief Operating Officer, as an individual defendant. In addition, the amended complaint expands the purported class of plaintiffs to include all persons who purchased common stock of the Company during the period from July 13, 1998 through August 29, 2000. The type of relief sought in the amended complaint is similar to that sought in the original action. The Company believes that it has good defenses to the claims made in this lawsuit and intends to file a motion to dismiss the amended complaint as to all of the defendants. At the present time, however, the Company is unable to predict the outcome, or the financial statement impact, if any, of this lawsuit. As publicly reported, in May 2000, Sazka, a.s., a lottery customer of the Company in the Czech Republic ("Sazka"), filed a Request for Arbitration with the International Arbitral Centre of the Austrian Federal Economic Chamber of Commerce in Vienna, Austria, seeking to arbitrate certain business and contractual issues under the Company's online lottery contract with Sazka. Sazka sought damages valued at approximately $2,600,000 in connection with alleged delays in the recent extensive expansion of the lottery sales network. Sazka also sought a determination that its online contract with the Company would expire approximately two years earlier than the date on which the Company maintained its contract would terminate. The Company, believing the claims made by Sazka to be without merit, filed a Memorandum in Reply and Counterclaim disputing such claims and raising counterclaims for breach of contract by Sazka. In March 2001, the Company entered into an agreement with Sazka which, among GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F - COMMITMENTS AND CONTINGENCIES-(CONTINUED) other things, resolved the arbitration. Under the agreed settlement, Sazka dropped its demand for liquidated damages, paid to the Company certain disputed amounts which it had previously withheld and agreed to extend the term of the contract. The Company in turn agreed to reduce its fee and to provide certain additional equipment and services under its contract with Sazka. In February 1999, the Company was sued by a Florida corporation called EIG Gaming International, Inc. ("EIG"), in the Circuit Court of the Eleventh Judicial Circuit of Florida. The Company removed the case to the U.S. District Court for the Southern District of Florida, where it is captioned EIG Gaming International, Inc. v. GTECH Corporation, Case No. 99-1808-Civ-Jordan. In its complaint EIG alleges that it entered into a Letter of Intent with the Company pursuant to which it would assist the Company to obtain the lottery contract for Peru in return for a percentage of the lottery's receipts. EIG further contends that it secured the Peruvian contract for the Company but that the Company thereupon declined to pursue it. Plaintiff claims damages exceeding $80,000,000. The Company vigorously denies plaintiff's allegations, to which it believes it has good defenses, and, in November 2000, moved for summary judgment. That motion is pending. In April 2001, the court entered an order tentatively scheduling a trial in the case during July 2001. At the present time, the Company is unable to predict the outcome, or the financial statement impact, if any, of this lawsuit. The Company also is subject to certain other legal proceedings and claims which management believes, on the basis of information presently available to it, will not materially adversely affect the Company's consolidated financial position or results of operations. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G - STOCK-BASED COMPENSATION PLANS Under various stock-based compensation plans, officers and other key employees of the Company may receive grants of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights and performance awards and nonemployee members of the Company's Board of Directors automatically are granted annual stock options and may elect to receive stock in lieu of directors' fees. The Company is authorized to grant up to 5,240,000 shares of Common Stock under these plans and, at February 24, 2001, 3,026,250 stock options and restricted stock had been granted. All current outstanding shares are nonqualified stock options and restricted stock. The stock options granted under these plans are to purchase Common Stock at a price not less than fair market value at the date of grant. Employee stock options generally become exercisable ratably over a four-year period from date of grant and expire 10 years after date of grant unless an earlier expiration date is set at time of grant. Nonemployee director stock options are exercisable approximately one year after date of grant and expire 10 years after date of grant. Both employee and nonemployee directors' stock options are subject to possible earlier exercise and termination in certain circumstances. During fiscal 2001, the Company awarded 387,250 shares of restricted stock to officers and certain key employees, with a weighted average fair value at the date of grant of $19.00 per share. The fair value of the restricted stock award is being charged to expense over the vesting period. Grants generally vest within two years from the date of grant. Recipients of restricted stock do not pay any cash consideration to the Company for the shares. During fiscal 2001, the Company recorded noncash charges to operations of $4,549,000 as compensation expense related to restricted stock. The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock option grants, whereby no compensation expense is deducted in determining net income. Had compensation expense for stock option grants under the plans been determined pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company's net income would have decreased accordingly. Using the Black-Scholes option pricing model, the Company's pro forma net income and pro forma weighted average fair value of options granted, with related assumptions, are as follows:
Fiscal Year Ended -------------------------------------------------------------------------------- February 24, 2001 February 26, 2000 February 27, 1999 ----------------------- ------------------------ ---------------------- Pro forma net income (in thousands) $ 39,269 $ 89,936 $ 85,797 Pro forma basic earnings per share $ 1.14 $ 2.48 $ 2.09 Pro forma diluted earnings per share $ 1.13 $ 2.48 $ 2.09 Pro forma weighted average fair value per share of options granted $ 7.00 $ 10.00 $ 15.00 Expected life (in years) 4.4 5.4 5.3 Risk-free interest rates 6.12% 5.21% 5.77% Volatility factors of the expected market price of the Common Stock .34 .35 .40 Dividend yield --- --- ---
The effects on fiscal 2001, 2000 and 1999 pro forma net income and earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net income for future years because of the vesting period of the stock options and the potential for issuance of additional stock options in future years. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G - STOCK-BASED COMPENSATION PLANS-(CONTINUED) The Company's stock option activity and related information is summarized as follows:
