The West Greenwich-based lottery giant is riding high, with sales up 17 percent and earnings up 31 percent over the same period last year.

01:00 AM EDT on Wednesday, June 23, 2004

BY ANDREA L. STAPE
Journal Staff Writer

Finishing its first quarter with a bang, GTECH Holdings Corp. yesterday announced a two-for-one stock split -- its second in two years.

Despite losing a contract in Puerto Rico, legal problems in Brazil and the possibility that a proposed Rhode Island casino could interfere with its 20-year state lottery contract, the company said both sales and income jumped.

Sales for the fiscal year's first quarter, which ended May 29, were $280.2 million -- a 17-percent increase over the same period last year.

Earnings jumped 30.7 percent, to $53.6 million, or 80 cents per share. Income was boosted by GTECH's sale of a portion of a Delaware gaming company for $6.4 million.

West Greenwich-based GTECH beat analysts' earnings expectations for the quarter, and raised its earnings forecast for the year. The company is now predicting earning $3.05 to $3.15 per share in fiscal 2005, 5 cents higher than its previous estimates.

GTECH's stock split will be distributed on July 30, with shareholders of record as of July 1 receiving one more share of stock for each share they own. The company's board yesterday also approved a quarterly cash dividend of 17 cents per share on a pre-split basis, which will also be distributed July 30.

The company's stock, though, fell 78 cents yesterday to close at $49.25 a share, due in part to the continued questions about legal problems in Brazil, according to an analyst's report yesterday from the Susquehanna Financial Group. GTECH derives more than 10 percent of its revenue from Brazil. Controversy about GTECH's Brazilian operations has been circulating since the beginning of the year. It's based on a 25-month, $120-million to $140-million lottery contract extension GTECH signed last year.

Brazilian federal prosecutors recommended that state officials there file criminal charges against a current GTECH employee and a former worker who are accused of offering to pay off a high-ranking political official to secure the lottery contract extension. GTECH denies the accusation.

The U.S. Securities and Exchange Commission has launched an informal investigation into the situation, according to the company.

In addition, the Brazilian federal government has filed a civil lawsuit against GTECH, former GTECH employees and some Brazilian lottery executives. The suit charges that GTECH and the lottery executives acted illegally when they entered into a contract in 1997 and again in 2000. Consequently, the government wants GTECH to return what it was paid for running the lottery, a telecommunications network and an electronic payment system. GTECH estimates that would be about $650 million.

However, the SEC hasn't taken any other action, W. Bruce Turner, the company's president and chief executive officer, said during a conference call yesterday. In addition, the company is about 95 percent finished with its internal investigation into the situation, he said.

"Preliminary results of [our] initial review have not uncovered any evidence of wrongdoing by GTECH," said Turner. "The actions of our company were both proper and appropriate."

He added that the company is confident that it has "adequate" defenses in the civil case and that it "remains committed to [having] a strong presence in Brazil now and in the future."

Another issue brought up during the company's quarterly conference call was whether GTECH's 20-year contract to run the Rhode Island Lottery would be affected by the casino that Harrah's Entertainment has proposed for West Warwick.

Under the terms of GTECH's agreement, the company would have the right to operate 50 percent of the video gambling machines at the new casino, as long as it was run by the Rhode Island Lottery. If a separate entity is created to run the casino, that would put GTECH's contract in default.

Turner said yesterday that the company believes the majority of the state's political leadership supports GTECH's contract and would not put it at risk.

"I feel reasonably comfortable that the very wise political minds in Rhode Island will make the right decision in that regard," said Turner.