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FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required) For the Fiscal Year Ended September 30,
2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from to
Commission File Number 001-10684
International Game Technology
(Exact name of registrant as specified in its charter)
Nevada 88-0173041
(State of Incorporation) (I.R.S. Employer Identification No.)
9295 Prototype Drive, Reno, Nevada 89511
(Address of principal executive offices)
Registrant's telephone number, including area code: (775) 448-7777
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, Par Value $.000625 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 24, 2000:
$2,876,779,414
The number of shares outstanding of each of the registrant's classes of common
stock, as of November 24, 2000:
72,721,196 shares of Common Stock, $.000625 Par Value
Part III incorporates information by reference from the Registrant's definitive
Proxy Statement to be filed with the Commission within 120 days after the close
of the Registrant's fiscal year.
Table of Contents
Part I
Page
Item 1. Business 2
Item 2. Properties 20
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security 21
Holders
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial 23
Condition and Results of Operations
Item 7a.Quantitative and Qualitative Factors about Market Risk 30
Item 8. Consolidated Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 64
Part III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 64
Item 12. Security Ownership of Certain Beneficial Owners and
Management 64
Item 13. Certain Relationships and Related Transactions 64
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports
on Form 8-K 64
Signatures 67
Part I
Item 1. Business
General
International Game Technology was incorporated in December 1980 to
acquire the gaming licensee and operating entity, IGT, and to facilitate its
initial public offering. In addition to its 100% ownership of IGT, International
Game Technology has the following directly or indirectly wholly-owned
subsidiaries: I.G.T. - Argentina S.A. (IGT-Argentina); I.G.T. Australia Pty.
Limited (IGT-Australia); International Game Technology (NZ) Ltd. (IGT-NZ); IGT
do Brazil Ltda. (IGT-Brazil); IGT-Europe B.V. (IGT-Europe); IGT-Iceland Ltd.
(IGT-Iceland); IGT-Japan K.K. (IGT-Japan); IGT-UK Limited (Barcrest);
International Game Technology - Africa Pty. Limited (IGT-Africa); International
Game Technology S.R. Ltda. (IGT-Peru); and Sodak Gaming, Inc. (Sodak).
Unless the context indicates otherwise, references to "International Game
Technology," "IGT," "we," "our" or "the Company" include International Game
Technology and its wholly-owned subsidiaries and their subsidiaries. Our
principal executive offices are located at 9295 Prototype Drive, Reno, Nevada
89511; our telephone number is (775) 448-7777.
IGT is the largest manufacturer of computerized casino gaming products and
operator of proprietary gaming systems in the world and was the first to develop
computerized video gaming machines. Since its founding in 1980, IGT has
principally served the casino gaming industry in the United States. In 1986, IGT
began expanding its business internationally, and in addition to its production
in the United States, currently manufactures its gaming products in the United
Kingdom and through a third party manufacturer in Japan. IGT also maintains
sales offices in selected legalized gaming jurisdictions globally, including
Australia, Argentina, New Zealand, Peru, South Africa and The Netherlands. We
also maintain a service office in Brazil. IGT provides gaming products in every
significant legalized gaming jurisdiction in the world.
The following are trademarks, service marks, and/or federally registered
trademarks of International Game Technology or its wholly-owned subsidiaries:
After Shock, All for One, Diamond Cinema, Dollars Deluxe, Dynamite, EZ Pay,
Fabulous 50's, Five Play Draw Poker, Game King, High Rollers, IGT Gaming System
(IGS), iGame, iGame Plus, Integrated Voucher System (IVS), Megabucks,
MegaJackpots, Monedin Joker, Multi-Denomination, Multi-Hand Poker, Nickelmania,
Nickels, Nickels Deluxe, Party Time, Pokermania, Popper King, Psycho Cash Beast
Club, Quartermania, Quarters Deluxe, S2000, S-Plus, Security Accounting
Management System (SAMS), Slotopoly, Super Nickelmania, Super Vision, Triple
Play Draw Poker, Triple Play Poker, and Vision Series.
IGT designs, manufactures, produces, operates, uses, and/or otherwise has
permission to exploit certain gaming machines utilizing materials under license
from third-party licensors. More specifically, the games which have been
mentioned in this filing and their related trademark and copyright ownership
information are: "The Addams Family" is a trademark of Monaco Entertainment
Corporation; "Elvis, Elvis Presley, and King of Rock `n' Roll" are registered
trademarks of Elvis Presley Enterprises, Inc. (C) Elvis Presley Enterprises,
Inc.; "Jeopardy!" is a registered trademark of Jeopardy Productions, Inc.,
"Jeopardy!" (C) 2000 Jeopardy Productions, Inc., All Rights Reserved; "Wheel of
Fortune" is a registered trademark of Califon Productions, Inc., "Wheel of
Fortune" (C) 2000 Califon Productions, Inc., All Rights Reserved; "Regis' Cash
Club" is a game developed in conjunction with Philbin Enterprises; "$1,000,000
Pyramid (TM) and (C) 2000 CPT Holdings, Inc., All Rights Reserved; "I Dream of
Jeannie" (TM) and (C) 2000 CPT Holdings, Inc., All Rights Reserved; "The Three
Stooges" (C) 2000 C3 Entertainment, Inc., All Rights Reserved; "The Three
Stooges" characters, names and all related indicia are trademarks of C3
Entertainment, Inc.; " The Honeymooners" is a trademark used under license;
"Let's Make A Deal" is a trademark of Let's Make a Deal, is registered in the US
and is pending elsewhere, and is used under license; "Beverly Hillbillies" (C)
2000 CBS Worldwide Inc., All Rights Reserved; "Lifestyles of the Rich and
Famous" (C) 2000 Rysher Entertainment, Inc., All Rights Reserved; "The Munsters"
is a copyright of Kayro-Vue Productions and a trademark of Universal Studios,
licensed by Universal Studios Licensing, Inc., All Rights Reserved; "American
Bandstand" is a trademark of Dick Clark Productions, Inc.; "Wheel of Gold" and
"Totem Pole" are federally registered trademarks of Anchor Gaming.
Item 1. Business
In March 1998, IGT completed the purchase of Barcrest Limited (Barcrest), a
Manchester, England-based manufacturer and supplier of gaming related amusement
devices and formed IGT-UK Limited. Also in March 1998, IGT purchased certain
assets of Olympic Amusements Pty. Limited (Olympic), a manufacturer and supplier
of electronic gaming machines, gaming systems and other gaming equipment and
services to the Australian gaming market. The Olympic business was consolidated
with IGT-Australia.
In September 1999, IGT completed the acquisition of Sodak Gaming, Inc. Sodak
distributes IGT gaming products and provides wide-area progressive systems to
Native American casinos. Sodak also provides financing for gaming ventures in
Native American markets.
In July 2000, IGT completed the sale of Barcrest K.K. (Barcrest-Japan) to a
Japanese company engaged in the manufacture, development and sale of pachinko
and pachisuro slot machines.
Risk Factors and Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
Forward-Looking Statements
This annual report on Form 10-K contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to analyses and other
information, which are based on forecasts of future results and estimates of
amounts not yet determinable. These statements also relate to our future
prospects, developments and business strategies. These forward-looking
statements are identified by their use of terms and phrases such as
"anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan",
"predict", "project", "will" and similar terms and phrases, including references
to assumptions.
Such forward-looking statements and IGT's operations, financial condition and
results of operations involve known and unknown risks and uncertainties. Such
risks and factors include, but are not limited to, the following:
o a decline in demand for IGT's gaming products or reduction in the
growth rate of new and existing markets;
o delays of scheduled openings of newly constructed or planned casinos;
o the effect of changes in economic conditions;
o a decline in public acceptance of gaming;
o unfavorable public referendums or anti-gaming legislation;
o unfavorable legislation affecting or directed at manufacturers or
operators of gaming products and systems;
o delays in approvals from regulatory agencies;
o political and economic instability in developing international
markets for IGT's products;
o a decline in the demand for replacement machines;
o a decrease in the desire of established casinos to upgrade
machines in response to added competition from newly constructed
casinos;
o a decline in the appeal of IGT's gaming products or an increase
in the popularity of existing or new games of competitors;
o changes in interest rates causing a reduction of investment income or
in market interest rate sensitive investments;
o loss or retirement of our key executives or other key employees;
o approval of pending patent applications of parties unrelated to
IGT that restrict our ability to compete effectively with products that
are the subject of such pending patents or infringement upon existing
patents;
o the effect of regulatory and governmental actions, including regulatory
or governmental actions challenging our compliance with applicable
gaming regulations;
o unfavorable determinations or challenges of suitability by gaming
regulatory authorities with respect to our officers,
directors or key employees;
o the limitation, conditioning, suspension or revocation of any of our
gaming licenses;
o fluctuations in foreign exchange rates, tariffs and other barriers;
o adverse changes in the credit worthiness of parties with whom IGT has
forward currency exchange contracts;
Item 1. Business
o the loss of sublessors of the leased properties no longer used by IGT;
o with respect to legal actions pending against IGT, the discovery of
facts not presently known to IGT or determinations by judges, juries or
other finders of fact which do not accord with IGT's evaluation of the
possible liability or outcome of existing litigation.
We do not undertake to update our forward-looking statements to reflect future
events or circumstances.
Lines of Business
We operate principally in two lines of business: the development, manufacturing,
marketing and distribution of gaming products, which we refer to as "Product
Sales," and the development, marketing and operation of wide-area progressive
systems and gaming equipment leasing, which we refer to as "Gaming Operations."
See Note 19 of Notes to Consolidated Financial Statements for information
concerning the revenues, operating results and identifiable assets of our two
principal lines of business and operations by geographic region. The
consolidated financial statements include the accounts of International Game
Technology and all of its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. In fiscal year 2000, gaming
product sales produced 60% of total revenues while gaming operations produced
40% of total revenues.
Product Sales
IGT designs, manufactures and markets computerized casino gaming products and
systems for both domestic and international markets. Domestically, IGT
manufactures a broad range of gaming machines, consisting of traditional
spinning reel slot machines, video gaming machines, government-sponsored and
other video gaming devices. In international markets, we target the amusement
with prize, casino-style, private clubs, gaming-hall and government-sponsored
video machine markets. For our domestic and certain international markets, we
offer hundreds of recognized game themes. We typically sell our machines
directly or through distributors to casino operators, but may in certain
circumstances finance the sale or lease of equipment to the operator. In the
North American gaming market, IGT holds a estimated 67% share of the installed
base of casino gaming machines and an estimated 59% share of the combined
installed base of both casino-style and government sponsored gaming machines. We
believe our market share is the result of our innovation in video and slot
technology, the efforts of our experienced sales force and our focus on customer
service and product reliability.
Gaming machines for the casino markets in Australia, Europe, South Africa and
Latin America are similar to the spinning reel and video games in the North
American markets. Features differ in each market but the games are generally
multiple coin games with random outcomes paid in coins returned to the customer.
In some jurisdictions, the machines pay out in the form of tickets, vouchers, or
tokens, rather than coins. Gaming machines in Japan and the United Kingdom
markets, however, are produced locally and differ substantially from domestic
machines.
In addition to gaming machines, IGT develops and sells computerized casino
management systems which provide casino operators with slot and table game
accounting, player tracking and specialized bonusing capabilities. We also
develop and sell specialized proprietary systems to allow the lottery
authorities to monitor video lottery terminals. We derive revenue related to the
operation of these systems and collect license and franchise fees for the use of
the systems.
Description of Product Sales
IGT's innovations in slot and video technology have increased the earning
potential of our gaming machines by enhancing entertainment value through
creative uses of sound, bonus features and overall aesthetics. We also focus on
improving the ease and speed-of-play of our machines by incorporating local game
preferences, and by minimizing downtime through improved reliability and added
service features. IGT's new gaming machines offer a wide variety of themes,
innovative designs, sophisticated security features, self-diagnostic
capabilities and various accounting and data retention functions. Over the past
decade, significant increases in the installed base of gaming machines have been
driven by the growth in the number of jurisdictions with legalized gaming,
advancements in gaming machine technology, and the increasing popularity
Item 1. Business
of large theme-based casinos. IGT estimates that in North America slot machine
revenue accounts for nearly 70% of total casino revenues. IGT was the first to
develop computerized video gaming machines and currently offers the largest
variety of gaming machines in this market. When making purchasing decisions,
casino operators look for machines with enhanced entertainment value such as
secondary games or bonusing features, superior graphics and audio and
recognizable game themes.
Multi-line, multi-coin video-based games are currently among the most popular
games on the floor. In response to this trend, IGT's current products employ
advanced technology to enhance entertainment and communication features while
retaining many of the familiar and popular features of older games. These
product lines include: The Game King(R) video platform, which offers a single or
multi-game format with a touchscreen monitor; the iGame Plus(TM) video machine,
an interactive video game with animated graphics and secondary bonusing
features; the Vision Series(TM), a spinning reel slot combined with a full-color
liquid crystal display; and the S2000(TM) spinning reel platform which combines
the reliability and game library of IGT's traditional S-Plus(TM) machine with
upgraded processor boards and an enhanced sound package.
As these new games are installed, the earnings disparity between the older and
newer machines on the casino floor widens, and the replacement cycle is
stimulated. In addition, all of IGT's newer games will be available in a
Multi-Denomination(TM) format and can be readily adapted for use with IGT's EZ
Pay(TM) system or other ticket in/ticket out (TITO) systems. We believe the
introduction of new, more sophisticated interactive games combined with the
added cost savings, convenience and other benefits of TITO systems will help
stimulate the replacement machine market.
One of IGT's newest products, the EZ Pay(TM) Ticket System, targets the casino
operator's need to reduce operating costs and machine downtime. This product
provides our customers with a system that allows machines to print tickets in
place of dropping coins from the hopper. In many cases the printing of a ticket
eliminates the delays encountered when a large payout requires the personal
attention of a casino employee. The system also provides the machines with the
capability of accepting tickets. This provides players with the added
flexibility to move from one machine to another without the inconvenience of
coin handling. Casinos will have the option to use both hoppers and tickets in
IGT's machines connected to the EZ Pay(TM) Ticket System. We believe this offers
casino operators and players the most flexibility while the industry explores
player preferences with respect to ticket based products. EZ Pay(TM) machines
will also enable the player to select any denomination he or she prefers. Our
Integrated Voucher System (IVS)(TM) product was also introduced during the last
quarter of fiscal 2000. The IVS(TM) product offers EZ Pay(TM) system
functionality, but can be integrated with a casino's existing slot accounting
system. This integration provides additional efficiencies to casino operators
who are looking to maximize the automation of accounting controls and other
functions. Initial customer response to this technology has been positive and we
believe this segment will be a significant driver of the machine replacement
market over the next several years.
Gaming machines in Japan and the United Kingdom markets differ substantially
from domestic machines. In the United Kingdom, IGT manufactures and sells
amusement with prize (AWP) machines. An AWP machine is a game of chance with low
stake wagering for amusement with low value cash prizes, typically under $25. In
the Japanese market, IGT manufactures and sells pachisuro machines. A pachisuro
machine is a three-reel slot machine played with tokens and is considered a
skill game, which allows the player to control the stopping of the reels.
In fiscal year 2000, IGT continued installing the IGT Gaming System (IGS)(TM),
which supports casinos' control and information needs. The IGS (TM) product is a
14 module integrated casino system which includes player tracking, pit cage and
credit, and slot management, plus specialized modules including bus scheduling
and events management. The IGS(TM) product is approved, marketed and operational
in most domestic jurisdictions as well as Australia, Canada, Portugal and South
Africa.
Item 1. Business
The following schedule sets forth net revenues derived from gaming product sales
for the fiscal years ended:
September 30, October 2, September 30,
2000 1999 1998
-----------------------------------------------------------------------
(Dollars in thousands)
Gaming products
Video products $263,412 $189,625 $177,804
Spinning reel slot 133,251 162,310 161,716
Amusement with prize 75,359 78,947 32,225
Pachisuro 34,787 55,328 17,466
Other gaming products(1) 96,572 90,388 87,813
-------- -------- --------
Total product sales $603,381 $576,598 $477,024
======== ======== ========
(1) Other gaming products includes revenues from gaming systems, lottery
systems, parts, equipment and service.
Demand for Gaming Products
Demand for IGT's gaming products comes principally from four sources: the
establishment of new gaming jurisdictions; expansions of existing casinos;
addition of new casinos within existing gaming markets; and the replacement of
older and/or technically obsolete machines. The replacement cycle is driven
primarily by competition in the casino industry to provide the customer with
more entertaining and sophisticated games combined with enhanced features such
as multi-denomination capability and TITO technology. To maximize our
opportunity in the replacement market, we are increasing the number of new games
released each year and focusing our product development efforts on creating
games that provide enhanced entertainment value as well as utilizing numerous
popular game themes and concepts. Technological advances, new designs,
improvements in visual characteristics, the development of new games, general
wear and tear and the evolving preferences of casino patrons also drive
replacement. The construction of new casino properties also has an impact on the
replacement machine market since, historically, the addition of new properties
has encouraged existing casinos to upgrade to new slot products in order to
remain competitive. Demand for replacement products is also dependent, in part,
upon the willingness of casinos to incur the costs associated with replacing
existing gaming machines with new machines.