Fiscal Year Ended -------------------------------------------------------------------------------------------- February 24, 2001 February 26, 2000 February 27, 1999 ------------------------------- --------------------------- --------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average under Exercise under Exercise under Exercise Options Price Options Price Options Price ------------- --------------- ------------- ------------ ------------ ------------ Outstanding at beginning of year 2,824,175 $ 27.71 2,083,300 $ 29.26 1,501,550 $ 25.13 Granted 1,279,000 19.78 1,075,500 24.79 1,012,500 34.04 Exercised (336,000) 19.21 (18,750) 16.88 (228,750) 22.30 Forfeited (472,800) 25.08 (315,875) 28.62 (202,000) 30.46 ------------- ------------ ------------ Outstanding at end of year 3,294,375 $ 25.87 2,824,175 $ 27.71 2,083,300 $ 29.26 ============= ============ ============ Exercisable at end of year 1,681,750 $ 28.30 1,176,800 $ 26.62 890,550 $ 24.22 ============= ============ ============
Exercise prices for stock options outstanding under the plans as of February 24, 2001 are summarized as follows:
Weighted Average ------------------------- Weighted Remaining Average Range of Options Contractual Exercise Options Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price ------------------------ ----------- ------------ ---------- ----------- ---------- $16.88 - $22.19 1,037,250 8.6 $ 19.25 163,500 $ 18.48 $22.25 - $25.31 838,500 7.9 $ 24.86 415,125 $ 24.96 $25.69 - $35.28 1,418,625 6.0 $ 31.32 1,103,125 $ 31.02 --------- --------- 3,294,375 1,681,750 ========= =========
NOTE H - EMPLOYEE STOCK PURCHASE PLAN In July 1998, shareholders approved the GTECH Holdings Corporation 1998 Employee Stock Purchase Plan (the "Plan") that allows substantially all full-time employees to acquire shares of Common Stock through payroll deductions over six-month offering periods. The purchase price is equal to 85% of the shares' fair market value on either the first or last day of the offering period, whichever is lower. Purchases are limited to 10% of an employee's salary, up to a maximum of $25,000 per calendar year. The Plan expires upon the earlier of July 31, 2003 or the date the shares provided by the Plan have been purchased. A total of 750,000 treasury shares are available for purchase under the Plan. At February 24, 2001, 212,807 shares of Common Stock had been issued under the Plan. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE I - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Fiscal Year Ended ----------------------------------------------------------- February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars and shares in thousands, except per share amounts) Numerator: Net income $ 43,148 $ 93,585 $ 89,063 Denominator: Weighted average shares - Basic 34,564 36,217 40,957 Effect of dilutive securities: Employee stock options and unvested restricted shares 91 43 188 --------------- --------------- --------------- Weighted average shares - Diluted 34,655 36,260 41,145 =============== =============== =============== Basic earnings per share $ 1.25 $ 2.58 $ 2.17 =============== =============== =============== Diluted earnings per share $ 1.25 $ 2.58 $ 2.16 =============== =============== ===============
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE J - INCOME TAXES The components of income before income taxes were as follows:
Fiscal Year Ended --------------------------------------------------------- February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) United States $ 13,455 $ 93,848 $ 51,773 Foreign 57,280 62,129 99,181 ---------------- ---------------- ------------- $ 70,735 $ 155,977 $ 150,954 ================ ================ =============
Significant components of the provision for income taxes were as follows:
Fiscal Year Ended -------------------------------------------------------- February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) Current: Federal $ 10,634 $ 12,375 $ 3,135 State 3,101 5,780 4,448 Foreign 27,187 42,484 44,440 --------------- ---------------- --------------- Total Current 40,922 60,639 52,023 --------------- ---------------- --------------- Deferred: Federal $ (17,149) $ (129) $ 14,216 State (931) 107 2,521 Foreign 4,745 1,775 (6,869) --------------- ---------------- --------------- Total Deferred (13,335) 1,753 9,868 --------------- ---------------- --------------- Total Provision $ 27,587 $ 62,392 $ 61,891 =============== ================ ===============
Significant components of the Company's deferred tax assets and liabilities were as follows:
February 24, 2001 February 26, 2000 ----------------- ----------------- (Dollars in thousands) Deferred tax assets: Accruals not currently deductible for tax purposes $ 19,956 $ 14,034 Tax credits 7,517 --- Special charges 3,822 --- Cash collected in excess of revenue recognized 3,690 5,398 Inventory reserves 2,207 2,788 Other 3,750 5,578 ------------- ------------ 40,942 27,798 Deferred tax liabilities: Depreciation (15,070) (15,553) Other (3,421) (3,129) ------------- ------------- (18,491) (18,682) ------------- ------------- Net deferred tax assets $ 22,451 $ 9,116 ============= ============
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE J - INCOME TAXES-(CONTINUED) Undistributed earnings of foreign subsidiaries, excluding accumulated net earnings of foreign subsidiaries that, if remitted, would result in little or no additional tax because of the availability of foreign tax credits, amounted to $5,977,000 at February 24, 2001. These earnings reflect full provision for foreign income taxes and are intended to be indefinitely reinvested in foreign operations. United States taxes that would be payable upon the remittance of these earnings are estimated to be $598,000. At February 24, 2001, the Company had $7,517,000 of tax credit carryforwards which will begin to expire in fiscal year 2020 if not utilized. The effective income tax rate on income before income taxes differed from the statutory federal income tax rate for the following reasons:
Fiscal Year Ended ------------------------------------------------------------------ February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- Federal income tax using statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.0 2.5 3.0 Equity in earnings of unconsolidated affiliates --- .4 --- Nondeductible expenses 2.9 1.7 1.6 Goodwill 3.4 1.1 1.1 Tax credits (2.5) (1.0) (.8) Other (1.8) .3 1.1 ----------------- ------------------ ------------------ 39.0% 40.0% 41.0% ================= ================== ==================
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K - TRANSACTIONS WITH RELATED PARTIES The Company has a 10% interest in Uthingo Management Proprietary Limited ("Uthingo"), which is accounted for using the equity method. Uthingo is a corporate joint venture that holds the license to operate the South African National Lottery. Sales of products and services to Uthingo were $28,236,000 and $41,845,000 in fiscal 2001 and 2000, respectively. At February 24, 2001 and February 26, 2000 the Company had trade receivables of $6,355,000 and $12,092,000 and loans receivable of $4,791,000 and $9,151,000 from Uthingo. Prior to February 24, 2001, the Company had a 50% interest in each of four joint ventures with Full House Resorts, Inc, ("Full House"). The joint ventures with Full House are engaged in the financing and development of Native American and other casino gaming ventures. At February 24, 2001 and February 26, 2000, the Company had a promissory note receivable ("Note") from Full House of $3,000,000. The Note bears interest at the prime rate due monthly. The principal balance on the Note was due on January 25, 2001. On March 30, 2001, after the close of its 2001 fiscal year, the Company sold its interest in three of the four joint ventures with Full