Product Development
The most significant factor influencing the purchase of all types of gaming
machines is player appeal followed by a mix of elements including service,
price, reliability, operational efficiencies, technical capability and the
financial condition and reputation of the manufacturer. Player appeal is the
combination of machine design, hardware, software, game features and ease of
play that ultimately improves the earning power of gaming machines and the
operator's return on investment. To increase the player appeal of our machines,
we have made significant investments in research and development of products
tailored toward the specific demands of our customers as well as the users of
our products. In this context, IGT developed numerous themes with a variety of
ideas and concepts. In fiscal year 2000, IGT debuted more than 40 new offerings,
most of which were directed at the growing multi-line, multi-coin video slot
market. IGT expects to debut a greater number of games in fiscal year 2001. As
with all new games, these machines are subject to regulatory approval. Using our
Megatest, an on-line computerized testing and monitoring system, to evaluate and
forecast acceptance of new products, IGT is able to evaluate and quickly focus
on the more popular gaming concepts. Megatest uses a central computer to monitor
the performance of games placed in a representative sample of casinos throughout
Nevada. The Megatest program allows IGT to test games in a relatively short time
span with a high degree of accuracy, which results in the quicker release of
higher-performing games.
In international markets, our strategy is to respond to developing markets with
local presence, customized games, new product introductions and local production
where feasible or required. For the European casino market, Barcrest has
designed the "Enhanced" series of reel-based, casino-style games to complement
the current product offerings in the market. The Enhanced machine incorporates
top box technologies designed in the UK with our casino-style machines to
Item 1. Business
add bonus features and will continue to be marketed by IGT-Europe. In Australia,
several platforms were replaced with one common platform featuring enhanced
technologies. This new product will become the IGT-Australia standard and is
supported by two game design centers. IGT-Japan's engineering department has
expanded in order to continue to develop new technologies for the pachisuro
market and expects to release a new platform during fiscal 2001.
North American Markets
In the last decade, the increased legalization of gaming in new jurisdictions,
expansion in existing gaming markets and growing popularity of gaming as a
leisure activity has influenced demand in North America and presented growth
opportunities for IGT. The introduction of riverboat gaming in the Midwest, the
expansion of Native American casino gaming, including the opening of the
California market, and the growth in the Canadian, Nevada and non-casino
government-sponsored gaming markets have all expanded the market for gaming
machines.
IGT's machine sales in North America increased by approximately 3,600 units in
fiscal year 2000 as compared to fiscal 1999 due primarily to the opening of the
Native American casino market in California. Fewer new casino openings
contributed to slower growth in certain domestic jurisdictions including Canada,
Colorado, Nevada, and cruise ship markets.
Nevada
Throughout the 1990s, the addition of new casinos with enhanced entertainment
and leisure activities has stimulated demand for our machines in this market.
The expansion or refurbishment of existing operations and replacement of older
gaming machines also increased demand for our machines. Nevada's developing
nickel video reel and traditional video poker markets are expected to drive
implementation of TITO systems much faster than many of the newer jurisdictions.
In fiscal year 2000, we provided gaming machines to two major new casinos,
Suncoast and Aladdin, and to two smaller casino openings, Arizona Charlies East
and The Hacienda, all in Las Vegas. Several other Nevada properties underwent
smaller-scale expansions. The majority of the sales in fiscal year 2001 are
expected to be for expansions and replacements with the exception of Terribles
Casino in Las Vegas, which is scheduled to open in early fiscal year 2001.
Midwest Gaming
Riverboat-style gaming began in Iowa in 1991 and currently is operating in
Illinois, Indiana, Iowa, Louisiana, Mississippi and Missouri. In late fiscal
year 2000, IGT shipped machines to the following new properties, which are
expected to open in early fiscal year 2001: Hollywood Park in Louisiana and
Belterra, a Pinnacle Entertainment property in Indiana. Lakeside Oceola in Iowa
was the only new opening in this region in fiscal year 2000. IGT provided gaming
machines to the Greektown, the third temporary casino in Detroit, which is
expected to open in early fiscal year 2001. The permanent casinos in Michigan
are expected to add 4,000 machines to the market in the next three to five
years.
Atlantic City
The Atlantic City market consists of 12 large casinos, which are concentrated in
the mature boardwalk area and the marina district. During fiscal year 2000, Boyd
Gaming and MGM Mirage began construction of the Borgata, a marine area-property,
which is expected to open in 2003. MGM Mirage has announced plans to construct
another new casino in Atlantic City within the next three years. In addition,
Trump Hotels and Casino Resorts plan to raze the World's Fair Casino and replace
it with a new casino property. Recent changes in the gaming approval process in
this jurisdiction may also serve to stimulate new games by accelerating approval
times and allowing a greater number of popular themes to be introduced.
Native American Gaming
Casino-style gaming continued to expand on Native American lands during fiscal
year 2000. Native American gaming is regulated under the Indian Gaming
Regulatory Act of 1988, which permits specific types of gaming. Pursuant to
these regulations, permissible gaming devices are denoted as "Class III Gaming"
which requires, as a condition to
Item 1. Business
implementation, that the Native American tribe and the state government in which
the Native American lands are located enter into a compact governing the terms
of the proposed gaming. We place machines with Native American tribes who have
negotiated compacts with their respective states and have received approval by
the US Department of the Interior.
IGT, through Sodak, began selling machines to authorized Native American casinos
in 1990, and to date has sold machines or components to Native American casinos
in 17 states. Sodak maintained a distributor relationship with IGT from 1990
until September 1999 when IGT acquired Sodak. Sodak provides financing for its
product sales and, in some instances, has participated in the development,
equipping, and financing of gaming ventures.
In March 2000, the California constitution was amended to allow the Governor to
compact with tribes for the operation of casinos including the operation of
traditional slot machines. The Governor, with the legislature's approval, has
entered into compacts with 61 California tribes. We commenced sales in
California immediately after the initial compacts were approved by the US
Department of the Interior in May 2000. This market potential is estimated at
43,000 machines based on the language in the compacts between the Governor and
the tribes. The portion of the compacts that defines machine limits can be
renegotiated in March of 2003, but there is no assurance renegotiations will
occur, or that they would result in increased machine numbers.
Gaming expanded to the state of Washington in 1999 where the Governor signed
compacts with 19 tribes that permit electronic gaming devices, linked to a
central determination system, at the Native American casinos. Sierra Design
Group (SDG) manufactures and distributes terminals and systems designed
specifically to comply with the Washington compacts. IGT provided manufactured
components to SDG for approximately 4,300 terminals for the Washington market;
2,300 in fiscal year 2000 and 2,000 in fiscal year 1999.
In addition to potential new markets, the replacement of older machines may
offer the potential for additional sales. Native American gaming experienced
rapid expansion in 1992 and 1993, suggesting that a greater proportion of the
installed machine base may be entering the replacement cycle, based on overall
gaming industry trends.
Canada
We currently provide spinning reel slot machines to all Canadian provincial
governments operating or authorizing casino-style gaming, including Alberta,
British Columbia, Manitoba, Nova Scotia, Ontario, Quebec, Saskatchewan and
Yukon. The expansion of existing casinos and opening of new properties in
Alberta, British Columbia and Ontario may create demand for approximately 5,000
new machines. In fiscal 2000 we introduced leased games into Alberta, Ontario,
and Quebec casinos. The Canadian lease market is expected to continue to expand
into additional jurisdictions due to the demonstrated success of properties
utilizing leased IGT games.
In fiscal year 2000, business opportunities in Canada prompted IGT to expand its
distribution agreement with the New Brunswick-based Hi-Tech Gaming.com, Ltd.
(Hi-Tech) to include machine and systems sales, in addition to parts and
service. While IGT will continue to maintain a corporate presence in Canada, we
expect this new distribution agreement with Hi-Tech to provide the increased
infrastructure necessary to service the anticipated growing volume of business.
In addition to government sponsored or approved casino gaming, the provinces of
Alberta, Manitoba, New Brunswick, Newfoundland, Nova Scotia, Prince Edward
Island, Quebec and Saskatchewan operate video gaming terminals (VGTs). In the
past year Lotto Quebec issued a request for proposal (RFP) calling for the
replacement of 15,000 VGTs, while the Atlantic Lottery Corporation (ALC) issued
an RFP for 3,000 VGTs. The Western Canada Lottery Corporation (WCLC) is expected
to issue RFPs for the replacement of 6,000 VGTs in Alberta and 3,500 VGTs in
Saskatchewan during the coming year. IGT through Hi-Tech has submitted bids for
the ALC and Quebec RFPs, which are currently being evaluated. It is expected
that bids will also be submitted for the WCLC and Saskatchewan RFPs once they
are released.
Item 1. Business
International Markets
IGT has sold to international markets since 1986. Each model must comply with
the individual country's regulations. We respond to the specific requirements of
a number of international jurisdictions by maintaining a local presence and by
providing products appropriate for each market.
Our unit sales in international markets are as follows:
Fiscal Fiscal
2000 1999
-----------------------------------------------------------------
Jurisdiction
United Kingdom(1) 33,400 31,500
Japan 14,600 27,900
Australia and New Zealand 6,700 6,700
Europe, Middle East and Africa 3,300 2,800
Latin America 2,200 3,900
South Africa 1,500 1,100
Other 600 1,000
--------- ---------
Total 62,300 74,900
========= =========
(1) Includes 15,500 AWP machines exported to Europe in fiscal year 2000 and
7,400 machines in fiscal year 1999.
Australia and New Zealand
We established manufacturing, sales, marketing and distribution operations in
Sydney in 1985 and began selling gaming machines in Australia in 1986. Australia
is the largest and most established market for gaming products outside of North
America and is primarily a video machine market. The installed base for machines
is approximately 200,000 units in the casino, hotel, pub and club markets in
Australia and New Zealand. Our installed base in this region is approximately
46,000 units or 23%. In both fiscal years 2000 and 1999, IGT had sales of 6,700
machines. This year has again been one of intense competition between
manufacturers as a result of the limited growth and technologically advanced
products.
In March 1998, we acquired the assets of Olympic Amusements Pty. Limited
(Olympic), an Australian-based manufacturer and supplier of electronic gaming
machines, gaming systems and other gaming equipment and services in an effort to
enhance our existing operation. As a result of the acquisition, approximately
$100 million in intangible assets were recognized. After the acquisition,
IGT-Australia experienced difficulties assimilating the two companies, and as a
result, we lost significant market share while our competition prospered in this
market. In an effort to return IGT-Australia to a profitable operation, we
developed a restructuring plan during late 1999 and implemented the changes
during the current fiscal year. These changes included narrowing product lines,
downsizing our sales, service and engineering departments and transferring
manufacturing to Reno.
In April 2000, the New South Wales (NSW) state government announced that it
would place a twelve-month moratorium on the number of new slot machines
permitted by registered clubs. There is the possibility that this moratorium
will be extended, thereby affecting the growth in this market. In Queensland,
similar "responsible gambling" restrictions were adopted during fiscal 2000,
where the limit on the number of gaming machines was set at 280 for clubs and 40
for hotels. Other Australian jurisdictions are considering similar measures. We
can't determine the effect this will have on future sales.
In July 2000, we introduced a new machine platform with eight new games. It has
been approved in the jurisdictions of NSW, Queensland and New Zealand. Initial
response to this new product line has been very positive. The performance of the
new games has been very strong, particularly in the lower denominations. There
are currently a number of additional games in development.
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United Kingdom
We established a manufacturing, sales, marketing and distribution operation in
Manchester, England with our acquisition of Barcrest Limited in March 1998.
Barcrest manufactures and sells amusement with prize machines, club machines and
top box products. AWP machines are approximately half the price of our domestic
S-Plus(TM) product and have a replacement cycle of less than 18 months.
The AWP installed base in the United Kingdom (UK), which is not expected to grow
in the near term, exceeds 220,000 units, located in a variety of outlets
including pubs, clubs, bingo halls, casinos, licensed betting offices and
arcades. The UK has a review every three years of the stake and prize
regulations for AWP machines. During fiscal year 2000, the UK market for AWP
machines was 53,000, down from 63,000 in fiscal year 1999, which had benefited
from increased demand following a change in stake and prize regulations. This
replacement market is dominated by bars and licensed betting offices that demand
regular releases of new machines. To meet this demand, new products are launched
in the UK every four to six weeks. In fiscal year 2000, AWP sales in the UK
totaled 14,905 units, approximately 29% of the market.
In response to the European market's continual need for new and innovative AWP
products, in fiscal year 2000 Barcrest launched a new design center, Red Gaming,
and re-named its BWB business to Vivid Gaming. Red Gaming is presently focused
on development for the UK market and has received orders for its first game,
After Shock(TM), to be delivered during the first quarter of fiscal year 2001.
Vivid develops product for the European leisure industry. It launched its first
game, All For One(TM), in June 2000 and sold 900 units of this machine in fiscal
year 2000.
We also sell AWP products, through distributors, in Germany, Spain, The
Netherlands and other smaller European markets. The total European market size
for AWP products is 800,000 machines with an annual replacement market of
approximately 113,000 machines. Export opportunities arise as various
governments recognize the benefits of AWP products. To capitalize upon these
opportunities, we have research and development centers in The Netherlands and
Spain, which design machines for various European markets. In FY 2000,
Barcrest's research and development center in Spain launched the highly
successful product, Monedin Joker(TM). The company's success in the Spanish
market resulted in an increase to 7,600 unit shipments in fiscal year 2000,
compared to 575 machines in the prior year. During the year, UK manufacturers
exported approximately 40,000 machines to Europe, up from 24,000, of which
approximately 37% were Barcrest products.
Club machines are more simply designed AWP products offering higher maximum
wagers and cash prices. These machines are replaced less often and are located
in private member clubs and bingo halls. The UK club market has an installed
base of approximately 60,000 units with an annual replacement market of
approximately 5,300 machines. Barcrest produced the most successful club machine
in the UK market, Psycho Cash Beast Club(TM), which sold 900 units. In fiscal
year 2000, our total club sales in the UK were 1,600 units, a 29% market share.
Barcrest designs and manufactures top boxes, which are attached to IGT's
domestically produced casino-style machines. These top boxes add a bonus
feature, which increases the player appeal of these games. In July 1999, we
began providing all of our top boxes, excluding Party Time(TM), to our joint
venture with Anchor Gaming for sale to the casino customer. The Party Time(TM)
top box is used with IGT's domestic MegaJackpots(TM) machines.
Europe, Middle East and Africa
In 1992, we opened our office in The Netherlands to service the European, Middle
Eastern and African markets, excluding South Africa. In these regions, gaming is
prevalent in casinos and non-casino environments such as pubs, bars and arcades.
Within the European markets, casino-style gaming machines compete with AWP
machines, which we sell exclusively through our Barcrest office.
We estimate that throughout this region, the market base of legally installed
casino-style gaming machines is approximately 68,000 units. Of these machines,
we estimate our share at 19,000. In fiscal year 2000, we made sales of
approximately 3,300 machines in this market, compared to 2,800 machines in
fiscal year 1999. The majority of our fiscal
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year 2000 sales were to gaming operations in France, Greece, Italy, Portugal,
Slovenia, Spain, Sweden and The Netherlands. We currently anticipate moderate
growth in the European installed base and our sales to this market will be
principally dependent upon replacement sales. Our market share improvement is
due to the success of our new product rollout, specifically relating to the new
video product. Additionally, this proved to be a successful year with the
rollout of the IGS(TM) product in the European market. The IGS(TM) product was
selected as the system of choice by the Portuguese government resulting in a
successful launch of three IGS(TM) systems in July 2000.
South Africa
Our office in Midrand, Gauteng, South Africa services the gaming markets located
in South Africa, sub-Saharan Africa and the Indian Ocean Islands. Casino gaming
in South Africa is governed under the National Gambling Act, which has allocated
a total of 40 casino licenses among each of the nine provinces in South Africa.
All 40 licenses are expected to be operational by the year 2003. There are
currently 19 operational casinos in the country with five additional new casinos
opening by the end of the calendar year. The new casino that opened in the
fiscal year 2000 was Desert Palace in the Northern Cape Province. Of the five
new casinos to be opened, three will be in the Western Cape Province, one in
KwaZulu Natal and one in the Eastern Cape.
By the end of fiscal year 2000, IGT-Africa was licensed as a
manufacturer/supplier in six of the nine provinces. We will receive licensure in
one other province in the first quarter of fiscal year 2001. We have an
application pending in one other province. The only remaining province to call
for licenses is the North West Province where five of the original casinos are
located.
During fiscal year 2000, we sold 1,500 machines in the South Africa casino
market, compared to 1,100 units in fiscal year 1999. We rank second in market
share in this region with 30% of unit sales. The majority of these sales were to
new casinos due to open later in the year including Tsogo Sun's permanent
casino.
South Africa is also in the final stages of legalizing a limited payout market
(LPM). The LPM permits smaller venues to operate a maximum of five machines,
with each machine limited to a maximum payout of 500 Rand or approximately US
$70. The National Gambling Act and the provincial gambling acts govern these
smaller venues, which include bars, taverns, and social or sports clubs. The
National Gambling Board has recently called for RFPs for the Central Monitoring
System. We anticipate that the first limited payout machines will begin
operating in mid to late calendar 2001. We estimate the total size of this
market will be approximately 38,000 machines.
Japan
Historically we have serviced the Japanese market with two offices in Tokyo:
IGT-Japan, established in 1992; and Barcrest-Japan, acquired in 1998 as part of
the Barcrest acquisition. In July 2000, Barcrest-Japan was sold to a Japanese
pachisuro manufacturer. The pachisuro machine is a three-reel slot machine
played with tokens and is considered a skill game as the player controls the
stopping of the reels. Payouts are relatively small. The product is regulated by
the Security Electronics and Communication Technological Agency (SECTA), which
ensures compliance with regulations mandated by the National Police Agency.
Pachisuro machines are more fashion-driven and sell for approximately a third of
the price of our domestic S-Plus(TM) machine. These machines are licensed for
three years. However, they typically have a replacement cycle of less than 12
months.