House for cash consideration of $1,800,000 which approximated carrying value. In connection with this transaction, the Company amended the terms of the Note to extend the maturity date until January 25, 2002. The Company paid rent of $3,510,000, $3,510,000 and $2,612,000 to West Greenwich Technology Associates Limited Partnership (which is 50% owned by the Company and 50% owned by an unrelated third party), in fiscal 2001, 2000 and 1999, respectively, for the Company's West Greenwich, Rhode Island corporate headquarters and research and development and main production facility. Rent payments will escalate to $3,531,000 beginning March 1, 2004. Prior to February 2001, the Company held a 40% interest in Lottery Technology Enterprises ("LTE"). The Company's interest is now 1%. LTE is a joint venture comprised of the Company and District Enterprise for Lottery Technology Applications of Washington, D.C., that holds a contract with the District of Columbia Lottery and Charitable Games Control Board. Sales of products and services to LTE were $2,125,000, $3,598,000 and $4,155,000 in fiscal 2001, 2000 and 1999, respectively. At February 24, 2001 and February 26, 2000, the Company had receivables of $2,893,000 and $682,000, respectively, from LTE. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE L - LEASES The Company leases certain facilities, equipment and vehicles under noncancelable operating leases that expire at various dates through fiscal 2014. Certain of these leases have escalation clauses and renewal options ranging from one to 10 years. The Company is required to pay all maintenance, taxes and insurance relating to its leased assets. Future minimum lease payments, by year and in the aggregate, under noncancelable operating leases with initial terms greater than one year, consist of the following at February 24, 2001:
Fiscal Year (Dollars in thousands) ----------- 2002 $ 31,614 2003 28,699 2004 15,445 2005 12,504 2006 11,245 Thereafter 34,959 ------------------ Total minimum lease payments $ 134,466 ==================
Rental expense for operating leases was $31,632,000, $31,412,000 and $28,358,000 for fiscal 2001, 2000 and 1999, respectively. NOTE M - EMPLOYEE BENEFITS The Company has two defined contribution 401(k) retirement savings and profit sharing plans (the "Plans") covering substantially all employees in the United States and the Commonwealth of Puerto Rico. Under these Plans, an eligible employee may elect to defer receipt of a portion of base pay each year. The Company contributes this amount on the employee's behalf to the Plans and also makes a matching contribution. For periods prior to January 1, 2001, the employer matching contribution was equal to 50% of the amount that the employee elected to defer, up to a maximum matching contribution of 2 1/2% of the employee's base pay. Effective January 1, 2001, and subject to Board of Director approval, the Company increased the matching contribution for the U.S. Plan to 100% on the first 3% and 50% on the next 2% that the employee elects to defer, up to a maximum matching contribution of 4% of the employee's base pay. Participants are 100% vested at all times in the amounts they defer and the Company's matching contributions on these amounts. The Company, at its discretion, may contribute additional amounts to the Plans on behalf of employees based upon its profits for a given fiscal year. Employees become 100% vested in these profit sharing contributions one year from their hire date. Benefits under the Plans generally will be paid to participants upon retirement or in certain other limited circumstances. In fiscal 2001, 2000, and 1999, the Company recorded expense under these Plans of $6,559,000, $5,840,000, and $7,070,000, respectively. The Company has a defined contribution Supplemental Retirement Plan that provides additional retirement benefits to certain key employees. The Company, at its discretion, may contribute additional amounts to this plan on behalf of such key employees equal to the percentage of profit sharing contributions contributed for the calendar year multiplied by the key employees' compensation (as defined) for such year. In fiscal 2001, 2000, and 1999 the Company recorded expense under this plan of $266,000, $275,000, and $415,000, respectively. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA 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. The accounting policies of the Lottery segment are the same as those described in the summary of significant accounting policies. 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 (See Note P for additional information regarding the Company's Transactive subsidiary). The composition of the "All Other" category for all periods presented was changed during fiscal 2001 to reflect a value assessment of the Company's business whereby the Company's Dreamport business unit was consolidated into the Lottery segment. The Company's business segment data is summarized below:
Lottery All Other Consolidated -------------- --------- ------------ (Dollars in thousands) February 24, 2001 ----------------- OPERATING DATA: Revenues from external sources $ 889,522 $ 47,021 $ 936,543 Net operating profit after income taxes 85,708 3,570 89,278 Interest income 5,548 48 5,596 Equity in earnings of unconsolidated affiliates 3,167 --- 3,167 Depreciation 155,329 933 156,262 Intangibles amortization 11,968 --- 11,968 Goodwill amortization 5,006 1,159 6,165 BALANCE SHEET DATA (AT END OF PERIOD): Segment assets 896,010 42,150 938,160 CASH FLOW DATA: Capital expenditures 136,804 87 136,891 February 26, 2000 ----------------- OPERATING DATA: Revenues from external sources $ 956,054 $ 54,744 $ 1,010,798 Net operating profit after income taxes 113,651 1,528 115,179 Interest income 3,466 43 3,509 Equity in earnings of unconsolidated affiliates 2,843 --- 2,843 Depreciation 167,446 838 168,284 Intangibles amortization 10,839 --- 10,839 Goodwill amortization 5,094 1,159 6,253 BALANCE SHEET DATA (AT END OF PERIOD): Segment assets 852,766 38,257 891,023 CASH FLOW DATA: Capital expenditures 128,392 226 128,618
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA-(CONTINUED)
Lottery All Other Consolidated -------------- --------- ------------ (Dollars in thousands) February 27, 1999 ----------------- OPERATING DATA: Revenues from external sources $ 917,284 $ 55,639 $ 972,923 Net operating profit after income taxes 112,694 608 113,302 Interest income 3,968 111 4,079 Equity in earnings of unconsolidated affiliates 7,113 --- 7,113 Depreciation 184,003 745 184,748 Intangibles amortization 8,719 --- 8,719 Goodwill amortization 5,082 772 5,854 BALANCE SHEET DATA (AT END OF PERIOD): Segment assets 834,988 39,227 874,215 CASH FLOW DATA: Capital expenditures 120,616 582 121,198
The following is a reconciliation of net operating profit after income taxes to net income as reported on the Consolidated Income Statements:
Fiscal Year Ended ------------------------------------------------------------------ February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) Net operating profit after income taxes $ 89,278 $ 115,179 $ 113,302 Reconciling items, net of tax: Interest expense (16,571) (17,419) (16,169) Special (charges) credit (25,785) 662 (8,850) Other (3,774) (4,837) 780 -------------------- --------------------- ---------------- Net income $ 43,148 $ 93,585 $ 89,063 ==================== ===================== ================
The Company's geographic data is summarized below:
Fiscal Year Ended ------------------------------------------------------------------ February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) Revenues from external sources: United States $ 522,132 $ 530,193 $ 570,548 Brazil 127,015 117,639 118,611 Other foreign 287,396 362,966 283,764 -------------------- --------------------- ----------------- $ 936,543 $ 1,010,798 $ 972,923 ==================== ===================== =================
Revenues are attributed to countries based on the location of the customer. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA-(CONTINUED)
Fiscal Year Ended ------------------------------------------------------------------ February 24, 2001 February 26, 2000 February 27, 1999 ----------------- ----------------- ----------------- (Dollars in thousands) Systems, equipment and other assets relating to contracts: United States $ 185,717 $ 216,498 $ 260,585 Brazil 68,309 58,104 63,015 Other foreign 107,308 101,316 73,961 ------------------- --------------------- ----------------- $ 361,334 $ 375,918 $ 397,561 =================== ===================== =================
For fiscal 2001, 2000 and 1999, the aggregate revenues from Caixa Economica Federal in Brazil represented 12.1%, 10.7% and 11.2% of the Company's consolidated revenues, respectively. For fiscal 1999, the aggregate revenues from the Company's lottery operations in the state of Texas represented 10.6% of the Company's consolidated revenues. No other customer accounted for more than 10% of the consolidated revenues in such years. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE O - FINANCIAL INSTRUMENTS Cash and cash equivalents Cash equivalents are stated at cost that approximates fair value. Debt The carrying amounts of the Company's borrowings under the Credit Facility at February 26, 2000 approximate fair value due primarily to its variable interest rate characteristics and its short-term tenure. At February 24, 2001, the Company had no outstanding borrowings under the Credit Facility. At February 24, 2001 and February 26, 2000, the estimated fair value of the Senior Notes as determined by an independent investment banker approximated $305,732,000 and $293,942,000, respectively. Foreign Currency Exchange Contracts At February 24, 2001, the Company had contracts for the sale of foreign currency of $94,820,000 (primarily Spanish pesetas, Australian dollars, and pounds sterling) and the purchase of foreign currency of $65,501,000 (primarily pounds sterling), compared to contracts for the sale of foreign currency of $87,749,000 (primarily Spanish pesetas, South African rand, and Irish punts) and the purchase of foreign currency of $66,675,000 (primarily pounds sterling) at February 26, 2000. The fair values of the Company's foreign currency exchange contracts are estimated based on quoted market prices of comparable contracts, adjusted through interpolation when necessary for maturity differences. In the aggregate, the carrying value of these contracts approximated fair value at February 24, 2001 and February 26, 2000. The Company had minimal exposure to loss from nonperformance by the counterparties to its forward exchange contract agreements at the end of fiscal 2001 and does not anticipate nonperformance by counterparties in the periodic settlements of amounts due. The Company currently minimizes this potential for risk by entering into forward exchange contracts exclusively with major, financially sound counterparties, and by limiting exposure with any one financial institution. Interest Rate Swaps The Company uses various interest rate hedging instruments to reduce the risk associated with future interest rate fluctuations. In February 2000, the Company entered into two interest rate swaps with an aggregate notional amount of $150,000,000 that provided interest rate protection over the period February 25, 2000 to May 15, 2007. The swaps were designated as fair value hedges and effectively entitled the Company to exchange fixed rate payments for variable rate payments. Accordingly, the fair value of the swaps was recorded as an asset and the carrying value of the underlying debt was adjusted by an equal amount in accordance with FAS 133. On February 1, 2001, the Company sold the two interest rate swaps for $12,970,000. Under FAS 133, the carrying value of debt has been increased by $12,970,000, the fair value of the swaps prior to termination. This amount will be amortized as a reduction of interest expense over the period February 2001 through May 2007 on an effective yield basis. GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE P - SPECIAL CHARGES In the fourth quarter of fiscal 1998, the Company recorded a $99,382,000 special charge which consisted principally of costs to exit the electronic benefit transfer (EBT) business conducted by the Company's Transactive subsidiary ("Transactive"), costs associated with a worldwide workforce reduction and contractual obligations in connection with the departures of the Company's former Chairman and Vice-Chairman from the Company. In February 1998, the Company entered into an asset purchase agreement with Citicorp Services, Inc. ("Citicorp"), to sell EBT contracts and certain related assets held by Transactive. In July 1998, the U.S. Department of Justice commenced a legal action seeking to enjoin the consummation of the transaction, on anti-trust grounds, and in January 1999 Citicorp terminated the agreement pursuant to a clause in the contract that permitted termination by either party if the closing did not occur within a timeframe that has expired. As a result, the Company recorded an additional special charge of $15,000,000 ($8,850,000 after-tax, or $.22 per diluted share) in the fourth quarter of fiscal 1999 in order to write down the assets held for sale in connection with this transaction to their net realizable value. Those assets consisted primarily of EBT contract assets. In fiscal 2001, the Company recorded special charges of $42,270,000 ($25,785,000 after-tax, or $0.74 per diluted share) 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 is as follows:
Exit of Certain Business Disposition Worldwide Executive Strategies of EBT Workforce Contractual and Product Business Reduction Obligations Lines Other Total ----------- ---------- ----------- ---------------- -------- ---------- (Dollars in thousands) Balance at February 28, 1998 $ 5,929 $ 12,280 $ 8,513 $ --- $ 6,909 $ 33,631 Change in estimate 13,601 (2,948) (20) --- 4,367 15,000 Cash expenditures (3,662) (7,868) (8,493) --- (6,082) (26,105) Noncash charges (14,241) --- --- --- (2,227) (16,468) ----------- ---------- ----------- ---------- ---------- ---------- Balance at February 27, 1999 1,627 1,464 --- --- 2,967 6,058 ----------- ----------- ----------- ---------- ---------- ---------- Change in estimate (930) (37) --- --- (137) (1,104) Cash expenditures (697) (1,427) --- --- (2,830) (4,954) ----------- ---------- ----------- ---------- ---------- ---------- Balance at February 26, 2000 --- --- --- --- --- --- ----------- ---------- ----------- ---------- ---------- ---------- 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 =========== ========== =========== ========== ========== ==========
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Q - QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for fiscal 2001 and 2000:
First Second Third Fourth Quarter Quarter Quarter Quarter ------------- -------------- ------------- ------------- (Dollars in thousands, except per share amounts) Fiscal year ended February 24, 2001: Service revenues $ 222,631 $ 204,209 $ 213,827 $ 215,808 Sales of products 19,367 23,399 7,204 30,098 Gross profit 83,424 55,371 68,421 90,388 Net income (loss) 20,229 (21,266) 18,287 25,898 Basic earnings (loss) per share $ .58 $ (.61) $ .53 $ .76 Diluted earnings (loss) per share $ .58 $ (.61) $ .53 $ .75 Fiscal year ended February 26, 2000: Service revenues $ 211,158 $ 209,843 $ 221,093 $ 218,325 Sales of products 27,502 45,546 28,473 48,858 Gross profit 80,630 82,664 90,065 100,177 Net income 18,935 21,754 22,779 30,117 Basic earnings per share $ .50 $ .58 $ .65 $ .87 Diluted earnings per share $ .50 $ .58 $ .65 $ .87
The Company recorded special charges of $40,018,000 and $2,252,000 in the second and fourth quarters of fiscal 2001, respectively (See Note P). Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly basic earnings per share in fiscal 2001 and the sum of the quarterly basic and diluted earnings per share in fiscal 2000 do not equal the total computed for the year. Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. Goodwill amortization, that was included in cost of services and selling, general and administrative expense in prior periods has been presented as a single line item in the Consolidated Income Statements. NOTE R - SUBSEQUENT EVENT On March 19, 2001, the Company repurchased 5,000,000 shares of its Common Stock from its largest shareholder for $130,000,000. Note S - Supplemental Guarantor/Non-Guarantor Financial Information On December 18, 2001, Holdings (the "Parent Company") issued $175 million of 1 3/4% Convertible Debentures due 2021 (the "Convertible Debentures"). The Convertible Debentures are unsecured and unsubordinated obligations of the Parent Company that are jointly and severally, fully and unconditionally guaranteed by GTECH and two of its wholly-owned subsidiaries: GTECH Rhode Island Corporation and GTECH Latin America Corporation (collectively with GTECH, the "Guarantor Subsidiaries"). Condensed consolidating financial information is presented below. Selling, general and administrative costs and research and development costs are allocated to each subsidiary based on the ratio of the subsidiaries combined service revenue and sales of products to consolidated revenues. The Parent Company conducts business through its consolidated subsidiaries and unconsolidated affiliates and has, as its only asset, an investment in GTECH. Equity in earnings of consolidated affiliates recorded by the Parent Company includes the Parent Company's share of the after-tax earnings of GTECH. Taxes payable and deferred income taxes are obligations of the subsidiaries. Income tax expense related to both current and deferred income taxes are allocated to each subsidiary based on the Company's consolidated effective income tax rates. Condensed Consolidating Balance Sheets February 24, 2001
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ----------- ------------ ------------- ------------ ------------ (Dollars in thousands) Assets Current Assets: Cash and cash equivalents $ --- $ 37,068 $ 9,880 $ --- $ 46,948 Trade accounts receivable --- 86,581 32,140 --- 118,721 Due from subsidiaries and affiliates --- 132,316 --- (132,316) --- Sales-type lease receivables --- 3,019 5,703 --- 8,722 Inventories --- 111,701 7,705 (1,617) 117,789 Deferred income taxes --- 25,681 1,169 --- 26,850 Other current assets --- 7,547 11,251 --- 18,798 ----------- ---------- ------------ ------------ ----------- Total Current Assets --- 403,913 67,848 (133,933) 337,828 Systems, Equipment and Other Assets Relating to Contracts --- 236,345 158,943 (33,954) 361,334 Investment in Subsidiaries and Affiliates 314,362 112,400 --- (426,762) --- Goodwill --- 73,134 49,191 --- 122,325 Other Assets --- 83,035 33,638 --- 116,673 ----------- ---------- ------------ ------------ ----------- Total Assets $ 314,362 $ 908,827 $ 309,620 $ (594,649) $ 938,160 =========== ========== ============ ============ =========== Liabilities and Shareholders' Equity Current Liabilities: Short term borrowings $ --- $ --- $ 2,316 $ --- $ 2,316 Accounts payable --- 35,419 13,848 --- 49,267 Due to subsidiaries and affiliates --- --- 132,316 (132,316) --- Accrued expenses --- 41,346 13,794 --- 55,140 Special charge --- 9,220 1,211 --- 10,431 Employee compensation --- 27,644 4,254 --- 31,898 Advance payments from customers --- 45,930 9,488 --- 55,418 Income taxes payable --- 67,363 (2,790) --- 64,573 Current portion of long-term debt --- 2,075 1,437 --- 3,512 ----------- ---------- ------------ ------------ ----------- Total Current Liabilities --- 228,997 175,874 (132,316) 272,555 Long-Term Debt, less current portion --- 310,735 6,226 --- 316,961 Other Liabilities --- 15,673 14,210 --- 29,883 Deferred Income Taxes --- 3,489 910 --- 4,399 Shareholders' Equity 314,362 349,933 112,400 (462,333) 314,362 ----------- ---------- ------------ ------------ ----------- Total Liabilities and Shareholders' Equity $ 314,362 $ 908,827 $ 309,620 $ (594,649) $ 938,160 =========== ========== ============ ============ ===========
Condensed Consolidating Balance Sheets February 26, 2000
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ----------- ---------- ------------ ------------ ------------ (Dollars in thousands) Assets Current Assets: Cash and cash equivalents $ --- $ 860 $ 10,255 $ --- $ 11,115 Trade accounts receivable --- 77,275 38,083 --- 115,358 Due from subsidiaries and affiliates --- 68,359 --- (68,359) --- Sales-type lease receivables --- 3,053 7,057 --- 10,110 Inventories --- 65,019 3,841 (1,442) 67,418 Deferred income taxes --- 9,506 6,347 --- 15,853 Other current assets --- 6,897 12,449 --- 19,346 ----------- ---------- ------------ ------------ ----------- Total Current Assets --- 230,969 78,032 (69,801) 239,200 Systems, Equipment and Other Assets Relating to Contracts --- 277,348 119,100 (20,530) 375,918 Investment in Subsidiaries and Affiliates 296,576 165,940 --- (462,516) --- Goodwill --- 75,663 55,047 --- 130,710 Other Assets --- 105,639 39,556 --- 145,195 ----------- ---------- ------------ ------------ ----------- Total Assets $ 296,576 $ 855,559 $ 291,735 $ (552,847) $ 891,023 =========== ========== ============ ============ =========== Liabilities and Shareholders' Equity Current Liabilities: Short term borrowings $ --- $ --- $ 1,620 $ --- $ 1,620 Accounts payable --- 37,486 15,617 --- 53,103 Due to subsidiaries and affiliates --- --- 68,359 (68,359) --- Accrued expenses --- 31,926 11,352 --- 43,278 Employee compensation --- 26,602 3,455 --- 30,057 Advance payments from customers --- 21,712 11,726 --- 33,438 Income taxes payable --- 43,965 5,417 --- 49,382 Current portion of long-term debt --- --- 69 --- 69 ----------- ---------- ------------ ------------ ----------- Total Current Liabilities --- 161,691 117,615 (68,359) 210,947 Long-Term Debt, less current portion --- 349,400 --- --- 349,400 Other Liabilities --- 19,277 8,086 --- 27,363 Deferred Income Taxes --- 6,643 94 --- 6,737 Shareholders' Equity 296,576 318,548 165,940 (484,488) 296,576 ----------- ---------- ------------ ------------ ----------- Total Liabilities and Shareholders' Equity $ 296,576 $ 855,559 $ 291,735 $ (552,847) $ 891,023 =========== ========== ============ ============ ===========
Condensed Consolidating Income Statements Fiscal Year Ended February 24, 2001