The pachisuro-installed base in the Japanese market is over 1,000,000 machines
in approximately 17,000 halls and sites throughout the country. There are 22
manufacturers that are members of the Nichidenkyo (NDK) manufacturer's
association and licensed to sell in this market. IGT-Japan became the first
foreign member of NDK in 1992 and a full member in 1995.
In Japan, we utilize third party manufacturers to produce our machines and
distributors to sell our products. The distributors sell to hall operators and
to second-tier distributors. IGT-Japan also has an in-house sales team to market
products directly to customers in Nagoya, Sendai and Tokyo.
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During fiscal 2000 we sold 14,600 units in the Japanese market compared to
27,900 units in the prior fiscal period. Fiscal 1999 was our most successful
year ever in this market as a result of the strong customer acceptance of our
Popper King(TM) product. The relatively short selling cycle of three to four
months for any one new game release makes success in this market highly
dependent upon the ability to regularly introduce popular new games.
Latin America
We sell casino-style gaming equipment to many legalized gaming jurisdictions in
Latin America through our established offices in Argentina, Miami, Peru, and our
distributor in Venezuela, Starwin. During fiscal year 2000, IGT sold 2,200
machines in Latin America compared to 3,900 machines in the previous fiscal
year. Sales decreased due to new laws in Brazil, which effectively closed that
market, and government delays in granting new operator licenses in Venezuela.
Gaming Operations
We have developed and operated wide-area progressive systems, collectively
referred to as MegaJackpots(TM), since 1986. As of September 30, 2000, IGT
operated 149 systems in 17 domestic jurisdictions, including Native America,
Nevada and New Jersey, under the following names or trademarks: The Addams
Family(TM), Dollars Deluxe (R), Elvis (R), Fabulous 50's(R), Five Play Draw
Poker(TM), High Rollers (TM), Jeopardy!(R), Megabucks(R), Nickelmania(TM),
Nickels(TM), Nickels Deluxe(R), Party Time(TM), Pokermania(R), Quartermania(R),
Quarters Deluxe(R), Slotopoly(TM), Super Nickelmania (TM), Totem Pole(R), Triple
Play Draw Poker(TM), Wheel of Fortune(R), and Wheel of Gold(R). These games may
be offered in different denominations in each jurisdiction. Internationally, our
IGT-Europe office supports one MegaJackpots(TM) system, operated under the name
Gullnaman in Iceland. Approximately 5% of the domestic installed base of gaming
machines generates recurring revenue including wide-area progressive systems and
stand-alone machines in which the manufacturer participates in the revenue from
the machine on a percentage or fee basis. Wide-area progressive systems are
electronically-linked, inter-casino systems that connect gaming machines to a
central computer, allowing the system to build a "progressive" jackpot with
every wager made throughout the system until a player hits a winning
combination. In the North American market, IGT estimates it holds more than a
70% share of the installed base of these machines.
Wide-area progressive systems are designed to increase gaming machine play for
participating casinos by giving players the opportunity to win larger or more
frequent jackpots than on machines not linked to progressive systems. Win (net
earnings to the operator) per machine on machines linked to progressive systems
are generally higher than on stand-alone machines.
IGT continually provides innovation and enhanced player appeal to its
MegaJackpots(TM) games consistent with product lines that are sold directly to
the casinos. This is accomplished through the introduction of feature rich games
with second event bonusing incorporating popular themes, such as The Addams
Family (TM) and video Jeopardy!(R), which were introduced in fiscal year 2000.
New themed product introductions planned for fiscal year 2001 include the Regis'
Cash Club(TM) and $1,000,000 Pyramid(TM) games.
IGT operates some of these systems under joint marketing alliances with other
gaming companies, principally with Anchor Gaming (Anchor). The purpose of these
strategic alliances is to combine the game development efforts of other
companies with IGT's wide-area progressive system expertise. The Wheel of
Fortune (R) game, which is offered through the Anchor joint venture, began in
December 1996 in Nevada and New Jersey with approximately 240 machines, and as
of September 2000, 11,500 machines were operating in 17 jurisdictions. The I
Dream of Jeannie(TM) wheel game is planned for introduction in fiscal year 2001
under the same joint venture. In addition, we entered into a licensing,
development and marketing agreement in fiscal year 2000 with Shuffle Master to
further develop Shuffle Master's licensed intellectual properties, The Three
Stooges(R), The Honeymooners(TM) and Let's Make A Deal(R). Introduction of these
products is planned for fiscal year 2001.
We also supply certain MegaJackpots(TM)games as "stand alone" games that are
proprietary in nature but not linked to a progressive system. In certain
jurisdictions, these games are either leased on a per machine per day basis or
are operated under a revenue sharing agreement. This additional marketing tool
was created for the customer that didn't want to
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contribute to a large jackpot, yet still wanted our games on the floor. They are
installed in Canada, Colorado, Connecticut, Illinois, Indiana, International
cruise ship markets, Iowa, Louisiana and Nevada. Approximately 3,600 machines
are operated as stand alone games. Most of these games were developed in
connection with the Anchor joint venture.
We recognize that all games, including MegaJackpots(TM) systems games, have a
finite life cycle. As a result, IGT systematically replaces, either wholly or in
part, older systems experiencing declining play levels with new systems that
incorporate enhanced entertainment value and improved player appeal. This serves
to increase revenue generation overall as well as on a per unit basis for both
IGT and our customers. During fiscal year 2000, IGT removed 19 MegaJackpots(TM)
systems in eight jurisdictions.
The operation of linked progressive systems varies among jurisdictions as a
result of different gaming regulations. In all jurisdictions, the casinos
contribute a portion of the wagered amount to fund the progressive jackpot.
Funding of the progressive jackpot differs by jurisdiction but is generally
administered by IGT. Jackpot winners may elect either a single payment of the
discounted value of the progressive jackpot, or annual installments which are
paid out over 20 to 26 years depending on the system and jurisdiction. Many of
our new products are Instant Winner systems, which pay the full jackpot amount
in one sum when won. In Atlantic City, the progressive jackpot fund is
administered by a trust managed by representatives of the participating casinos.
The trust pays IGT fees for annual licensing and machine rental. In Colorado,
funding of progressive jackpots is administered by a separate fund managed by
IGT. Progressive system lease fees or a portion of the amount contributed by the
casinos is paid to us from this fund. In Iowa, the progressive jackpot fund is
administered by a trust managed by IGT and net profits are transferred to IGT.
Lease and Other Gaming Operations
IGT also receives gaming operations revenue from machines and systems on lease,
rental and other recurring revenue agreements. Lease revenue increased in fiscal
year 2000 due primarily to royalty revenue earned on our most popular game,
Triple Play Draw Poker (TM), which is operational in various domestic
jurisdictions. These machines are placed under a royalty agreement whereby
casinos pay Action Gaming, the company that holds a patent for the game concept,
and IGT a monthly royalty fee.
IGT currently leases machines to three state lotteries: Delaware, Oregon and
Rhode Island. Under a technology provider license with the Delaware State
Lottery, IGT leases approximately 2,400 terminals to the state at three
pari-mutuel facilities. During the past year we added 540 terminals. Under the
technology lease with the Delaware State Lottery, which will expire in December
2001, we receive a percentage of revenue for use and maintenance of these
machines. We lease approximately 2,200 video gaming terminals to the Oregon
State Lottery under a lease agreement expiring in April 2002. We also have
machines on Rhode Island's video lottery system, which links two pari-mutuel
facilities. As of September 30, 2000, there were approximately 400 IGT terminals
operating in Rhode Island's system.
In 1999, we entered into a license agreement with the West Virginia Racing
Association for IGT's SAMS(TM) system that will monitor approximately 6,000
machines at the state's four pari-mutuel facilities. The West Virginia Lottery
will operate this system while IGT will provide hardware and software
maintenance. We successfully installed the SAMS system in West Virginia in 2000
and will complete the installation of the progressive portion during fiscal year
2001. IGT shipped more than 1,500 terminals to four pari-mutuel facilities in
West Virginia during fiscal year 2000.
As part of our normal business, we also receive other recurring revenue in
various jurisdictions from short-term rental contracts or long-term lease
contracts for gaming machines.
Business Strategy
IGT's product development staff works to provide innovation in gaming machines
and related computer system technology. IGT invested approximately $55.2 million
in research and development in fiscal year 2000. Innovations from these efforts
increase our gaming machines' earning potential through enhancements in
entertainment value, ease of play,
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and decreased machine downtime. Machine downtime is minimized by improvements in
product reliability and functionality. IGT's creative designs enhance player
entertainment with features such as larger jackpots, choreographed sound events,
multiple interactive bonus features and unique mechanical packages. The
introduction of innovative products, Multi-Denomination(TM) capability and TITO
technology is anticipated to shorten the replacement cycle by encouraging casino
operators to upgrade to new products which improve earnings and operating
efficiencies.
To capitalize on future opportunities, management is committed to:
o innovative new product development such as our Game King(R), iGame
Plus(TM), Vision Series(TM), S2000(TM), Super Vision(TM) and Game
King(R) SI platforms; EZ Pay(TM) (TITO) and Multi-Denomination(TM)
technology;
o development and rollout of new wide-area progressive systems such as
The Addams Family(TM), video Jeopardy!(R) nickel, 15-line Wheel of
Fortune(R) nickel, Wheel of Fortune(R) video quarter, video
Megabucks(R) nickel, Regis' Cash Club(TM), Diamond Cinema(TM), Beverly
Hillbillies(TM), Lifestyles of the Rich and Famous(R), The Munsters(TM)
(New Jersey only), $1,000,000 Pyramid(TM) and American Bandstand(R)
games;
o continued focus on customer service and reliability through our more
than 300 trained sales and service personnel;
o increased focus on opportunities to roll out IGT products and
systems into new markets including international jurisdictions;
o enhancement of our industry-leading game library with strong
new offerings for all product lines both domestically and
internationally; and
o ongoing improvements to our IGS(TM)products that answer industry
demandsfor improved operational efficiencies.
Sales and Service
Sales and Distribution
Our products and services are sold to gaming operators and governmental
entities, which conduct gaming operations. During fiscal year 2000, our ten
largest domestic customers accounted for 33% of our domestic gaming product
sales. IGT markets gaming products and proprietary systems through its internal
sales staff, agents and distributors. We employ more than 300 sales personnel in
various domestic and international locations.
IGT uses distributors for sales to specific markets including Canada, the
Caribbean, France, Germany, Japan, Korea, Louisiana, New Jersey, New Mexico, New
Zealand, Spain, The Netherlands and Venezuela. Sodak was our exclusive
distributor to Native American casinos until we acquired it in September 1999.
IGT's agreements with distributors do not specify minimum purchases, but
generally provide that IGT may terminate the distribution agreement if certain
performance standards have not been satisfied.
Customer Service
IGT considers its customer service department an important aspect of the overall
marketing strategy and a key differentiating factor when casino operators
purchase equipment. We typically provide a 90-day service and parts warranty
domestically and up to a 180-day warranty internationally, for our gaming
machines. We employ more than 300 trained service personnel for customer
assistance and maintain 20 customer service support centers domestically in 11
jurisdictions and internationally in Argentina, Australia, Brazil, Japan, New
Zealand, Peru, South Africa, The Netherlands and the United Kingdom.
We also provide extensive customer education and service through training,
videotaped instruction, a 24-hour customer service hotline, newsletters, our
website, www.IGT.com, and the Technical Assistance Center (TAC). The TAC is a
fully staffed facility providing 24-hour telephone support to all types of
casino system customers. The TAC has access to a range of field support
engineering resources to resolve technical issues. Through these extensive
resources, IGT provides a direct link for two-way communication between the
customer and IGT and access to product information 24 hours a day, seven days a
week.
Item 1. Business
Competition
The market for gaming machines and proprietary systems is intensely competitive.
The principal method of competition is product development. A library of strong
performing games can be a significant competitive advantage. Other methods of
competition include quality and reach of sales and service organizations,
financial stability of the manufacture, and pricing.
Product Sales
US and foreign manufacturers which compete with IGT in the
domestic casino-style gaming machine market include Anchor, Aristocrat Leisure
Limited (Aristocrat), Bally Gaming Inc., a subsidiary of Alliance Gaming Corp.
(Bally), Atronic Casino Technology, Ltd. (Atronics), Casino Data Systems (CDS),
Konami Co. Ltd. (Konami), Sigma Game, Inc. (Sigma), Silicon Gaming, Inc.
(Silicon), Universal Distributing, Inc. and WMS Industries, Inc. (WMS). All have
developed casino products and are either authorized to sell products or are in
the licensing process in many US gaming jurisdictions. There are several
competitors for the international markets including Aristocrat, Atronics, Aruze,
formerly known as Universal, Cirsa Group, Franco Gaming, Ltd., a division of
Recreativos Franco, Konami, and Novomatic Industries. In the accounting and
player tracking systems product market, our IGS(TM)system competes with products
offered by Bally, CDS and several other systems manufacturers.
We consider ourselves one of five primary competitors in the linked gaming
market along with Anchor, GTECH Holdings Corp. (GTECH), Spielo, a supplier based
in Canada, and WMS. These suppliers have substantial resources, established
presence in the lottery market, and specialize in the development and marketing
of gaming terminals to governments. We continue to view the video lottery
industry as an important market for our products.
Gaming Operations
IGT's competitors in the progressive systems market are Bally and CDS, who each
operate one system. IGT's competitors in the stand alone participation market
are Anchor, Bally, CDS, Mikohn Gaming Corp, Silicon, and WMS. We provide
substantial marketing and advertising support for our MegaJackpots(TM) systems
products and compete on the basis of our progressive systems brand names,
product appeal, jackpot awards, player loyalty and technical and marketing
experience.
Manufacturing and Suppliers
We manufacture gaming machines in the United Kingdom, the US and through a
manufacturing relationship with a third party in Japan. The manufacturing
operations primarily involve the assembly of electronic components, cables,
harnesses, video monitors and prefabricated parts purchased from outside
sources. We also operate a cabinet manufacturing and silkscreen facility in the
US. IGT has a broad base of material suppliers and utilizes multi-sourcing
practices to assure component availability. Domestic manufacturing has been ISO
9002 certified since 1996. As part of our restructuring plan for IGT-Australia,
we began manufacturing the IGT-Australia product lines in the Reno, Nevada
facility in fiscal year 2000.
IGT generally carries a significant amount of inventory due to the broad range
of products it manufactures and to facilitate its capacity to fill customer
orders on a timely basis. At October 30, 2000 and 1999, we had an estimated
$196.4 million and $50.1 million in backlog orders. The backlog has increased
due to a large influx of orders in the fourth quarter of fiscal year 2000. In
response, production has increased output significantly and the backlog, as well
as production lead-times are expected to decrease within fiscal year 2001.
Our research and development activities totaled $55.2 million, $45.5 million and
$38.1 million for the fiscal years 2000, 1999 and 1998. Research and development
activities for specific customers are charged to cost of product sales and
totaled $300,000, $1.2 million and $900,000 for fiscal years 2000, 1999 and
1998.
Item 1. Business
Patents, Trademarks, Copyrights and Trade Secrets
IGT believes that its patents, trademarks, copyrights and trade secrets
(intellectual property rights) are significant assets. IGT seeks to protect its
investment in research and development and the unique and distinctive features
of its products and services by perfecting and maintaining its intellectual
property rights. IGT has obtained patent rights protection covering many of its
products. It has a large number of United States and foreign patent applications
pending. The subject matter of these patents and patent applications include
game designs, bonus and secondary game features, gaming device components and a
variety of other aspects of video and electronic slot machines and associated
equipment. Most of IGT's products are sold under trademarks and copyrights that
provide product recognition and promote widespread acceptance. IGT creates and
licenses trademarks and copyrighted works. Some of these trademarks and
copyrights relate to products that are significant to IGT.
There can be no assurance that the intellectual property rights of IGT will not
be infringed or that others will not develop products that do not violate these
intellectual property rights. No assurance can be given that IGT's pending
applications to obtain additional intellectual property rights will be granted.
Employees
As of September 30, 2000, IGT, including all subsidiaries, employed
approximately 3,600 persons, including 600 in administrative positions, 300 in
sales and 700 in engineering. Of the total employees, our North American
operation accounted for 2,700; IGT-Australia, 300; IGT-UK, 400; and
approximately 200 employees at other subsidiaries. The total number of employees
increased in fiscal year 2000 by approximately 250 compared to the number of
employees at October 2, 1999.
Government Regulation
General
The manufacture and distribution of gaming equipment and related gaming software
is subject to federal, state, tribal, local and foreign regulation. While the
regulatory requirements vary from jurisdiction to jurisdiction, the majority of
these jurisdictions require licenses, permits, findings of suitability,
documentation of qualification including evidence of financial stability and/or
other required approvals for companies who manufacture and distribute gaming
equipment, as well as the individual suitability of officers, directors, major
stockholders and key employees. Laws of the various gaming regulatory agencies
generally serve to protect the public and ensure that gaming related activity is
conducted honestly, competitively, and free of corruption.
Various gaming regulatory agencies have issued licenses allowing IGT to
manufacture and/or distribute its products and operate wide-area progressive
systems. IGT and its key personnel have obtained or applied for all government
licenses, permits, registrations, findings of suitability and approvals
necessary allowing for the manufacture, distribution, and where permitted,
operation of gaming machines in the jurisdictions where we do business. We have
never been denied a gaming related license, nor have our licenses been suspended
or revoked.
Nevada Regulation
The manufacture, sale and distribution of gaming devices in Nevada are subject
to extensive state laws, regulations of the Nevada Gaming Commission and State
Gaming Control Board (the "Nevada Commission"), and various county and municipal
ordinances. These laws, regulations and ordinances primarily concern the
responsibility, financial stability and character of gaming equipment
manufacturers, distributors and operators, as well as persons financially
interested or involved in gaming operations. The manufacture, distribution and
operation of gaming devices require separate licenses. The laws, regulations and
supervisory procedures of the Nevada Commission seek to (i) prevent unsavory or
unsuitable persons from having a direct or indirect involvement with gaming at
any time or in any capacity; (ii) establish and maintain responsible accounting
practices and procedures, (iii) maintain effective control over the financial
practices of licensees, including establishing minimum procedures for internal
fiscal affairs and the safeguarding of assets and revenues, providing reliable
record keeping and requiring the filing of periodic reports with the Nevada
Commission, (iv)
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prevent cheating and fraudulent practices, and (v) provide a source of state and
local revenues through taxation and licensing fees. Changes in such laws,
regulations and procedures could have an adverse effect on our operations.
A Nevada gaming licensee is subject to numerous restrictions. Licenses must be
renewed periodically and licensing authorities have broad discretion with regard
to such renewals. Licenses are not transferable. Each type of machine sold by
the Company in Nevada must first be approved by the Nevada Commission, which may
require subsequent machine modification. Substantially all material loans,
leases, sales of securities and similar financing transactions must be reported
to or approved by the Nevada Commission. Changes in legislation or in judicial
or regulatory interpretations could occur which could adversely affect the
Company.
A publicly traded corporation must be registered and found suitable to hold an
interest in a corporate subsidiary that holds a gaming license. International
Game Technology has been registered by the Nevada Commission as a publicly
traded holding company and was permitted to acquire IGT as its wholly-owned
subsidiary. As a registered holding company, it is required periodically to
submit detailed financial and operating reports to such Commission and furnish
any other information that the Commission may require. No person may become a
stockholder of, or receive any percentage of profits from, a licensed subsidiary
without first obtaining licenses and approvals from the Nevada Commission.
Officers, directors and key employees of a licensed subsidiary and of the
Company who are actively engaged in the administration or supervision of gaming
must be found suitable.
No proceeds from any public sale of securities of a registered holding
corporation may be used for gaming operations in Nevada or to acquire a gaming
property without the prior approval of the Nevada Commission. The Company
believes it has all required licenses to carry on its business in Nevada.
Officers, directors, and certain key employees of IGT who are actively and
directly involved in gaming activities of the Company's licensed gaming
subsidiary may be required to be licensed or found suitable. Officers,
directors, and certain key employees of the Company's licensed gaming subsidiary
must file applications with the Nevada Commission and may be required to be
licensed or found suitable. Employees associated with gaming must obtain work
permits, which are subject to immediate suspension under certain circumstances.
In addition, anyone having a material relationship or involvement with the
Company may be required to be found suitable or licensed, in which case those
persons would be required to pay the costs and fees of the State Gaming Control
Board (the "Control Board") in connection with the investigation. An application
for licensure or finding of suitability may be denied for any cause deemed
reasonable by the Nevada Commission. A finding of suitability is comparable to
licensing and both require submission of detailed personal and financial
information followed by a thorough investigation. Changes in licensed positions
must be reported to the Nevada Commission. In addition to its authority to deny
an application for a license or finding of suitability, the Nevada Commission
has jurisdiction to disapprove a change in position by such officer, director,
or key employee.
The Nevada Commission has the power to require the Company and its licensed
gaming subsidiary to suspend or dismiss officers, directors or other key
employees and to sever relationships with other persons who refuse to file
appropriate applications or whom the authorities find unsuitable to act in such
capacities. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and its licensed gaming subsidiary are required to submit detailed
financial and operating reports to the Nevada Commission. If it were determined
that gaming laws were violated by a licensee, the gaming licenses it holds could
be limited, conditioned, suspended or revoked subject to compliance with certain
statutory and regulatory procedures. In addition to the licensee, the Company
and the persons involved could be subject to substantial fines for each separate
violation of the gaming laws at the discretion of the Nevada Commission. In
addition, a supervisor could be appointed by the Nevada Commission to operate
the Company's gaming property and, under certain circumstances, earnings
generated during the supervisor's appointment could be forfeited to the State of
Nevada. The limitation, conditioning or suspension of any gaming license or the
appointment of a supervisor could (and revocation of the gaming license would)
materially and adversely affect the Company's operations.
Item 1. Business
The Nevada Commission may also require any beneficial holder of our voting
securities, regardless of the number of shares owned, to file an application, be
investigated, and be found suitable, in which case the applicant would be
required to pay the costs and fees of the Control Board investigation. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership, or trust, it must submit detailed business and
financial information including a list of beneficial owners. Any person who
acquires 5% or more of the Company's voting securities must report the
acquisition to the Nevada Commission; any person who becomes a beneficial owner
of 10% or more of our voting securities must apply for a finding of suitability
within 30 days after the Chairman of the Nevada Control Board mails the written
notice requiring such finding.
Under certain circumstances, an Institutional Investor, as such term is defined
in the Nevada Regulations, which acquires more than 10%, but not more than 15%,
of the Company's voting securities may apply to the Nevada Commission for a
waiver of such finding of suitability requirements, provided the institutional
investor holds the voting securities for investment purposes only. An
institutional investor will not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
board of directors of the Company, any change in its corporate charter, bylaws,
management, policies or operations of the Company, or any of its gaming
affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Company's voting securities for investment
purposes only. Activities which are not deemed to be inconsistent with holding
voting securities for investment purposes only include: (i) voting on all
matters voted on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent.
The Nevada Commission has the power to investigate any debt or equity security
holder of the Company. The Clark County Liquor and Gaming Licensing Board, which
has jurisdiction over gaming in the Las Vegas area, may similarly require a
finding of suitability for a security holder. The applicant stockholder is
required to pay all costs of such investigation. The bylaws of the Company
provide for the Company to pay such costs as to its officers, directors or
employees.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
Chairman of the Control Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock beyond such period
of time as may be prescribed by the Nevada Commission may be guilty of a
criminal offense. The Company is subject to disciplinary action, and possible
loss of our approvals, if, after it receives notice that a person is unsuitable
to be a stockholder or to have any other relationship with, the Company (i) pays
that person any dividend or interest upon voting securities of the Company, (ii)
allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) gives remuneration in
any form to that person, for services rendered or otherwise, or (iv) fails to
pursue all lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value. Additionally the Clark County
authorities have taken the position that they have the authority to approve all
persons owning or controlling the stock of any corporation controlling a gaming
license.
The Nevada Commission may, in its discretion, require the holder of any debt
security of the Company to file applications, be investigated and be found
suitable to own the debt security of the Company. If the Nevada Commission
determines that a person is unsuitable to own such security, then pursuant to
the Nevada Gaming Control Act (the "Nevada Act"), the Company can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
Item 1. Business
The Company is required to maintain a current stock ledger in Nevada, which may
be examined by the Nevada Commission at any time. If any securities are held in
trust by an agent or by a nominee, the record holder may be required to disclose
the identity of the beneficial owner to the Nevada Commission. A failure to make
such disclosure may be grounds for finding the record holder unsuitable. The
Company is also required to render maximum assistance in determining the
identity of the beneficial owner. The Nevada Commission has the power at any
time to require the Company's stock certificates to bear a legend indicating
that the securities are subject to the Nevada Act and the regulations of the
Nevada Commission. To date, the Nevada Commission has not imposed such a
requirement.
The Company may not make a public offering of its securities without the prior
approval of the Nevada Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in
Nevada, or retire or extend obligations incurred for such purposes. Such
approval, if given, does not constitute a finding, recommendation, or approval
by the Nevada Commission or the Nevada Control Board to the accuracy or adequacy
of the prospectus or investment merits of the securities. Any representation to
the contrary is unlawful. Changes in control of the Company through merger,
consolidation, acquisition of assets or stock, management or consulting
agreements or any form of takeover cannot occur without the prior investigation
of the Control Board and approval of the Nevada Commission. Entities seeking to
acquire control of the Company must satisfy the Nevada Board and Nevada
Commission in a variety of stringent standards prior to assuming control of the
Company. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction. The Nevada
legislature has declared that some corporate acquisitions opposed by management,
repurchases of voting securities and other corporate defense tactics that affect
corporate gaming licensees in Nevada, and corporations whose stock is publicly
traded that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these business practices
upon Nevada's gaming industry and to further Nevada's policy to (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. Nevada's gaming laws and
regulations also require prior approval by the Nevada Commission if the Company
were to adopt a plan of recapitalization proposed by our Board of Directors in
opposition to a tender offer made directly to its stockholders for the purpose
of acquiring control of the Company.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Control Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Control Board of the licensee's participation in foreign gaming.
The revolving fund is subject to increase or decrease at the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. A licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the grounds of personal unsuitability.
International Regulation
Certain foreign countries permit the importation, sale
and operation of gaming equipment in casino and non-casino environments. Some
countries prohibit or restrict the payout feature of the traditional slot
machine or limit the operation and the number of slot machines to a controlled
number of casinos or casino-like locations. Each gaming machine must comply with
the individual country's regulations. Certain jurisdictions require the
licensing of gaming machine operators and manufacturers.
Item 1. Business
We manufacture and supply gaming equipment to various international markets
including Australia, Europe, Japan, Latin America, the Middle East, New Zealand,
South Africa, and the United Kingdom. We have obtained the required licenses to
manufacture and distribute our products in the various foreign jurisdictions
where we do business.
Federal Registration
The Federal Gambling Devices Act of 1962 (the Act) makes it unlawful for a
person to manufacture, transport, or receive gaming machines, gaming devices or
components across interstate lines unless that person has first registered with
the Attorney General of the US Department of Justice. In addition, gambling
device identification and recordkeeping requirements are imposed by the Act.
Violation of the Act may result in seizure and forfeiture of the equipment, as
well as other penalties. Subsidiaries of International Game Technology involved
in the manufacture and transportation of gaming devices are required to register
annually. We have complied with the registration requirements of the Act.
Native American Gaming Regulation
Gaming on Native American lands is governed by federal law, tribal-state
compacts, and tribal gaming regulations. The Indian Gaming Regulatory Act of
1988 (IGRA) provides the framework for federal and state control over all gaming
on Native American lands and is administered by the National Indian Gaming
Commission (the NIGC) and the Secretary of the US Department of the Interior.
IGRA requires that the tribe and the state enter into a written agreement, a
tribal-state compact, that governs the terms of the gaming activities.
Tribal-state compacts vary from state-to-state and in many cases require
equipment manufacturers and/or distributors to meet ongoing registration and
licensing requirements. In addition, tribal gaming commissions have been
established by many Native American tribes to regulate gaming related activity
on Indian lands. IGT manufactures and supplies gaming equipment to Native
American tribes who have negotiated compacts with their state and have received
federal approval.
In March 2000, the state of California approved a constitutional amendment that
permitted Native American casino-style gaming within the state. As of September
30, 2000, we are licensed to sell gaming machines and components to Native
American casinos in 17 states.
Item 2. Properties
Square Owned/
Location Footage Leased Use
- ----------------------------------------------------------------------------------------------------
Reno, Nevada 1,000,000 Owned Manufacturing, warehousing, sales, administration
Sydney, Australia 157,000 Leased Assembly, warehousing, sales, administration
Las Vegas, Nevada 128,500 Leased Warehousing, sales, administration
Ashton, UK 122,300 Owned Manufacturing
Rapid City, South Dakota 94,000 Owned Warehousing, sales, administration
Ashton, UK 17,200 Leased Manufacturing
Wellington, New Zealand 12,000 Owned Warehousing, sales, administration
Other domestic 184,800 Leased Sales and administration
Other international 174,800 Leased Warehousing, sales, administration
IGT also leases two buildings in Reno, Nevada consisting of approximately
179,000 square feet. We vacated these buildings during 1996 and 1997 upon
completion of our South Meadows facility. Our original lease on these facilities
expires in 2001. This expiration date was extended to 2003 for 91,500 square
feet that we sublease to third parties.
Item 3. Legal Proceedings
IGT has been named in and has brought lawsuits in the normal course of business.
Management does not expect the outcome of these suits to have a material adverse
effect on our financial position or results of future operations. For a
description of certain of these matters, see Note 13 of Notes to Consolidated
Financial Statements, which is incorporated by reference in response to this
item.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
Our common stock is listed on the New York Stock Exchange (NYSE) under the
symbol "IGT." The following table sets forth for the periods presented the high
and low sales prices of the common stock as traded on the NYSE:
Fiscal 2000 High Low
----------------------------------------------
First Quarter $ 20.6250 $ 17.5625
Second Quarter 22.4375 17.4375
Third Quarter 28.5625 20.2500
Fourth Quarter 34.5000 26.8750
Fiscal 1999 High Low
----------------------------------------------
First Quarter $ 24.5000 $ 16.5000
Second Quarter 23.4375 14.3750
Third Quarter 19.5000 14.6875
Fourth Quarter 19.2500 16.1875
As of November 24, 2000, there were approximately 3,699 record holders of IGT's
common stock. The closing price of the common stock was $41.25 on that date.
We declared no quarterly dividend in fiscal 2000 and one quarterly dividend of
$0.03 per share in fiscal 1999. During fiscal 1999, IGT's Board of Directors
voted to discontinue payment of cash dividends and redirect the funds toward the
stock repurchase plan or other corporate purposes.
IGT's transfer agent and registrar is The Bank of New York, P.O. Box 11258,
Church Street Station, New York, NY 10286, (800) 524-4458.
Item 6. Selected Financial Data
The following information has been derived from our consolidated financial
statements as of and for the years ended:
September 30, October 2, September 30,
-------------------------------------
2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands,
except per share data)
Selected Income Statement Data
Total revenues $1,004,395 $ 929,662 $ 824,123 $ 743,970 $ 733,452
Income from operations $ 267,528 $ 116,318 $ 218,877 $ 191,437 $ 169,833
Income before extraordinary item $ 156,792 $ 65,312 $ 152,446 $ 137,247 $ 118,017
Net income $ 156,792 $ 62,058 $ 152,446 $ 137,247 $ 118,017
Basic earnings per share
Income before extraordinary item $ 2.05 $ 0.65 $ 1.35 $ 1.14 $ 0.93
Net income $ 2.05 $ 0.62 $ 1.35 $ 1.14 $ 0.93
Diluted earnings per share
Income before extraordinary item $ 2.00 $ 0.65 $ 1.33 $ 1.13 $ 0.93
Net income $ 2.00 $ 0.62 $ 1.33 $ 1.13 $ 0.93
Cash dividends declared per common
share $ - $ 0.03 $ 0.12 $ 0.12 $ 0.12
Weighted average common shares
outstanding 76,586 99,461 113,064 120,715 126,555
Weighted average common and potential
shares outstanding 78,229 100,238 114,703 121,829 127,412
Selected Balance Sheet Data
Working capital $ 555,233 $ 739,753 $ 470,003 $ 406,958 $ 488,150
Total assets $1,623,716 $1,765,060 $1,543,628 $1,215,052 $1,154,187
Long-term notes payable and capital
lease obligations $ 991,507 $ 990,436 $ 322,510 $ 140,713 $ 107,155
Stockholders' equity $ 96,585 $ 242,218 $ 541,276 $ 519,847 $ 623,200
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
We operate principally in two lines of business: the development, manufacturing,
marketing and distribution of gaming products "product sales"; and the
development, marketing and operation of wide-area progressive systems and gaming
equipment leasing "gaming operations".
Fiscal 2000 Compared to Fiscal 1999
Fiscal 2000 net income, excluding one-time items discussed below, totaled $138.4
million or $1.77 per diluted share compared to $135.7 million or $1.35 per
diluted share for fiscal 1999. Both fiscal years included several one-time items
that affected net income. Current year net income of $156.8 million or $2.00 per
diluted share included the effects of the following one-time events:
o gain of $27.0 million ($17.3 million net of tax) or $0.22 per diluted
share from a legal settlement;
o loss of $1.4 million ($900,000 net of tax) or $0.01 per diluted share
on the sale of the gaming systems business unit previously purchased
as part of the Olympic Gaming acquisition; and
o gain of $3.2 million ($2.0 million net of tax) or $0.02 per diluted
share on the sale of the Japanese subsidiary of Barcrest.
Prior year net income of $62.1 million or $0.62 per diluted share included the
following one-time items:
o impairment and restructuring charges of $98.1 million ($70.4 million
net of tax) or $0.70 per diluted share related to operations in
Australia and Brazil; and
o an extraordinary loss on early redemption of debt of $4.9 million
($3.3 million net of tax) or $0.03 per diluted share.
The legal settlement gain, received in the first quarter of fiscal 2000,
resulted from the resolution of legal actions between IGT and WMS related to
infringement claims involving our Telnaes patent for virtual reel technology.
See Note 13 of Notes to Consolidated Financial Statements.
After difficulties experienced with the acquisition of Olympic, we initiated a
significant restructuring plan in late fiscal 1999 in an effort to return
IGT-Australia to a profitable operation. The changes implemented in fiscal 2000
included narrowing the product lines, downsizing the sales, service, and
engineering departments, and transferring manufacturing to Reno. In addition to
the write-off of intangible assets of $86.8 million related to the Olympic
acquisition, in fiscal 1999 we recognized restructuring costs of $6.0 million
related to this plan. An additional $1.9 million in restructuring costs were
incurred during fiscal 2000 related to the elimination of certain administrative
and manufacturing positions in Australia. See Note 7 of Notes to Consolidated
Financial Statements.