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- ------------- (Dollars in thousands) Revenues: Services $ --- $ 635,643 $ 220,832 $ --- $ 856,475 Sales of products --- 43,973 36,095 --- 80,068 Intercompany sales and fees --- 158,421 113,771 (272,192) --- --------------- ------------- --------------- ------------- -------------- --- 838,037 370,698 (272,192) 936,543 Costs and expenses: Costs of services --- 390,351 179,201 (5,457) 564,095 Costs of sales --- 57,030 17,907 (93) 74,844 Intercompany cost of sales and fees --- 131,172 57,077 (188,249) --- --------------- ------------- --------------- ------------- -------------- --- 578,553 254,185 (193,799) 638,939 --------------- ------------- --------------- -------------- -------------- Gross profit --- 259,484 116,513 (78,393) 297,604 Selling, general & administrative --- 85,624 32,373 --- 117,997 Research and development --- 35,753 13,514 --- 49,267 Goodwill amortization --- 2,529 3,636 --- 6,165 Special charge --- 35,514 6,756 --- 42,270 --------------- ------------- --------------- ------------- -------------- Operating expenses --- 159,420 56,279 --- 215,699 --------------- ------------- --------------- ------------- -------------- Operating income --- 100,064 60,234 (78,393) 81,905 Other income (expense): Interest income --- 2,096 3,500 --- 5,596 Equity in earnings of unconsolidated affiliates --- 1,639 1,528 --- 3,167 Equity in earnings of consolidated affiliates 43,148 45,815 --- (88,963) --- Other income (expense) --- (3,667) 10,899 --- 7,232 Interest expense --- (26,111) (1,054) --- (27,165) --------------- -------------- ---------------- ------------- -------------- Income before income taxes 43,148 119,836 75,107 (167,356) 70,735 Income taxes --- 46,736 29,292 (48,441) 27,587 --------------- ------------- --------------- -------------- -------------- Net income $ 43,148 $ 73,100 $ 45,815 $ (118,915) $ 43,148 =============== ============= =============== ============== ==============
Condensed Consolidating Income Statements Fiscal Year Ended February 26, 2000
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- -------------- (Dollars in thousands) Revenues: Services $ --- $ 648,455 $ 211,964 $ --- $ 860,419 Sales of products --- 103,827 46,552 --- 150,379 Intercompany sales and fees --- 106,646 133,256 (239,902) --- --------------- ------------- --------------- ------------- -------------- --- 858,928 391,772 (239,902) 1,010,798 Costs and expenses: Costs of services --- 382,667 179,468 (6,826) 555,309 Costs of sales --- 70,536 35,606 (4,189) 101,953 Intercompany cost of sales and fees --- 154,244 49,768 (204,012) --- --------------- ------------- --------------- ------------- -------------- --- 607,447 264,842 (215,027) 657,262 --------------- ------------- --------------- ------------- -------------- Gross profit --- 251,481 126,930 (24,875) 353,536 Selling, general & administrative --- 91,054 31,280 --- 122,334 Research and development --- 34,265 11,788 --- 46,053 Goodwill amortization --- 2,529 3,724 --- 6,253 Special charge (credit) --- (181) (923) --- (1,104) --------------- -------------- --------------- ------------- --------------- Operating expenses --- 127,667 45,869 --- 173,536 --------------- ------------- --------------- ------------- -------------- Operating income --- 123,814 81,061 (24,875) 180,000 Other income (expense): Interest income --- 1,720 1,789 --- 3,509 Equity in earnings (loss) of unconsolidated affiliates --- (1,588) 4,431 --- 2,843 Equity in earnings of consolidated affiliates 93,585 52,217 --- (145,802) --- Other income (expense) --- (1,471) 128 --- (1,343) Interest expense --- (28,651) (381) --- (29,032) --------------- -------------- ---------------- ------------- -------------- Income before income taxes 93,585 146,041 87,028 (170,677) 155,977 Income taxes --- 58,416 34,811 (30,835) 62,392 --------------- ------------- --------------- -------------- -------------- Net income $ 93,585 $ 87,625 $ 52,217 $ (139,842) $ 93,585 =============== ============= =============== ============== ==============
Condensed Consolidating Income Statements Fiscal Year Ended February 27, 1999
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- -------------- (Dollars in thousands) Revenues: Services $ --- $ 676,453 $ 210,942 $ --- $ 887,395 Sales of products --- 56,070 29,458 --- 85,528 Intercompany sales and fees --- 91,320 86,195 (177,515) --- --------------- ------------- --------------- ------------- -------------- --- 823,843 326,595 (177,515) 972,923 Costs and expenses: Costs of services --- 391,373 204,823 (6,431) 589,765 Costs of sales --- 39,541 20,445 (161) 59,825 Intercompany cost of sales and fees --- 85,403 34,164 (119,567) --- --------------- ------------- --------------- ------------- -------------- --- 516,317 259,432 (126,159) 649,590 --------------- ------------- --------------- ------------- -------------- Gross profit --- 307,526 67,163 (51,356) 323,333 Selling, general & administrative --- 90,791 29,810 --- 120,601 Research and development --- 30,229 9,929 --- 40,158 Goodwill amortization --- 2,528 3,326 --- 5,854 Special charge --- 2,174 12,826 --- 15,000 --------------- ------------- --------------- ------------- -------------- Operating expenses --- 125,722 55,891 --- 181,613 --------------- ------------- --------------- ------------- -------------- Operating income --- 181,804 11,272 (51,356) 141,720 Other income (expense): Interest income --- 1,114 2,965 --- 4,079 Equity in earnings of unconsolidated affiliates --- 1,297 5,816 --- 7,113 Equity in earnings of consolidated affiliates 89,063 32,919 --- (121,982) --- Other income (expense) --- (10,987) 36,434 --- 25,447 Interest expense --- (26,713) (692) --- (27,405) --------------- -------------- ---------------- ------------- -------------- Income before income taxes 89,063 179,434 55,795 (173,338) 150,954 Income taxes --- 73,568 22,876 (34,553) 61,891 --------------- ------------- --------------- -------------- -------------- Net income $ 89,063 $ 105,866 $ 32,919 $ (138,785) $ 89,063 =============== ============= =============== ============== ==============
Condensed Consolidating Statements of Cash Flows Fiscal Year Ended February 24, 2001
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- -------------- (Dollars in thousands) Net cash provided by operating activities $ --- $ 189,575 $ 80,467 $ (18,072) $ 251,970 Investing Activities Purchases of systems, equipment and other assets relating to contracts --- (67,774) (87,189) 18,072 (136,891) Investments in and advances to unconsolidated affiliates --- (16,424) (177) --- (16,601) Cash received from affiliates --- 2,075 --- --- 2,075 Other --- (12,118) 969 --- (11,149) --------------- -------------- --------------- ------------- --------------- Net cash used for investing activities --- (94,241) (86,397) 18,072 (162,566) Financing Activities Net proceeds from issuance of long-term debt --- 88,000 7,908 --- 95,908 Principal payments on long-term debt --- (137,400) (1,337) --- (138,737) Purchases of treasury stock (19,587) --- --- --- (19,587) Proceeds from stock options 6,455 --- --- --- 6,455 Intercompany capital transactions 11,431 (11,431) --- --- --- Other 1,701 --- 3,535 --- 5,236 --------------- ------------- --------------- ------------- -------------- Net cash provided by (used for) financing activities --- (60,831) 10,106 --- (50,725) Effect of exchange rate changes on cash --- 1,705 (4,551) --- (2,846) --------------- ------------- --------------- ------------- -------------- Increase (decrease) in cash and cash equivalents --- 36,208 (375) --- 35,833 Cash and cash equivalents at beginning of year --- 860 10,255 --- 11,115 --------------- ------------- --------------- ------------- -------------- Cash and cash equivalents at end of year $ --- $ 37,068 $ 9,880 $ --- $ 46,948 =============== ============= =============== ============= ==============