In the fourth quarter of 1999, the Brazilian government rescinded the law
allowing gaming devices in bingo halls. Based on our assessment of the
recoverability of our inventories and receivables in Brazil, October 2, 1999 we
recorded impairment charges of $5.3 million. During fiscal 2000, we received
payment of $1.9 million for receivables and inventories previously considered
fully impaired.
In July 2000, in a move to eliminate duplication within our operations in Japan,
we sold Barcrest KK, the Japanese subsidiary of Barcrest, for a gain of $3.2
million ($2.0 million net of tax). The net cash proceeds from the sale were $9.8
million and the net assets disposed of were $6.6 million. The purchaser is a
Japanese company engaged in the manufacture, development, and sale of pachinko
and pachisuro slot machines. See Note 2 of Notes to Consolidated Financial
Statements.
Revenues and Gross Profit Margins
For the first time in our near 20-year history, annual revenues for fiscal 2000
exceeded the $1.0 billion mark. This 8% improvement over fiscal 1999 revenues of
$929.7 million resulted from a 14% increase in gaming operations revenue and a
5% increase in product sales revenue.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Worldwide, IGT shipped 107,000 gaming machines for product sales of $603.4
million in fiscal 2000 versus 116,000 units for $576.6 million in the prior
fiscal year. Domestic shipments increased to 44,700 units for the current year
from 41,100 units in fiscal 1999, predominantly due to sales of approximately
5,000 units into the new California Native American market. Current year
domestic shipments to new casinos also included Suncoast (87% market share) in
Nevada, Hollywood Casino (91% market share) in Louisiana, Belterra Resort (87%
market share) in Indiana, and Greektown Casino (67% market share) in Michigan.
Although fiscal 2000 offered fewer major casino openings than fiscal 1999,
domestic replacement sales were up 52% for the fourth quarter and 10% for the
year compared to the same prior year periods, led by strong demand for our newer
games.
International shipments, comprising 58% of total units in fiscal 2000, declined
17% to 62,300 units compared to 74,900 units in fiscal 1999. This decline
reflected a slower year in Japan and Latin America, partially offset by
increased unit sales in Europe, Africa, and the United Kingdom. Unit sales in
Australia were virtually flat year over year, but improved 84% in the fourth
quarter of fiscal 2000 over the prior year quarter, reflecting improvement from
the restructuring plan implemented during fiscal 2000.
Gaming operations revenue for the year ended September 30, 2000 improved 14% to
$401.0 million compared to $353.1 million in fiscal 1999. Performance of our
gaming operations segment accelerated markedly in fiscal 2000 due to significant
placements of our newest and most popular game themes. The installed base of our
MegaJackpots(TM) machines, including placement under joint ventures, at
September 30, 2000 experienced unprecedented year over year growth of 27% to
19,200 games from 15,100 machines at the end of fiscal 1999. Our joint venture
activities contributed significantly to this growth, led by the installation of
4,300 video and 800 spinning reel Wheel of Fortune(R) games during the year. The
ever growing popularity of the Wheel of Fortune(R) games boosted joint venture
revenues, reported net of expenses for accounting purposes, by 40% to $109.4
million from $78.3 in the prior year.
Also contributing to the overall growth in gaming operations revenue were the
successes of Multi-Hand Poker(TM), Party Time(TM), Elvis(R) and The Addams
Family (TM) games, as well as the inclusion of Sodak's gaming operations
revenue. Fiscal 2000 brought the installation of new feature rich
MegaJackpots(TM) games with second event bonusing, incorporating popular themes
such as The Addams Family (TM) and Jeopardy!(R) Video. In recognition that all
games have a finite life cycle, IGT systematically replaces legacy systems
experiencing declining play levels with new systems incorporating enhanced
entertainment value and improved player appeal. Of the current installed base,
approximately 16,300 units are new platform, higher performing games. During
fiscal 2000, we discontinued 19 MegaJackpots(TM) systems in eight jurisdictions.
As of September 30, 2000, our MegaJackpots(TM) games operated in 17 domestic
jurisdictions and one international location versus 11 domestic jurisdictions
and one international location at the end of fiscal 1999. IGT continues to
pursue additional markets for our MegaJackpots(TM) systems of linked progressive
games.
Gross profit on total revenues for fiscal 2000 increased 20% to $503.8 million
compared to $421.2 million in fiscal 1999. This positive movement was
attributable to growth in profitability for both product sales and gaming
operations. The gross profit margin on product sales improved to 38% in the
current fiscal year compared to 37% in the prior year. Margins were positively
impacted by a higher percentage of domestic sales in the overall mix, offset by
additional costs associated with sourcing more sophisticated electronic
components and the rapid production ramp-up in the latter half of the year. The
gross profit performance in gaming operations climbed to $276.2 million or 69%
for fiscal 2000 from $210.6 million or 60% in fiscal 1999. This improvement was
due primarily to increased profits from joint venture activities, which are
reported net of expenses for accounting purposes. The inclusion of Sodak's
gaming operations revenues and the impact of higher interest rates, which
lowered the cost of funding jackpot payments, also contributed to this margin
growth.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Operating Expenses
Fiscal 2000 operating expenses, excluding impairment and restructuring charges,
totaled $236.3 million or 24% of total revenue compared to $206.8 million or 22%
in fiscal 1999. The $20.8 million increase in selling, general and
administrative expenses reflects the inclusion of Sodak's operating expenses and
increased incentives as the result of improved operating results. Depreciation
and amortization expense, not included in cost of sales, declined 13% from the
prior year to $20.9 million, primarily due to the write-off of intangible assets
in Australia in the fourth quarter of fiscal 1999. The addition of goodwill and
fixed assets relating to the acquisition of Sodak partially offset this decline.
Research and development expenses increased $9.7 million to $55.2 million for
the current year, primarily as a result of engineering expenses related to the
unprecedented rate of new game development. Bad debt expense increased $2.0
million over fiscal 1999 primarily due to fluctuations in sales volumes.
Operating Income
Fiscal 2000 operating income, before impairment and restructuring charges, grew
25% to $267.5 million or 27% of revenues compared to $214.4 million or 23% of
revenues last year. This improvement was due to the increased gross profit
margins in both product sales and gaming operations, partially offset by higher
operating expenses, as discussed above.
Other Income and Expense
Other expense, net for the current year, totaled $22.5 million versus $14.9
million in the prior year. Increased interest expense from our outstanding $1.0
billion Senior Notes issued in May 1999 was partially offset by the $27.0
million legal settlement received. Operation of our MegaJackpots(TM) systems
results in interest income from both the investment of cash and from investments
purchased to fund jackpot payments. Interest expense on the jackpot liability is
accrued at the rate earned on the investments purchased to fund the liability.
Therefore, interest income and expense relating to funding jackpot winners are
similar and increase at approximately the same rate based on the growth in total
jackpot winners.
Our worldwide tax rate increased to 36% in fiscal 2000 from 35.6% in fiscal
1999. We expect our tax rate for fiscal 2001 to fluctuate between 37% and 38%.
Business Segments Operating Profit
(See Note 19 of Notes to Consolidated Financial Statements)
IGT's operating profit by business segment reflects an
appropriate allocation of selling, general and administrative expenses, research
and development expenses, interest income and interest expense.
Product sales operating profit, before impairment and restructuring charges, for
the year ended September 30, 2000 improved to $95.5 million or 16% of related
revenues compared to $95.6 million or 17% in fiscal 1999. Including the one-time
charges for impairment and restructuring of $98.1 million, product sales
operating loss for the year ended October 2, 1999 was $2.5 million. This
fluctuation reflects increased sales volume, offset by increased research and
development costs, and increased interest expense allocated to the product sales
segment from our $1.0 billion Senior Notes proceeds used to fund the acquisition
of Sodak in September 1999.
In fiscal 2000, operating profit for the gaming operations segment totaled
$190.0 million, an increase of $46.5 million or 32% compared to the prior year.
This improvement resulted from the growth of the installed base and excellent
player acceptance of our new MegaJackpots(TM) systems games, the continued
popularity of the Wheel of Fortune(R) games, higher interest rates which lowered
the cost of funding jackpot payments, and the inclusion of gaming operations
revenue from Sodak.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Fiscal 1999 net income of $62.1 million or $0.62 per diluted share included
certain one-time charges recorded in the fourth quarter totaling $98.1 million
($70.4 million or $0.70 per diluted share, net of tax) as discussed below. An
extraordinary loss on early redemption of debt of $3.3 million or $0.03 per
diluted share was also recognized during fiscal 1999. Net income for the year
ended October 2, 1999 before the one-time charges and extraordinary loss totaled
$135.7 million or $1.35 per diluted share versus net income of $152.4 million or
$1.33 per diluted share in fiscal 1998.
The one-time charges in fiscal 1999 of $98.1 million consisted primarily of the
write-off of intangible assets of $86.8 million related to IGT-Australia's prior
acquisition of Olympic. See Note 7 of Notes to Consolidated Financial
Statements. In an effort to return IGT-Australia to a profitable operation, we
initiated a significant restructuring plan in late fiscal 1999 which included
narrowing current product lines and utilizing IGT's Reno, Nevada manufacturing
plant to reduce product costs. We recorded restructuring costs of $6.0 million
in fiscal 1999 related to this plan, including a $4.0 million inventory
obsolescence charge and $2.0 million in asset and facility redundancy costs. We
also recorded impairment charges of $5.3 million in fiscal 1999, relating to
changes in our recoverability assessment of inventory and receivables in Brazil.
In fiscal 1999 the government in Brazil rescinded the law allowing gaming
devices in bingo halls throughout this market.
Revenues and Cost of Sales
Fiscal 1999 revenues of $929.7 million improved 13% over fiscal 1998 revenues of
$824.1 million. This improvement resulted from a 21% increase in product sales
revenue as well as a 2% increase in gaming operations revenue.
We shipped 116,000 gaming machines for total product sales revenues of $576.6
million in fiscal 1999 compared to 77,000 units for $477.0 million in the prior
fiscal year. Domestic shipments totaled 41,100 units for the year ended October
2, 1999 compared to 37,800 units in the year earlier period. The four major new
casino openings in the Las Vegas, Nevada market, as well as growth in the
Canadian and Native American markets, positively impacted domestic product sales
during 1999. Fiscal 1999 shipments to new Las Vegas properties included Park
Place's Paris Resort, The Resort at Summerlin, the Mandalay Bay and the Venetian
Resort. Also contributing to the fiscal 1999 improvement were shipments of 3,000
machines to the Ontario Lottery Commission and 1,800 machines to new casinos in
Detroit, Michigan. Domestic revenues for fiscal 1999 also benefited from
increased demand in the Native American market. In June 1999, we became a
licensed manufacturer for Native American venues in Washington. Fiscal 1999
sales included 1,500 games for a market share of approximately 93% to a
Washington licensee who designs and markets gaming machines for placement in
eight Native American casinos.
International shipments of 74,900 machines in fiscal 1999 accounted for 65% of
total units, the highest percentage in our history, compared to 39,200 machines
in fiscal 1998. This 91% growth in international unit shipments was driven
primarily by Japan and Barcrest which contributed increased shipments of
approximately 18,400 units each. Growth in Japanese pachisuro sales were driven
by the introduction of popular game themes including Popper King(TM),
Dynamite(TM) and Elvis (R). Fiscal 1999 shipments for Barcrest, which was
acquired in March 1998, include a full year of results. Machine shipments in the
Australia market totaled 6,700 units in fiscal 1999 compared to 6,200 machines
in fiscal 1998. The lack of anticipated growth in the fiscal 1999 unit sales as
a result of the Olympic acquisition influenced our assessment of the
IGT-Australia intangible asset impairment.
The gross margin on product sales was 37% in fiscal 1999 compared to 41% in
fiscal 1998. This fluctuation is the result of an increase in the mix of new
domestic product lines, including the Game King(R) and Vision Series(R)
platforms, which have lower gross margin percentages yet higher gross margin
dollars along with increased obsolescence expense domestically. The gross margin
was also impacted by the higher percentage of international sales during 1999
which are typically at lower gross margins.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Gaming operations revenue for the year ended October 2, 1999 totaled $353.1
million compared to $347.1 million in fiscal 1998. This growth primarily
resulted from joint venture activities. The total installed base of gaming
machines operating on our MegaJackpots(TM) systems at October 2, 1999 increased
to 15,100 games on 137 systems from 13,900 machines on 92 systems at the end of
fiscal 1998. Joint venture games including Wheel of Fortune(R) contributed $78.3
million to total gaming operations revenues for fiscal 1999. During fiscal 1999
we began operating MegaJackpots(TM) systems in two new jurisdictions, Iowa and
Michigan. We introduced 36 new systems in nine jurisdictions during the year
including the Slotopoly(TM), Elvis (R), Party Time(TM) and Triple Play Poker(TM)
in the MegaJackpots(TM) system formats in Atlantic City. The introduction of
these new systems in various jurisdictions offset the decrease in revenue of
other maturing systems.
The gross margin on gaming operations revenues was 60% in fiscal 1999 compared
to 54% in the fiscal 1998. This improvement was due primarily to profits from
joint venture activities which, for accounting purposes, are reported net of
expenses in gaming operations revenues. Additionally, higher average interest
rates lowered the cost of funding jackpot payments.
Expenses
Fiscal 1999 operating expenses totaled $304.9 million, including the $98.1
million impairment of assets and restructuring charges. Operating expenses
before the one-time charges discussed above as a percent of total revenue were
22% in fiscal 1999 compared to 20% in fiscal 1998. The $23.3 million increase in
selling, general and administrative expenses reflects the inclusion of operating
expenses attributable to the businesses acquired in the UK and Australia in
March 1998, along with increased wages, professional services and domestic
advertising, marketing, and compliance expenses related to new product
offerings.
Depreciation and amortization expenses totaled $24.0 million in the fiscal 1999
compared to $18.6 million in fiscal 1998. This increase was primarily due to
amortization of goodwill and additional depreciation of the acquired assets.
Research and development expenses increased $7.4 million in fiscal 1999 compared
to the prior year due to the inclusion of a full year of Barcrest and Olympic
operations along with higher engineering expenditures domestically related to
the development of over 30 new games. Bad debt expense increased $3.4 million
over fiscal 1998 due to growth in product sales as well as additional reserves
for gaming operations activities.
Other Income and Expense
Other expense, net, for fiscal 1999 totaled $14.9 million and was impacted by
interest expense of $31.2 million on the $1.0 billion Senior Notes issued in May
1999. Other income, net for fiscal 1998 totaled $15.7 million which included a
gain on the sale of the IGT-Australia manufacturing facility of $10.4 million.
Operation of our MegaJackpots(TM) systems results in interest income from both
the investment of cash and from investments purchased to fund jackpot payments.
Interest expense on the jackpot liability is accrued at the rate earned on the
investments purchased to fund the liability. Therefore, interest income and
expense relating to funding jackpot winners are similar and increase at
approximately the same rate based on the growth in total jackpot winners.
Business Segments Operating Profit
(See Note 19 of Notes to Consolidated Financial Statements)
Product sales and gaming operations operating profit reflects an allocation of
selling, general, administrative and engineering expenses to each of these
business segments.
Product sales operating loss was $2.5 million for the year ended October 2,
1999, including the one-time charges for impairment and restructuring of $98.1
million. Product sales operating profit before these charges totaled $95.6
million compared to $121.2 million in the prior period. This fluctuation
resulted from a decline in the gross margin to 37% from 41% in the prior year,
as well as increased domestic advertising, marketing, and compliance expenses,
increased selling expenses in Japan, and the inclusion of a full year of
operating expenses from Barcrest and Olympic.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Fiscal 1999 gaming operations operating profit increased $10.2 million or 8%
compared to fiscal 1998. This improvement resulted primarily from the continued
popularity of the Wheel of Fortune (R) games and higher average interest rates,
which resulted in lower costs of funding jackpot payments.
Foreign Operations
Approximately 24% of our total revenues in fiscal 2000, 28% in fiscal 1999, and
23% in fiscal 1998 were derived outside of North America. To date, we have not
experienced significant translation or transaction losses related to foreign
exchange fluctuations.
Financial Condition, Liquidity and Capital Resources
Capital Resources
IGT's sources of capital include, but are not limited to, cash flows from
operations, the issuance of public or private placement debt, bank borrowings,
and the issuance of equity securities. We believe that our available short-term
and long-term capital resources are sufficient to fund our capital expenditure
and operating capital requirements, scheduled debt payments, interest and income
tax obligations, strategic investments, acquisitions, and share repurchases. Our
sources of capital afford us the financial flexibility to target acquisition of
businesses that offer opportunities to implement our operating strategies,
increase our rates of return, and improve shareholder value.
Credit Facilities and Indebtedness
Our domestic and foreign borrowing facilities totaled $273.0 million at
September 30, 2000. Of this amount, $4.6 million was drawn, $2.8 million was
reserved for letters of credit and the remaining $265.6 million was available
for future borrowings. We are required to comply with certain covenants
contained in these agreements which, among other things, limit financial
commitments we may make without the written consent of the lenders and require
the maintenance of certain financial ratios. At September 30, 2000, we were in
compliance with all applicable covenants.
In May 1999, we completed the private placement of $1.0 billion in aggregate
principal amount of Senior Notes pursuant to rule 144A under the Securities Act
of 1933. The Senior Notes were issued in two tranches: $400 million aggregate
principal amount of 7.875% Senior Notes, due May 15, 2004, priced at 99.053% and
$600 million aggregate principal amount of 8.375% Senior Notes, due May 15,
2009, priced at 98.974%. In August 1999, we exchanged all outstanding Senior
Notes for identical registered notes. A portion of the proceeds was used to
redeem previously outstanding 7.84% Senior Notes due 2004, which resulted in a
prepayment penalty of $3.3 million, net of tax. Additionally, we repaid
outstanding borrowings under both our US and Australian credit facilities. The
remaining net proceeds from the offering were used to fund our acquisition of
Sodak, working capital, and share repurchases.