Condensed Consolidating Statements of Cash Flows Fiscal Year Ended February 26, 2000
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- -------------- (Dollars in thousands) Net cash provided by operating activities $ --- $ 187,380 $ 44,600 $ (1,198) $ 230,782 Investing Activities Purchases of systems, equipment and other assets relating to contracts --- (91,979) (37,837) 1,198 (128,618) Investments in and advances to unconsolidated affiliates --- (10,797) (5,412) --- (16,209) Other --- (18,944) (572) --- (19,516) --------------- -------------- ---------------- ------------- --------------- Net cash used for investing activities --- (121,720) (43,821) 1,198 (164,343) Financing Activities Net proceeds from issuance of long-term debt --- 221,500 --- --- 221,500 Principal payments on long-term debt --- (191,100) (1,836) --- (192,936) Purchases of treasury stock (98,747) --- --- --- (98,747) Proceeds from stock options 316 --- --- --- 316 Intercompany capital transactions 96,414 (96,414) --- --- --- Other 2,017 (895) 992 --- 2,114 --------------- -------------- --------------- ------------- -------------- Net cash used for financing activities --- (66,909) (844) --- (67,753) Effect of exchange rate changes on cash --- 540 4,156 --- 4,696 --------------- ------------- --------------- ------------- -------------- Increase (decrease) in cash and cash equivalents --- (709) 4,091 --- 3,382 Cash and cash equivalents at beginning of year --- 1,569 6,164 --- 7,733 --------------- ------------- --------------- ------------- -------------- Cash and cash equivalents at end of year $ --- $ 860 $ 10,255 $ --- $ 11,115 =============== ============= =============== ============= ==============
Condensed Consolidating Statements of Cash Flows Fiscal Year Ended February 27, 1999
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- -------------- (Dollars in thousands) Net cash provided by (used for) operating activities $ --- $ 309,605 $ (16,573) $ (6,750) $ 286,282 Investing Activities Purchases of systems, equipment and other assets relating to contracts --- (83,298) (44,650) 6,750 (121,198) Acquisitions (net of cash acquired) --- (19,687) --- --- (19,687) Investments in and advances to unconsolidated affiliates --- (17) (512) --- (529) Cash received from affiliates --- 1,941 (35) --- 1,906 Proceeds from sale of investments --- --- 84,904 --- 84,904 Other --- (22,586) (41) --- (22,627) --------------- ------------- ---------------- ------------- --------------- Net cash provided by (used for) investing activities --- (123,647) 39,666 6,750 (77,231) Financing Activities Net proceeds from issuance of long-term debt --- 117,500 206 --- 117,706 Principal payments on long-term debt --- (237,220) (17,548) --- (254,768) Purchases of treasury stock (70,757) --- --- --- (70,757) Proceeds from stock options 4,976 --- --- --- 4,976 Intercompany capital transactions 65,781 (65,781) --- --- --- Other --- --- (205) --- (205) --------------- ------------- ---------------- ------------- --------------- Net cash used for financing activities --- (185,501) (17,547) --- (203,048) Effect of exchange rate changes on cash --- 152 (6,672) --- (6,520) --------------- ------------- --------------- ------------- -------------- Increase (decrease) in cash and cash equivalents --- 609 (1,126) --- (517) Cash and cash equivalents at beginning of year --- 960 7,290 --- 8,250 --------------- ------------- --------------- ------------- -------------- Cash and cash equivalents at end of year $ --- $ 1,569 $ 6,164 $ --- $ 7,733 =============== ============= =============== ============= ==============
Note T - Supplemental Guarantor/Non-Guarantor Financial Information (Unaudited) On December 18, 2001, Holdings (the "Parent Company") issued $175 million of 1 3/4% Convertible Debentures due 2021 (the "Convertible Debentures"). The Convertible Debentures are unsecured and unsubordinated obligations of the Parent Company that are jointly and severally, fully and unconditionally guaranteed by GTECH and two of its wholly-owned subsidiaries: GTECH Rhode Island Corporation and GTECH Latin America Corporation (collectively with GTECH, the "Guarantor Subsidiaries"). Condensed consolidating financial information is presented below. Selling, general and administrative costs and research and development costs are allocated to each subsidiary based on the ratio of the subsidiaries combined service revenue and sales of products to consolidated revenues. The Parent Company conducts business through its consolidated subsidiaries and unconsolidated affiliates and has, as its only asset, an investment in GTECH. Equity in earnings of consolidated affiliates recorded by the Parent Company includes the Parent Company's share of the after-tax earnings of GTECH. Taxes payable and deferred income taxes are obligations of the subsidiaries. Income tax expense related to both current and deferred income taxes are allocated to each subsidiary based on the Company's consolidated effective income tax rates. Condensed Consolidating Balance Sheets November 24, 2001
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ---------- --------- ----------- --------- --------- (Dollars in thousands) Assets Current Assets: Cash and cash equivalents $ --- $ 906 $ 10,527 $ --- $ 11,433 Trade accounts receivable --- 72,397 21,962 --- 94,359 Due from subsidiaries and affiliates --- 126,517 --- (126,517) --- Sales-type lease receivables --- 3,050 4,922 --- 7,972 Inventories --- 85,186 26,161 (5,613) 105,734 Deferred income taxes --- 24,405 2,445 --- 26,850 Other current assets --- 6,982 12,342 --- 19,324 ---------- --------- ----------- --------- --------- Total Current Assets --- 319,443 78,359 (132,130) 265,672 Systems, Equipment and Other Assets Relating to Contracts --- 274,909 149,323 (37,336) 386,896 Investment in Subsidiaries and Affiliates 207,642 87,744 --- (295,386) --- Goodwill --- 71,237 47,084 --- 118,321 Other Assets --- 72,338 20,585 --- 92,923 ---------- --------- ----------- --------- --------- Total Assets $ 207,642 $ 825,671 $ 295,351 $(464,852) $ 863,812 ========== ========= =========== ========== ========= Liabilities and Shareholders' Equity Current Liabilities: Short term borrowings $ --- $ --- $ 2,541 $ --- $ 2,541 Accounts payable --- 28,327 10,500 --- 38,827 Due to subsidiaries and affiliates --- --- 126,517 (126,517) --- Accrued expenses --- 51,559 17,971 --- 69,530 Employee compensation --- 26,344 5,697 --- 32,041 Advance payments from customers --- 55,645 24,149 --- 79,794 Income taxes payable --- 68,221 (2,191) --- 66,030 Current portion of long-term debt --- 2,075 1,508 --- 3,583 ---------- --------- ----------- --------- --------- Total Current Liabilities --- 232,171 186,692 (126,517) 292,346 Long-Term Debt, less current portion --- 321,793 4,145 --- 325,938 Other Liabilities --- 18,653 14,834 --- 33,487 Deferred Income Taxes --- 2,463 1,936 --- 4,399 Shareholders' Equity 207,642 250,591 87,744 (338,335) 207,642 ---------- --------- ----------- --------- --------- Total Liabilities and Shareholders' Equity $ 207,642 $ 825,671 $ 295,351 $(464,852) $ 863,812 ========== ========= =========== ========== =========