The issuance of our $1.0 billion of Senior Notes could have important
consequences, including: increasing our vulnerability to general adverse
economic and industry conditions; limiting our ability to obtain additional
financing to fund future working capital, capital expenditures, acquisitions and
other general corporate requirements; requiring a substantial portion of our
cash flow from operations for the payment of interest on our indebtedness and
reducing our ability to use our cash flow to fund working capital, capital
expenditures, acquisitions and general corporate requirements; limiting our
flexibility in planning for, or reacting to, changes in our business and the
industry; and disadvantaging us compared to competitors with less indebtedness.
Our ability to meet our debt service obligations on the Senior Notes and our
other indebtedness will depend on our future performance. In addition, our bank
revolving line of credit requires us to maintain specified financial ratio
tests. Our ability to maintain such ratio tests will also depend on our future
performance. Our future performance will be subject to
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
general economic conditions and to financial, business, regulatory and other
factors affecting our operations, many of which are beyond our control. If we
were unable to maintain the financial ratio tests under the bank revolving line
of credit, the lenders could terminate their commitments and declare all amounts
borrowed, together with accrued interest and fees, to be immediately due and
payable. If this happened, other indebtedness that contains cross-default or
cross- acceleration provisions, including the Senior Notes, may also be
accelerated and become due and payable. If any of these events should occur, we
may not be able to pay such amounts and the Senior Notes.
Summary of Cash Activities
IGT's principal sources of cash consisted of $128.8 million derived from
operations and $43.0 million in proceeds from the October 1999 sale of the Miss
Marquette riverboat held for sale as part of the Sodak acquisition. Our primary
use of cash was share repurchases of $318.5 million.
Our proprietary MegaJackpots(TM) systems provide cash through collections from
systems to fund jackpot liabilities and from maturities of US government
securities purchased to fund jackpot liabilities. Cash is used to make payments
to jackpot winners or to purchase investments to fund liabilities to jackpot
winners. These activities used cash of $23.2 million in the current year and
$21.3 million in fiscal 1999. The net cash provided by these activities for
fiscal 1998 was $36.3 million. Fluctuations in net cash flows from systems
represent differences between the growth in liabilities for jackpots and the
actual payments to the winners during the period, based on the timing of the
jackpot cycles and the volume of play across all of our MegaJackpots(TM)
systems.
Operating Activities: Cash flows from operating activities in fiscal 2000
resulted from the favorable operating performance discussed earlier. Fiscal 1999
operating cash flow increased due to the realization of deferred tax assets
related to the timing of the tax deductibility of jackpot payments. Federal
legislation was passed in October 1998 allowing jackpot winners to receive the
discounted value of progressive jackpots won in lieu of annual installments.
Investing Activities: Cash provided by investing activities in the current year
was primarily due to proceeds from the October 1999 sale of the Miss Marquette
riverboat held for sale as part of the Sodak acquisition. The primary use of
investing cash in fiscal 1999 related to our acquisition of businesses. See Note
2 of Notes to Consolidated Financial Statements. Use of cash from investing
activities also included purchases of property, plant, and equipment totaling
$18.5 million in fiscal 2000, $17.8 million in fiscal 1999, and $16.8 million in
fiscal 1998.
Financing Activities: The primary use of cash in financing activities in the
current year related to treasury stock purchases. Net borrowings in the prior
year periods were used primarily to fund business acquisitions, stock
repurchases, and working capital.
Stock Repurchase Plan
A stock repurchase plan was originally authorized by our Board of Directors in
October 1990. As of November 25, 2000, the remaining share repurchase
authorization, as amended, totaled 10.8 million additional shares. During fiscal
2000, we repurchased 15.7 million shares for an aggregate purchase price of
$318.5 million, including 11.0 million shares repurchased pursuant to an
issuer-tender offer at $21 per share. During fiscal 1999, we repurchased 21.8
million shares for an aggregate purchase price of $361.4 million. During fiscal
1998, we repurchased 5.5 million shares for an aggregate purchase price of
$122.2 million.
Recently Issued Accounting Standards
On June 30, 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities and is effective for the first quarter of our
fiscal year ending September 29, 2001. We believe that adoption of this
statement will not have a material impact on our financial condition or results
of operations.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 clarifies existing accounting principles related to revenue recognition in
financial statements. SAB 101 is effective for the fourth quarter of our fiscal
year 2001. We believe that the adoption of this statement will not have a
material impact on our financial condition or results of operations.
Reclassifications
Certain amounts in the prior years' comparative consolidated financial
statements have been reclassified to be consistent with the presentation used in
the current fiscal year.
Impact of Inflation
Inflation has not had a significant effect on IGT's operations during the last
three fiscal years.
Euro Currency Conversions
On January 1, 1999, 11 of 15 member countries of the European Union fixed
conversion rates between their existing currencies and one common currency - the
"euro". Conversion to the euro eliminated currency exchange rate risk between
the member countries. The euro trades on currency exchanges and may be used in
business transactions. Beginning in January 2002, new euro-denominated bills and
coins will be issued and the former currencies will be withdrawn from
circulation.
Our operating subsidiaries effected by the euro conversion have established
plans to address the issues raised by the euro currency conversion. These issues
include: the need to adapt financial systems and business processes; changes
required to equipment, such as coin validators and note acceptors, to
accommodate euro-denominated transactions in our current products; and the
impact of one common currency on pricing. We do not expect material system and
equipment conversion costs related exclusively to the euro. Due to numerous
uncertainties, we cannot reasonably estimate the long-term effects that one
common currency will have on pricing and the resulting impact, if any, on our
financial condition or results of operations.
Year 2000
IGT's Year 2000 strategic plan identified initiatives necessary to minimize
failures of our electronic systems to process date sensitive information in and
beyond the year 2000. Necessary modifications and replacements of our critical
systems were completed timely. To date we have not experienced any significant
failures of our electronic systems related to year 2000 processing issues. The
total cost to accomplish our year 2000 plan was $2.7 million, of which
approximately $2.2 million was capitalized for the replacement of non-compliant
equipment and software. We continue to monitor systems performance to assure
compliance.
Item 7a. Quantitative and Qualitative Factors about Market Risk
Market Risk
Under established procedures and controls, we enter into contractual
arrangements or derivatives, in the ordinary course of business, to hedge our
exposure to foreign exchange rate and interest rate risks. The counterparties to
these contractual arrangements are major financial institutions and we believe
that credit loss in the event of nonperformance is remote.
Foreign Currency Risk
We routinely use forward exchange contracts to hedge our net exposures, by
currency, related to the monetary assets and liabilities of our operations
denominated in non-functional currency. The primary business objective of this
hedging program is to minimize the gains and losses resulting from exchange rate
changes. At September 30, 2000, we had net foreign currency exposure of $58.0
million hedged with $63.5 million in currency forward contracts. At October 2,
1999, we had net foreign currency exposure of $41.7 million, of which $38.8
million was hedged with currency forward
Item 7a. Quantitative and Qualitative Factors about Market Risk
contracts. In addition, from time to time, we may enter into forward exchange
contracts to establish with certainty the US dollar amount of future firm
commitments denominated in a foreign currency.
Given our foreign exchange position, a ten percent adverse change in foreign
exchange rates upon which these foreign exchange contracts are based would
result in exchange gains and losses. In all material aspects, these exchange
gains and losses would be fully offset by exchange gains and losses on the
underlying net monetary exposures for which the contracts are designated as
hedges. We do not expect material exchange rate gains and losses from unhedged
foreign currency exposures.
As currency exchange rates change, translation of the income statements of our
international businesses into US dollars affects year-over-year comparability of
operating results. IGT does not generally hedge translation risks because cash
flows from international operations are generally reinvested locally.
Changes in the currency exchange rates that would have the largest impact on
translating our international operating results include the Australian dollar,
the British pound and the Japanese yen. We estimate that a 10% change in foreign
exchange rates would impact reported operating results by less than $1.0
million. This sensitivity analysis disregards the possibility that rates can
move in opposite directions and that gains from one area may or may not be
offset by losses from another area.
Interest Rate Risk
IGT's results of operations are exposed to fluctuations in bank lending rates
and the cost of US government securities, both of which are used to fund
liabilities to jackpot winners. We record gaming operations expense for future
jackpots based on these rates which are impacted by market interest rates and
other economic conditions. Therefore, the gross profit on gaming operations
decreases when interest rates decline. We estimated that a 10% decline in
interest rates would impact gaming operations gross profit by $3.9 million in
the current year, $3.4 million in fiscal 1999, and $4.3 million in fiscal 1998.
IGT currently does not manage this exposure with derivative financial
instruments.
Our outstanding Senior Notes carry interest at fixed rates. If interest rates
increased by 10%, then the fair market value of these notes would decrease
approximately $40.1 million at September 30, 2000 and $45.0 million at October
2, 1999.
Item 8. Consolidated Financial Statements and
Supplementary Data
Index to Financial Statements Page
Independent Auditors' Report 33
Consolidated Statements of Income
for the years ended September 30, 2000,
October 2, 1999 and September 30, 1998 34
Consolidated Balance Sheets
at September 30, 2000 and October 2, 1999 35
Consolidated Statements of Cash Flows
for the years ended September 30, 2000,
October 2, 1999 and September 30, 1998 37
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
September 30, 2000, October 2, 1999 and September 30, 1998 39
Notes to Consolidated Financial Statements 40
Independent Auditors' Report
To the Stockholders and Board of Directors of International Game Technology:
We have audited the accompanying consolidated balance sheets of International
Game Technology and Subsidiaries (the "Company") as of September 30, 2000 and
October 2, 1999, and the related consolidated statements of income, cash flows
and changes in stockholders' equity for each of the three years in the period
ended September 30, 2000. Our audits also included the consolidated financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2000 and October 2, 1999, and the results of its operations and its cash flows
for each of the three years in the period ended September 30, 2000 in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Reno, Nevada
November 6, 2000
Consolidated Statements of Income
Years Ended
---------------------------------------------
September 30, October 2, September 30,
2000 1999 1998
- ------------------------------------------------------------------------------------------------
(Amounts in thousands except per share amounts)
Revenues
Product sales $ 603,381 $576,598 $477,024
Gaming operations 401,014 353,064 347,099
---------- -------- --------
Total revenues 1,004,395 929,662 824,123
---------- -------- --------
Costs and Expenses
Cost of product sales 375,750 365,948 279,337
Cost of gaming operations 124,806 142,497 158,528
Selling, general and administrative 150,051 129,211 105,945
Depreciation and amortization 20,897 23,955 18,635
Research and development 55,204 45,462 38,066
Provision for bad debts 10,153 8,153 4,735
Impairment of assets and restructuring charges 6 98,118 -
---------- -------- --------
Total costs and expenses 736,867 813,344 605,246
---------- -------- --------
Income from Operations 267,528 116,318 218,877
---------- -------- --------
Other Income (Expense)
Interest income 50,977 55,525 45,346
Interest expense (102,170) (72,764) (41,049)
Gain on investments 4,553 5,438 1,031
Gain (loss) on the sale of assets (917) (562) 10,115
Other 25,016 (2,562) 212
--------- -------- --------
Other income (expense), net (22,541) (14,925) 15,655
--------- -------- --------
Income Before Income Taxes and
Extraordinary Item 244,987 101,393 234,532
Provision for Income Taxes 88,195 36,081 82,086
--------- -------- --------
Income Before Extraordinary Item 156,792 65,312 152,446
Extraordinary Loss on Early Redemption of
Debt, Net of Income Tax Benefit of $1,640 - (3,254) -
---------- -------- --------
Net Income $ 156,792 $ 62,058 $152,446
========== ======== ========
Basic Earnings Per Share
Income before extraordinary item $ 2.05 $ 0.65 $ 1.35
Extraordinary loss - (0.03) -
---------- -------- --------
Net income $ 2.05 $ 0.62 $ 1.35
========== ======== ========
Diluted Earnings Per Share
Income before extraordinary item $ 2.00 $ 0.65 $ 1.33
Extraordinary loss - (0.03) -
---------- ------- --------
Net income $ 2.00 $ 0.62 $ 1.33
========== ======== ========
Weighted Average Common Shares Outstanding 76,586 99,461 113,064
Weighted Average Common and Potential
Shares Outstanding 78,229 100,238 114,703
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Balance Sheets
September 30, October 2,
2000 1999
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Current assets
Cash and cash equivalents $ 244,907 $ 426,343
Investment securities, at market value 21,473 18,546
Accounts receivable, net of allowances for doubtful
accounts of $13,831 and $8,904 219,948 193,479
Current maturities of long-term notes and contracts
receivable, net of allowances 76,320 74,987
Inventories, net of allowances for obsolescence
of $24,304 and $23,901:
Raw materials 98,081 60,616
Work-in-process 4,593 4,902
Finished goods 44,315 51,094
---------- ----------
Total inventories 146,989 116,612
---------- ----------
Investments to fund liabilities to jackpot winners 27,939 27,702
Deferred income taxes 29,086 23,977
Assets held for sale - 42,292
Prepaid expenses and other 47,564 51,302
---------- ----------
Total Current Assets 814,226 975,240
---------- ----------
Long-term notes and contracts receivable,
net of allowances and current maturities 76,888 60,870
---------- ----------
Property, plant and equipment, at cost
Land 19,889 19,938
Buildings 75,891 76,050
Gaming operations equipment 87,918 87,499
Manufacturing machinery and equipment 121,512 114,912
Leasehold improvements 4,996 5,361
---------- ----------
Total 310,206 303,760
Less accumulated depreciation and amortization (143,297) (121,644)
---------- ----------
Property, plant and equipment, net 166,909 182,116
---------- ----------
Investments to fund liabilities to jackpot winners 229,726 235,230
Deferred income taxes 97,670 89,474
Intangible assets, net 143,738 152,036
Other assets 94,559 70,094
---------- ----------
Total Assets $1,623,716 $1,765,060
========== ==========
Consolidated Balance Sheets
September 30, October 2,
2000 1999
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes payable $ 4,621 $ 3,278
Accounts payable 76,387 55,705
Jackpot liabilities 55,942 64,061
Accrued employee benefit plan liabilities 31,425 23,746
Accrued interest 31,369 30,684
Other accrued liabilities 59,249 58,013
----------- ----------
Total Current Liabilities 258,993 235,487
Long-term notes payable, net of current maturities 991,507 990,436
Long-term jackpot liabilities 267,985 293,895
Other liabilities 8,646 3,024
----------- ----------
Total Liabilities 1,527,131 1,522,842
----------- ----------
Commitments and contingencies (See Note 13)
Stockholders' equity
Common stock, $.000625 par value; 320,000,000
shares authorized; 153,739,686 and 152,871,297
shares issued 96 96
Additional paid-in capital 278,825 261,941
Retained earnings 1,043,184 886,392
Treasury stock; 81,170,767 and 65,515,867 shares, at cost (1,215,707) (897,234)
Accumulated other comprehensive loss (9,813) (8,977)
----------- ----------
Total Stockholders' Equity 96,585 242,218
----------- ----------
Total Liabilities and Stockholders' Equity $ 1,623,716 $1,765,060
=========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
Years Ended
--------------------------------------
September 30, October 2, September 30,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $156,792 $ 62,058 $152,446
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 54,387 61,448 44,494
Amortization of discounts and deferred offering costs 2,457 879 -
Provision for bad debts 10,153 8,153 4,735
Provision for inventory obsolescence 16,001 19,185 9,173
Gain on investment securities and fixed assets (3,636) (4,876) (11,146)
Common stock awards 1,216 1,005 1,973
(Increase) decrease in assets, net of effects from
acquisitions of businesses:
Receivables (32,878) 17,257 8,585
Inventories (67,430) (32,403) (57,690)
Prepaid expenses and other (5,993) (21,867) (21,696)
Other assets (8,458) (8,864) 6,473
Net accrued and deferred income taxes, net of tax
benefit of employee stock plans (17,394) 38,165 (22,343)
Increase in accounts payable and accrued liabilities,
net of effects from acquisitions of businesses 44,610 13,481 6,187
Impairment of assets and restructuring charges 6 98,118 -
Extraordinary loss on debt retirement - 4,894 -
Earnings of unconsolidated affiliates (in excess of)
less than distributions (20,993) 4,806 (14,042)
Other - - (23)
-------- -------- --------
Total adjustments (27,952) 199,381 (45,320)
-------- -------- --------
Net cash provided by operating activities 128,840 261,439 107,126
-------- -------- --------
Consolidated Statements of Cash Flows
Years Ended
------------------------------------------
September 30, October 2, September 30,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Investing Activities
Cash advanced on loans receivable (25,327) - -
Payments received on loans receivable 3,519 - -
Investment in property, plant and equipment (18,460) (17,751) (16,828)
Proceeds from sale of property, plant and equipment 11,503 2,988 24,452
Purchase of investment securities (14,034) (12,510) (15,191)
Proceeds from sale of investment securities 12,758 11,957 12,528
Proceeds from investments to fund liabilities
to jackpot winners 30,469 194,957 40,286
Purchase of investments to fund liabilities
to jackpot winners (25,202) (43,589) (102,122)
Proceeds from sale of other assets 43,249 - -
Investment in unconsolidated affiliates (55) (26,229) (1,422)
Acquisition of businesses - (198,860) (181,764)
--------- ----------- ---------
Net cash provided by (used in)
investing activities 18,420 (89,037) (240,061)
--------- ----------- ---------
Cash Flows from Financing Activities
Proceeds from long-term debt 12,008 1,636,276 624,199
Principal payments on debt (10,408) (1,013,484) (430,018)
Payments on jackpot liabilities (111,251) (261,899) (40,286)
Collections from systems to fund jackpot liabilities 82,769 89,184 138,442
Proceeds from employee stock plans 13,287 3,693 7,484
Purchases of treasury stock (318,473) (361,419) (122,180)
Penalties paid on early retirement of debt - (4,658) -
Payments of cash dividends - (6,474) (13,594)
--------- ----------- ---------
Net cash provided by (used in)
financing activities (332,068) 81,219 164,047
--------- ----------- ---------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents 3,372 (2,691) (7,470)
--------- ----------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents (181,436) 250,930 23,642
Cash and Cash Equivalents at:
Beginning of Year 426,343 175,413 151,771
--------- ----------- ---------
End of Year $ 244,907 $ 426,343 $ 175,413
========= =========== =========
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended
----------------------------------------
September 30, October 2, September 30,
2000 1999 1998
- --------------------------------------------------------------------------------------
(Amounts in thousands)
Common Stock
Balance at beginning of year
152,871; 152,587; and 151,883 shares $ 96 $ 95 $ 95
Employee stock plans
869; 284; and 704 shares - 1 -
----------- --------- ---------
Balance at end of year
153,740 shares at 2000 $ 96 $ 96 $ 95
=========== ========= =========
Additional Paid-In Capital
Balance at beginning of year $ 261,941 $ 256,656 $ 243,950
Employee stock plans 13,287 3,710 7,484
Common stock awards 1,216 1,005 1,973
Tax benefit of employee stock plans 2,381 570 3,249
----------- --------- ---------
Balance at end of year $ 278,825 $ 261,941 $ 256,656
=========== ========= =========
Retained Earnings
Balance at beginning of year $ 886,392 $ 827,542 $ 688,545
Dividends declared - (3,208) (13,449)
Net income 156,792 62,058 152,446
----------- --------- ---------
Balance at end of year $ 1,043,184 $ 886,392 $ 827,542
=========== ========= =========
Treasury Stock
Balance at beginning of year $ (897,234) $(535,797) $(413,617)
Purchases of treasury stock (318,473) (361,437) (122,180)
----------- --------- ---------
Balance at end of year $(1,215,707) $(897,234) $(535,797)
=========== ========= =========
Accumulated Comprehensive Income (Loss) (a)
Balance at beginning of year $ (8,977) $ (7,220) $ 874
Other comprehensive loss $ (836) $ (1,757) $ (8,094)
----------- ---------- ---------
Balance at end of year $ (9,813) $ (8,977) $ (7,220)
=========== ========= =========
Summary of Total Comprehensive Income (a)
Net income $ 156,792 $ 62,058 $ 152,446
Other comprehensive loss $ (836) $ (1,757) $ (8,094)
----------- --------- ---------
Comprehensive income $ 155,956 $ 60,301 $ 144,352
=========== ========= =========
(a) All items of comprehensive income and other comprehensive income are displayed netof tax effects (see Note 15).
The accompanying notes are an integral part of these consolidated financial statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
International Game Technology (referred throughout these notes, together with
its consolidated subsidiaries where appropriate, as "IGT," "the Company," "we,"
"our" and "us") was incorporated in December 1980 to acquire the gaming licensee
and operating entity, IGT, and to facilitate our initial public offering. We
operate principally in two lines of business: the development, manufacturing,
marketing and distribution of gaming products "product sales" and the
development, marketing and operation of wide-area progressive systems and gaming
equipment leasing "gaming operations". Our revenues are generated domestically
in the US and Canada, and internationally in Australia, Europe, Japan, Latin
America, New Zealand, South Africa, and the United Kingdom.
Product Sales
IGT manufactures domestically a broad range of gaming machines, consisting of
traditional spinning reel slot machines, video gaming machines,
government-sponsored and other video gaming devices. For our domestic and
certain international markets, we offer hundreds of recognized game themes. We
typically sell our machines directly or through distributors to casino
operators, but may in certain circumstances finance the sale or lease of
equipment to the operator.
Gaming machines for the markets in Australia, Europe, Latin America and South
Africa are similar to the spinning reel and video games in North America.
Features differ in each market, but the games are generally multiple coin games
with random outcomes paid in coins returned to the customer. In some
jurisdictions, the machines pay out in the form of tickets, vouchers or tokens,
rather than coins. Gaming machines in Japan and the United Kingdom markets are
produced locally and differ substantially from domestic machines.
In addition to gaming machines, IGT develops and sells computerized casino
management systems which provide casino operators with slot and table game
accounting, player tracking and specialized bonusing capabilities. We also
develop and sell specialized proprietary systems to allow the lottery
authorities to monitor video lottery terminals. We derive revenue related to the
operation of these systems and collect license and franchise fees for the use of
the systems.
Gaming Operations
Approximately 5% of the domestic installed base of all gaming machines generate
recurring revenue including wide-area progressive systems and stand-alone
machines in which the manufacturer participates in the revenue from the machine
on a percentage or fee basis. Wide-area progressive systems are
electronically-linked, inter-casino systems that connect gaming machines to a
central computer, allowing the system to build a "progressive" jackpot with
every wager made throughout the system until a player hits a winning
combination. In the North American market, IGT estimates it holds more than a
70% share of the installed base of these machines.
We have developed and operated wide-area progressive systems since 1986. As of
September 30, 2000, IGT operated 149 such systems in 17 domestic jurisdictions
and one international location. We operate some of these systems under joint
marketing alliances, principally with Anchor Gaming (Anchor). The purpose of
these strategic alliances is to combine the game development efforts of other
companies with IGT's wide-area progressive system expertise. Wide-area
progressive systems are designed to increase gaming machine play for
participating casinos by giving players the opportunity to win larger or more
frequent jackpots than on machines not linked to progressive systems. Win (net
earnings to the operator) per machine on machines linked to progressive systems
are generally higher than on stand-alone machines.
Principles of Consolidation The consolidated financial statements include the
accounts of International Game Technology and all of its majority-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
Notes to Consolidated Financial Statements
Product Sales
IGT makes product sales for cash, on normal credit terms of 90 days or less, and
over longer term installments. Generally, sales are recorded when the products
are shipped and title passes to the customer.
Gaming Operations
The following table shows the revenues from gaming operations:
Years Ended
-------------------------------------------------
September 30, October 2, September 30,
2000 1999 1998
--------------------------------------------------------------------------
(Dollars in thousands)
Proprietary systems $ 355,943 $ 320,364 $ 318,499
Lease operations 45,071 32,700 28,600
---------- ---------- ---------
Total $ 401,014 $ 353,064 $ 347,099
========== ========== =========
Gaming operations revenues consist of revenues relating to the operation of the
proprietary systems, a share of the net gaming winnings from the operation of
machines at customer locations, and the lease and rental of gaming and video
lottery machines. IGT operates several proprietary systems in accordance with
joint venture agreements and accounts for this activity under the equity method.
IGT's portion of joint venture related income, net of expenses, is also included
in gaming operations revenue.
IGT's linked wide-area progressive systems are operated in 17 domestic
jurisdictions, including Nevada, New Jersey, and Native American markets, as
well as internationally in Iceland. Stand alone versions of some of the
MegaJackpots(TM) games are also operated in Colorado, Connecticut, Illinois,
Indiana, Louisiana, Nevada, Canada, and on cruise ships.
The operation of linked progressive systems varies among jurisdictions as a
result of different gaming regulations. In all jurisdictions, the casinos pay a
percentage of the handle to fund the progressive jackpot. Funding of the
progressive jackpot differs by jurisdiction but is generally administered by
IGT. Jackpots are currently paid in equal installments over a 20 to 26 year
period or winners can elect to receive the discounted value of the jackpot in
lieu of annual installments. Jackpots on some of our newer MegaJackpots(TM)
games are paid out at the time they are won. In Atlantic City, the progressive
jackpot fund is administered by a trust managed by representatives of the
participating casinos. The trust records a liability to IGT for an annual casino
licensing fee as well as an annual machine rental fee for each machine. In
Colorado, funding of progressive jackpots is administered by a separate fund
managed by IGT. Progressive system lease fees are paid to IGT from this fund. A
linked progressive system is also operated by a trust in Iowa. IGT derives
revenue based on trust profits.
Research and Development
Research and development costs are expensed as incurred. Research and
development performed for specific customers is charged to cost of product sales
when the related sale is recorded.
Cash and Cash Equivalents
Cash and cash equivalents includes operating cash and cash required for funding
progressive systems jackpot payments. Cash in excess of daily requirements is
generally invested in various marketable securities. If these securities have
original maturities of three months or less, they are considered cash
equivalents. Such investments are stated at cost, which approximates market.
Notes to Consolidated Financial Statements
Investment Securities
Our investment securities are classified as available-for-sale and stated at
market value. Unrealized gains and losses, net of income tax effects, are
excluded from income and reported as a component of accumulated other
comprehensive income. Market value is determined by the most recently traded
price of the security at the balance sheet date. Net realized gains or losses
are determined on the specific identification cost method.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Depreciation and Amortization
Depreciation and amortization are provided on the straight-line method over the
following useful lives:
Buildings 39 to 40 years
Gaming operations equipment 2 to 5 years
Manufacturing machinery and equipment 2 to 15 years
Leasehold improvements Term of lease
Excess of cost over net assets acquired 40 years
Maintenance and repairs are expensed as incurred. The costs of improvements are
capitalized. Gains or losses on the disposition of assets are included in
income.
Long-Lived Assets
We review the carrying amount of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In fiscal 1999, our review
of the recoverability of certain long-lived and intangible assets resulted in
charges to income for the estimated impairment of these assets (see Note 7).
Investments to Fund Liabilities to Jackpot Winners
These investments represent discounted US Treasury Securities purchased to meet
obligations for annual payments to progressive systems jackpot winners. We have
both the intent and ability to hold these investments to maturity and,
therefore, classify them as held-to-maturity. Accordingly, these investments are
stated at cost, adjusted for amortization of premiums and accretion of discounts
over the term of the security, using the interest method. Securities in this
portfolio have maturity dates through 2027. Certain events during fiscal 1999
prompted IGT to sell a portion of these investments prior to maturity (see Note
4).
Other Assets
Other assets are primarily comprised of investments in joint ventures which are
accounted for under the equity method and deferred offering costs related to
Senior Notes issued in May 1999 (see Note 8). Other assets also include deferred
royalties, deposits and certain investments.
Earnings Per Share
Earnings per share is computed based on the weighted average number of common
and potential shares outstanding.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Notes to Consolidated Financial Statements
Foreign Currency Translation
The functional currency of certain of IGT's international subsidiaries is the
local currency. For those subsidiaries, assets and liabilities are translated at
exchange rates in effect at the balance sheet date, and income and expense
accounts at average exchange rates during the year. Resulting translation
adjustments are recorded directly to accumulated other comprehensive income
within stockholders' equity. Gains and losses resulting from foreign currency
transactions are recorded in income. For subsidiaries whose functional currency
is the US dollar, gains and losses on non-US dollar denominated assets and
liabilities are recorded in income.
Derivatives
IGT uses derivative financial instruments to reduce our exposure resulting from
fluctuations in foreign exchange rates and interest rates. Derivative financial
instruments are used to minimize our net exposure, by currency, related to the
foreign currency denominated monetary assets and liabilities of our operations.
These gains and losses are included in income. From time to time, we may hedge
firm foreign currency commitments by entering into forward exchange contracts.
Gains and losses on these hedges are included as a component of the hedged
transaction when recorded. At times IGT may enter into interest rate swap
agreements to effectively manage variable interest rate fluctuations. Amounts
paid under these interest rate swap agreements are accrued as interest rates
change and are recognized over the life of the agreement as an adjustment to
interest expense. The counterparties to each of these agreements are major
commercial banks. We believe that losses related to credit risk are remote.
Recently Issued Accounting Standards
On June 30, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments and hedging activities and is effective for
the first quarter of our fiscal year ending September 29, 2001. We believe that
adoption of this statement will not have a material impact on our financial
condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 clarifies existing accounting principles related to revenue recognition in
financial statements. SAB 101 is effective for the fourth quarter of our fiscal
year 2001. We believe that the adoption of this statement will not have a
material impact on our financial condition or results of operations.
Reclassifications
Certain amounts in the comparative prior years' consolidated financial
statements have been reclassified to be consistent with the presentation used in
the current fiscal year.
Year End
IGT changed its fiscal year end to the Saturday closest to September 30,
beginning with the fiscal year ended October 2, 1999. Similarly, subsequent
quarters end on the Saturday closest to the last day of the quarter end month.
2. Acquisitions, Divestitures, and Subsequent Events
Acquisitions
In September 1999, we completed the purchase of Sodak, a South Dakota-based
distributor of casino gaming products and software systems to Native American
casino and gaming operators in the US. The purchase method of accounting for
business combinations was applied to the Sodak acquisition. Accordingly, the
aggregate purchase price of $198.9 million was allocated to the net assets of
$87.0 million based on estimated fair values of the tangible assets and
liabilities at the date of acquisition. The Miss Marquette riverboat, with its
associated real property and assets, was classified as an asset held for sale in
the purchase price and net assets of the Sodak acquisition. It was
Notes to Consolidated Financial Statements
subsequently sold for $43.0 million. The excess of the purchase price over the
net assets acquired totaled $111.9 million. This acquisition was funded
primarily by the issuance of Senior Notes in May 1999. Results of Sodak since
the closing of the acquisition are included in the results of operations.
The following unaudited pro forma financial information is presented as if the
Sodak acquisition had been made at the beginning of fiscal 1998:
October 2, September 30,
1999 1998
-----------------------------------------------------------------------
(Dollars in thousands)
Total revenues $963,437 $850,028
Income before extraordinary item 65,698 144,486
Net income 62,444 144,486
Earnings per share:
Basic $ 0.63 $ 1.28
Diluted $ 0.62 $ 1.26
In June 1999, we made an investment in Access Systems Pty., Limited (Access) of
Sydney, Australia. During the latter half of fiscal 1999 and the first quarter
of fiscal 2000, we owned a minority interest in Access. We also held options to
purchase additional shares and notes convertible into capital stock of Access.
We used the equity method of accounting for this investment. In December 1999,
notes receivable increased by $3.9 million as a result of converting our equity
interest in Access to a debt instrument.
In March 1998, we purchased Barcrest Limited (Barcrest), a Manchester,
England-based manufacturer and supplier of gaming related amusement devices, and
purchased certain assets of Olympic Amusements Pty. Limited (Olympic), a
manufacturer and supplier of electronic gaming machines, gaming systems and
other gaming equipment and services to the Australian gaming market. The
purchase method of accounting for business combinations was applied to the
Barcrest and Olympic acquisitions. The aggregate purchase price of $181.8
million was allocated to the net assets of $76.5 million based on estimated fair
values of the tangible assets, intangible assets and liabilities at the dates of
acquisition. The excess of the purchase price over the net assets acquired,
totaled $105.3 million (see Note 7). These acquisitions were funded primarily
with additional borrowings on our line of credit, as well as long-term
borrowings by our Australian subsidiary.
Divestitures
In July 2000, in a move to eliminate duplication within our operations in Japan,
we sold Barcrest KK, the Japanese subsidiary of Barcrest, for a gain of $3.2
million ($2.0 million net of tax). The net cash proceeds from the sale were $9.8
million and the net assets disposed of were $6.6 million. The purchaser is a
Japanese company engaged in the manufacture, development, and sale of pachinko
and pachisuro slot machines.
Subsequent Events
In October 2000, IGT began negotiations to acquire Silicon Gaming, Inc.
(Silicon). Silicon, headquartered in Palo Alto, California, designs and
manufactures a full line of innovative wagering products and holds an extensive
library of game applications. Under the terms of the proposed transaction, the
total consideration paid by IGT would be approximately $45.0 million. If a
definitive agreement is reached, completion of the business combination will be
conditioned upon regulatory approvals, Silicon shareholder approval and other
customary closing conditions.
Notes to Consolidated Financial Statements
3. Investment Securities
Available-for-sale investment securities consisted of the following:
Gross Unrealized
Net ---------------- Market
Cost Gains Losses Value
------------------------------------------------------------------
(Dollars in thousands)
September 30, 2000
US government obligations $10,010 $ - $ (122) $ 9,888
Equity securities 12,397 102 (914) 11,585
------- ---- -------- -------
Total investment securities $22,407 $102 $(1,036) $21,473
======= ==== ======= =======
October 2, 1999
US government obligations $10,010 $ - $ (60) $ 9,950
Equity securities 10,083 - (1,487) 8,596
------- ---- -------- -------
Total investment securities $20,093 $ - $(1,547) $18,546
======= ==== ======= =======
At September 30, 2000, debt securities had maturity dates ranging from five
months to 14 years.
Below is a summary of sales of available-for-sale securities for the years
ended:
September 30, October 2, September 30,
2000 1999 1998
-------------------------------------------------------------------------------
(Dollars in thousands)
Proceeds from sales $12,758 $11,956 $12,528
Gross realized gains 1,441 5,852 1,145
Gross realized losses 403 27 187
Permanent impairment loss recognized - 236 -
4. Investments to Fund Liabilities to Jackpot Winners
Held-to-maturity investments to fund liabilities to jackpot winners consisted of
the following:
Gross Unrealized
Amortized ---------------- Market
Cost Gains Losses Value
------------------------------------------------------------------------
(Dollars in thousands)
September 30, 2000
US government obligations $257,665 $13,584 $(4,006) $267,243
======== ======= ======= ========
October 2, 1999
US government obligations $262,932 $10,202 $(4,892) $268,242
======== ======= ======= ========
Federal legislation was passed in October 1998 permitting jackpot winners to
receive the discounted value of progressive jackpots won in lieu of annual
installments. For jackpots won prior to the effective date of the legislation,
the winner was able to make this election after July 1, 1999. Upon a winner's
election after July 1, 1999, investments held by IGT to fund the winner's
liability were sold to settle the liability. The offer for these past winners to
elect a single cash payment has now expired and we do not anticipate additional
sales of these held-to-maturity investments.