Condensed Consolidating Income Statements For The Nine Months Ended November 24, 2001
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- -------------- (Dollars in thousands) Revenues: Services $ --- $ 469,721 $ 146,876 $ --- $ 616,597 Sales of products --- 90,985 27,546 --- 118,531 Intercompany sales and fees --- 100,770 69,408 (170,178) --- --------------- ------------- --------------- -------------- -------------- --- 661,476 243,830 (170,178) 735,128 Costs and expenses: Costs of services --- 299,052 134,704 (7,326) 426,430 Costs of sales --- 79,895 15,158 (306) 94,747 Intercompany cost of sales and fees --- 81,609 35,087 (116,696) --- --------------- ------------- --------------- ------------- -------------- --- 460,556 184,949 (124,328) 521,177 --------------- ------------- --------------- -------------- -------------- Gross profit --- 200,920 58,881 (45,850) 213,951 Selling, general & administrative --- 63,564 19,779 --- 83,343 Research and development --- 18,263 5,686 --- 23,949 Goodwill amortization --- 1,897 2,659 --- 4,556 --------------- ------------- --------------- ------------- -------------- Operating expenses --- 83,724 28,124 --- 111,848 --------------- ------------- --------------- ------------- -------------- Operating income --- 117,196 30,757 (45,850) 102,103 Other income (expense): Interest income --- 1,707 2,617 --- 4,324 Equity in earnings of unconsolidated affiliates --- 850 2,980 --- 3,830 Equity in earnings of consolidated affiliates 57,366 25,924 --- (83,290) --- Other income (expense) --- (6,350) 7,093 --- 743 Interest expense --- (16,841) (1,634) --- (18,475) --------------- -------------- ---------------- ------------- -------------- Income before income taxes 57,366 122,486 41,813 (129,140) 92,525 Income taxes --- 46,545 15,889 (27,275) 35,159 --------------- ------------- --------------- -------------- -------------- Net income $ 57,366 $ 75,941 $ 25,924 $ (101,865) $ 57,366 =============== ============= =============== ============== ==============
Condensed Consolidating Income Statements For the Nine Months Ended November 25, 2000
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- -------------- (Dollars in thousands) Revenues: Services $ --- $ 476,579 $ 164,088 $ --- $ 640,667 Sales of products --- 22,461 27,509 --- 49,970 Intercompany sales and fees --- 51,476 48,617 (100,093) --- --------------- ------------- --------------- -------------- -------------- --- 550,516 240,214 (100,093) 690,637 Costs and expenses: Costs of services --- 301,636 132,441 (3,354) 430,723 Costs of sales --- 38,372 14,655 (329) 52,698 Intercompany cost of sales and fees --- 54,515 12,205 (66,720) --- --------------- ------------- --------------- ------------- -------------- --- 394,523 159,301 (70,403) 483,421 --------------- ------------- --------------- -------------- -------------- Gross profit --- 155,993 80,913 (29,690) 207,216 Selling, general & administrative --- 64,580 24,793 --- 89,373 Research and development --- 27,594 10,595 --- 38,189 Goodwill amortization --- 1,897 2,794 --- 4,691 Special charge --- 31,686 8,332 --- 40,018 --------------- ------------- --------------- ------------- -------------- Operating expenses --- 125,757 46,514 --- 172,271 --------------- ------------- --------------- ------------- -------------- Operating income --- 30,236 34,399 (29,690) 34,945 Other income (expense): Interest income --- 1,659 2,653 --- 4,312 Equity in earnings of unconsolidated affiliates --- 1,146 1,468 --- 2,614 Equity in earnings of consolidated affiliates 17,250 28,160 --- (45,410) --- Other income (expense) --- (903) 8,115 --- 7,212 Interest expense --- (20,333) (471) --- (20,804) --------------- -------------- ---------------- ------------- -------------- Income before income taxes 17,250 39,965 46,164 (75,100) 28,279 Income taxes --- 15,586 18,004 (22,561) 11,029 --------------- ------------- --------------- -------------- -------------- Net income $ 17,250 $ 24,379 $ 28,160 $ (52,539) $ 17,250 =============== ============= =============== ============== ==============
Condensed Consolidating Statements of Cash Flows For the Nine Months Ended November 24, 2001
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- -------------- (Dollars in thousands) Net cash provided by operating $ --- $ 211,402 $ 53,935 $ (10,741) $ 254,596 activities Investing Activities Purchases of systems, equipment and other assets relating to contracts --- (111,900) (44,958) 10,741 (146,117) Investments in and advances to unconsolidated affiliates --- 3,786 --- --- 3,786 Other --- 5,806 1,461 --- 7,267 --------------- ------------- --------------- -------------- -------------- Net cash used for investing activities --- (102,308) (43,497) 10,741 (135,064) Financing Activities Net proceeds from issuance of long-term debt --- 186,000 --- --- 186,000 Principal payments on long-term debt --- (178,003) (4,295) --- (182,298) Purchases of treasury stock (194,389) --- --- --- (194,389) Proceeds from stock options 40,968 --- --- --- 40,968 Intercompany capital transactions 151,701 (151,701) --- --- --- Other 1,720 (1,428) (1,348) --- (1,056) --------------- ------------- --------------- -------------- -------------- Net cash used for financing activities --- (145,132) (5,643) --- (150,775) Effect of exchange rate changes on cash --- (124) (4,148) --- (4,272) --------------- ------------- --------------- -------------- -------------- Increase (decrease) in cash and cash equivalents --- (36,162) 647 --- (35,515) Cash and cash equivalents at beginning of period --- 37,068 9,880 --- 46,948 --------------- ------------- --------------- -------------- -------------- Cash and cash equivalents at end of period $ --- $ 906 $ 10,527 $ --- $ 11,433 =============== ============= =============== ============== ==============
Condensed Consolidating Statements of Cash Flows For the Nine Months Ended November 25, 2000
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------------- ------------- --------------- ------------- -------------- (Dollars in thousands) Net cash provided by operating $ --- $ 100,420 $ 49,210 $ (768) $ 148,862 activities Investing Activities Purchases of systems, equipment and other assets relating to contracts --- (58,199) (50,485) 768 (107,916) Investments in and advances to unconsolidated affiliates --- (14,107) (168) --- (14,275) Other --- (10,089) 869 --- (9.220) --------------- ------------- --------------- -------------- -------------- Net cash used for investing activities --- (82,395) (49,784) 768 (131,411) Financing Activities Net proceeds from issuance of long-term debt --- 92,500 --- --- 92,500 Principal payments on long-term debt --- (100,000) (66) --- (100,066) Purchases of treasury stock (13,995) --- --- --- (13,995) Intercompany capital transactions 11,980 (11,980) --- --- --- Other 2,015 --- 3,897 --- 5,912 --------------- ------------- --------------- -------------- -------------- Net cash provided by (used for) financing activities --- (19,480) 3,831 --- (15,649) Effect of exchange rate changes on cash --- 2,308 (5,458) --- (3,150) --------------- ------------- --------------- -------------- -------------- Increase (decrease) in cash and cash equivalents --- 853 (2,201) --- (1,348) Cash and cash equivalents at beginning of period --- 860 10,255 --- 11,115 --------------- ------------- --------------- -------------- -------------- Cash and cash equivalents at end of period $ --- $ 1,713 $ 8,054 $ --- $ 9,767 =============== ============= =============== ============== ==============