Notes to Consolidated Financial Statements
Since all proceeds from the sale of these securities were paid to jackpot
winners, the net realized gain was offset by an equal loss on the settlement of
winner liabilities. Below is a summary of sales of these securities for the
years ended:
September 30, October 2, September 30,
2000 1999 1998
------------------------------------------------------------------------
(Dollars in thousands
Proceeds from sales $3,020 $154,146 -
Gross realized gains 99 5,682 -
Gross realized losses 10 2,025 -
5. Notes and Contracts Receivable
IGT grants customers extended payment terms under contracts of sale. These
contracts are generally for terms of one to five years, with interest recognized
at prevailing rates, and are secured by the related equipment sold.
The following table represents the estimated future collections of notes and
contracts receivable, net of allowances, at September 30, 2000:
Fiscal Year Estimated Receipts
--------------------------------------------------------
(Dollars in thousands)
2001 $ 76,320
2002 40,996
2003 14,125
2004 4,159
2005 1,402
Thereafter 16,206
--------
$153,208
========
At September 30, 2000 and October 2, 1999, the following allowances for doubtful
notes and contracts were netted against current and long-term maturities:
September 30, October 2,
2000 1999
-----------------------------------------------------------
(Dollars in thousands)
Current $ 14,607 $ 14,157
Long-term 3,426 5,497
--------- ---------
$ 18,033 $ 19,654
========= =========
Occasionally, IGT has provided loans, other than for gaming equipment, to
customers. With the acquisition of Sodak and the restructuring of
CMS-International (CMS) (see Note 6), our portfolio of this type of loan has
increased. Included in total notes and contracts receivable were loans of $49.4
million at September 30, 2000 and $27.6 million at October 2, 1999. Allowances
for doubtful loans were $60,000 at September 30, 2000, and $58,000 at October
2,1999. These loans are generally for terms of one to five years with interest
at prevailing rates.
Notes to Consolidated Financial Statements
6. Concentrations of Credit Risk
The financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents and accounts,
contracts, and notes receivable. At September 30, 2000, we had bank deposits in
excess of insured limits of approximately $43.6 million.
Product sales and the resulting receivables are concentrated in specific
legalized gaming regions. We also distribute a portion of our products through
third party distributors resulting in significant distributor receivables. We
did not have sales to a single customer which exceeded 10% of revenues during
fiscal 2000, 1999 or 1998. Accounts, contracts, and notes receivable by region
as a percentage of total receivables at September 30, 2000 were as follows:
Domestic Region
Native American casinos 30%
Nevada 29%
Riverboats (greater Mississippi River area) 7%
Other US regions (individually less than 3%) 10%
-----
Total domestic 76%
-----
International Region
Europe 7%
Australia 6%
Latin America 5%
Other international (individually less than 3%) 6%
-----
Total international 24%
-----
Total 100%
=====
In September 1993, we sold our equity ownership interest in CMS to Summit
Casinos-Nevada, Inc., whose owners included senior management of CMS. During
fiscal 1999 we remained as guarantor on certain indebtedness of CMS, which at
October 2, 1999 had an aggregate outstanding balance of $14.4 million, including
principal and accrued interest. CMS was restructured in November 1999, at which
time we purchased the notes from the lender and restructured the terms with the
new owners. The revised notes call for monthly payments of principal and
interest and have a maturity date of December 31, 2008. The notes remain
collateralized by the respective casino properties. At September 30, 2000, the
outstanding balances of these notes totaled $13.9 million. At this time we do
not believe a reserve against these notes is necessary.
7. Intangible Assets and Restructuring
Intangible assets consisted of the following:
September 30, October 2,
2000 1999
- ----------------------------------------------------------------------------
(Dollars in thousands)
Intellectual property $ 1,650 $ 1,650
Excess of cost over net assets acquired 148,631 153,209
---------- ----------
150,281 154,859
Less accumulated amortization (6,543) (2,823)
---------- ----------
$ 143,738 $ 152,036
========== ==========
Notes to Consolidated Financial Statements
Impairment of assets and restructuring costs
In late fiscal 1999, due to difficulties experienced in assimilating products
and operational strategies, we determined it necessary to re-evaluate the
recoverability of intangible assets related to IGT-Australia's March 1998
acquisition of Olympic. We determined that the total unamortized balance of
intangible assets was impaired and recorded a charge of $86.8 million. In an
effort to return IGT-Australia to a profitable operation, we also developed a
restructuring plan and recorded a total of $6.0 million in restructuring costs,
composed of $4.0 million for inventory obsolescence and $2.0 million for asset
and facility redundancy costs. During fiscal 2000, we recorded additional
restructuring charges of $1.9 million predominantly related to our plan to
eliminate certain administrative and manufacturing positions in Australia. As of
September 30, 2000, 130 positions were eliminated resulting in payments of $2.3
million. Other restructuring costs of $1.1 million were paid during fiscal 2000.
In the fourth quarter of fiscal 1999, the government in Brazil rescinded the law
allowing gaming devices in bingo halls throughout this market. At that time, we
recorded impairment charges of $5.3 million relating to our assessment of the
recoverability of our inventories and receivables in Brazil. During fiscal 2000,
we received payments of $1.9 million for receivables and inventories previously
considered fully impaired.
8. Notes Payable
Notes payable consisted of the following:
September 30, October 2,
2000 1999
---------------------------------------------------------------------
(Dollars in thousands)
Senior notes, net of unamortized discount $991,507 $990,436
Credit facilities 4,621 3,278
-------- --------
Total 996,128 993,714
Less current maturities (4,621) (3,278)
-------- --------
Long-term notes payable, net of current
maturities $991,507 $990,436
======== ========
The following table represents the future fiscal year principal payments of our
notes payable at September 30, 2000:
Fiscal Year Principal Payments
--------------------------------------------------
(Dollars in thousands)
2001 $ 4,621
2002 -
2003 -
2004 400,000
2005 -
2006 and after 600,000
-----------
Total principal payments 1,004,621
Less unamortized discount (8,493)
-----------
Net notes payable $ 996,128
===========
Senior Notes
In May 1999, IGT completed the private placement of $1.0 billion in aggregate
principal amount of Senior Notes pursuant to rule 144A under the Securities Act
of 1933. The Senior Notes were issued in two tranches: $400 million aggregate
principal amount of 7.875% Senior Notes, due May 15, 2004, priced at 99.053%;
and $600 million
Notes to Consolidated Financial Statements
aggregate principal amount of 8.375% Senior Notes, due May 15, 2009, priced at
98.974%. In August 1999, we exchanged all outstanding Senior Notes for identical
registered notes. A portion of the proceeds was used to redeem previously
outstanding 7.84% Senior Notes due 2004, which resulted in a prepayment penalty
of $3.3 million (net of tax) reflected as an extraordinary item in fiscal 1999.
Additionally, we repaid outstanding borrowings under both our US and Australian
credit facilities. The remaining net proceeds from the offering were used to
fund our acquisition of Sodak, working capital, and share repurchases.
Credit Facilities
Our domestic and foreign borrowing facilities totaled $273.0 million at
September 30, 2000. Of this amount, $4.6 million was drawn, $2.8 million was
reserved for letters of credit, and the remaining $265.6 million was available.
We are required to comply with certain covenants contained in these agreements
which, among other things, limit financial commitments we may make without the
written consent of the lenders and require the maintenance of certain financial
ratios. At September 30, 2000, we were in compliance with all applicable
covenants.
9. Commitments
We lease certain of our facilities and equipment under various agreements for
periods through the year 2006. The following table shows the future minimum
rental payments required under these operating leases which have initial or
remaining non-cancelable lease terms in excess of one year as of September 30,
2000.
Operating
Fiscal Year Leases
------------------------------------------
(Dollars in thousands)
2001 $ 5,637
2002 3,489
2003 1,558
2004 638
2005 194
2006 and after 198
--------
Total minimum payments $11,714
========
Certain of the facility leases provide that we pay utilities, maintenance,
property taxes, and certain other operating expenses applicable to the leased
property, including liability and property damage insurance. The lease term for
our previous manufacturing facility in Reno, Nevada extends through February
2003 and the related payments are included in the schedule above. We have sublet
approximately half of this facility to third parties. The terms of the sublease
agreements call for receipts of $2.3 million for the period of October 2000
through February 2003. We previously accrued for the future gross lease payments
of these abandoned buildings, net of anticipated sublease receipts, and do not
anticipate additional impact on our results of operations.
Our total rental expense was approximately $5.9 million for fiscal 2000, $6.0
million for fiscal 1999 and $5.1 million for fiscal 1998.
Notes to Consolidated Financial Statements
10. Jackpot Liabilities
IGT receives a percentage of the amounts wagered or fees for machine rental and
service from the linked wide-area progressive systems to fund the related
jackpot payments. Winners may elect to receive a single payment of the
discounted value of the jackpot won or annual installments. Equal annual
installments are paid over 20 to 26 years without interest. The following
schedule sets forth the future gross payments due to jackpot winners under these
systems at September 30, 2000:
Fiscal Year Payments
-----------------------------------------
(Dollars in thousands)
2001 $ 30,251
2002 27,939
2003 27,896
2004 27,769
2005 27,769
2006 and after 271,029
----------
$ 412,653
==========
Jackpot liabilities include discounted payments due to winners for jackpots won,
as well as amounts accrued for jackpots not yet won that are contractual
obligations of IGT. Jackpot liabilities consist of the following:
September 30, October 2,
2000 1999
--------------------------------------------------------------------------
(Dollars in thousands)
Gross payments due to jackpot winners $ 412,653 $ 431,661
Unamortized discount on payments to jackpot
winners (151,472) (164,481)
Accrual for jackpots not yet won 62,746 90,776
---------- ----------
Total jackpot liabilities 323,927 357,956
Less current liabilities (55,942) (64,061)
----------- ----------
Long-term jackpot liabilities $ 267,985 $ 293,895
========== ==========
We amortize the discounts on the jackpot liabilities to interest expense. During
fiscal 2000, we recorded interest expense on jackpot liabilities of $17.3
million, $25.9 million in fiscal 1999, and $25.6 million in fiscal 1998. We were
required to maintain cash and investments relating to systems liabilities
totaling $38.8 million at September 30, 2000 and $54.6 million at October 2,
1999.
11. Financial Instruments
IGT uses derivative financial instruments for the purpose of reducing its
exposure to adverse fluctuations in foreign exchange rates. While these hedging
instruments are subject to fluctuations in value, such fluctuations are
generally offset by the value of the underlying exposures being hedged. IGT is
not a party to leveraged derivatives and does not hold or issue financial
instruments for speculative purposes.
Foreign Currency Management
We routinely use forward exchange contracts to hedge our net exposures, by
currency, related to the monetary assets and liabilities of our operations
denominated in non-functional currency. The primary business objective of this
hedging program is to minimize the gains and losses resulting from exchange rate
changes. At September 30, 2000, IGT had net foreign currency exposure of $58.0
million hedged with $63.5 million in currency forward contracts. At October 2,
1999, we had net foreign currency exposure of $41.7 million, of which $38.8
million was hedged with
Notes to Consolidated Financial Statements
currency forward contracts. In addition, from time to time, we may enter into
forward exchange contracts to establish with certainty the US dollar amount of
future firm commitments denominated in a foreign currency.
Interest Rate Management
During fiscal 1999, we effectively converted variable rate debt in Australia to
fixed rate debt using an interest rate swap agreement with three counterparties.
These swaps were required under our Australian facility agreement and had
quarterly interest settlement dates. In conjunction with the payoff and closure
of this Australian facility agreement in May 1999, these swaps were settled with
no gain/loss recorded.
Other Off-Balance Sheet Instruments
In the normal course of business, IGT is a party to financial instruments with
off-balance-sheet risk such as performance bonds and other guarantees, which are
not reflected in the accompanying balance sheets. We had performance bonds
outstanding that related to our operation of two lottery systems and a gaming
machine route totaling $2.2 million at September 30, 2000 and $2.3 million at
October 2, 1999. IGT is liable to reimburse the bond issuer in the event the
bond is exercised as a result of our non-performance. We had outstanding letters
of credit, issued under our line of credit (see Note 8), totaling $2.8 million
at September 30, 2000 and $3.2 million at October 2, 1999, which were issued to
insure payment by IGT to certain vendors and governmental agencies. Management
does not expect any material losses to result from these off-balance-sheet
instruments.
At September 30, 2000 and October 2, 1999, we had no foreign currency contracts
to hedge firm commitments. At September 30, 1998, IGT had foreign currency
contracts to hedge firm commitments in the amount of $1.2 million in Australia.
The gain or loss on these instruments was deferred and recognized in income when
the hedged transaction occurred. At September 30, 1998, the unrealized
gains/losses on these instruments were immaterial to the consolidated financial
statements.
The following table presents the carrying amount and estimated fair value of
IGT's financial instruments:
September 30, October 2,
2000 1999
---------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Cash and cash equivalents $244,907 $244,907 $426,343 $426,343
Investment securities 21,473 21,473 18,546 18,546
Notes and contracts receivable 153,208 139,086 135,857 125,581
Investments to fund jackpot payments 257,665 267,243 262,932 268,242
Liabilities
Jackpot liabilities 323,927 333,505 357,956 363,267
Notes payable obligations 996,128 981,141 993,714 955,778
Foreign currency contracts
On balance sheet 63,467 61,481 38,813 39,860
Off balance sheet - - - -
The carrying value of cash and cash equivalents approximates fair value because
of the short-term maturity of those instruments. The estimated fair value of
investment securities and investments to fund jackpot payments are based on
quoted market prices. The fair value of our notes and contracts receivable is
estimated by discounting the future cash flows using interest rates determined
by management to reflect the credit risk and remaining maturities of the related
notes and contracts. The estimated fair value of jackpot liabilities is based on
quoted market prices of investments that will be used to fund these liabilities.
The estimated fair value of the registered Senior Notes is based on quoted
market prices. The carrying value of the credit facilities included in notes
payable approximates fair value.
Notes to Consolidated Financial Statements
The estimated fair value of foreign currency contracts is based on quoted market
prices for an instrument with similar terms.
12. Earnings Per Share
The following table shows the reconciliation of basic earnings per share (EPS)
to diluted EPS for income before extraordinary item as of and for the years
ended:
September 30, October 2, September 30,
2000 1999 1998
--------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Income before extraordinary item $156,792 $ 65,312 $152,446
======== ======== ========
Weighted average common shares outstanding 76,586 99,461 113,064
Dilutive effect of stock options outstanding 1,643 777 1,639
-------- -------- ---------
Weighted average common and potential
shares outstanding 78,229 100,238 114,703
======== ======== =========
Basic earnings per share $ 2.05 $ 0.65 $ 1.35
Diluted earnings per share $ 2.00 $ 0.65 $ 1.33
Number of common shares excluded from
diluted EPS because option exercise price
was greater than average market price 358 1,300 159
Stock Repurchase Plan
A stock repurchase plan was originally authorized by our Board of Directors in
October 1990. As of November 25, 2000, the remaining share repurchase
authorization, as amended, totaled 10.8 million additional shares. During fiscal
2000, we repurchased 15.7 million shares for an aggregate purchase price of
$318.5 million, including 11.0 million shares at $21 per share pursuant to an
issuer-tender offer. During fiscal 1999, we repurchased 21.8 million shares for
an aggregate purchase price of $361.4 million. During fiscal 1998, we
repurchased 5.5 million shares for an aggregate purchase price of $122.2
million.
13. Contingencies
IGT has been named in and has brought lawsuits in the normal course of business.
We do not expect the outcome of these suits, including the lawsuits described
below, to have a material adverse effect on our financial position or results of
future operations.
Ahern
Along with a number of other public gaming corporations, IGT is a defendant in
three class action lawsuits: one filed in the United States District Court of
Nevada, Southern Division, entitled Larry Schreier v. Caesar's World, Inc., et
al, and two filed in the United States District Court of Florida, Orlando
Division, entitled Poulos v. Caesar's World, Inc., et al. and Ahern v. Caesar's
World, Inc., et al., which have been consolidated into a single action. The
Court granted the defendants' motion to transfer venue of the consolidated
action to Las Vegas. The actions allege that the defendants have engaged in
fraudulent and misleading conduct by inducing people to play video poker
machines and electronic slot machines, based on false beliefs concerning how the
machines operate and the extent to which there is an opportunity to win on a
given play. The amended complaint alleges that the defendants' acts constitute
violations of the Racketeer Influenced and Corrupt Organizations Act, and also
give rise to claims for common law fraud and unjust enrichment, and seeks
compensatory, special, consequential, incidental and punitive damages of several
billion dollars. In December 1997, the Court denied the motions that would have
dismissed the Consolidated Amended Complaint or that would have stayed the
action pending Nevada gaming regulatory action. The defendants filed their
Notes to Consolidated Financial Statements
consolidated answer to the Consolidated Amended Complaint on February 11, 1998.
At this time, motions concerning class certification are pending before the
Court.
WMS
Under a resolution of matters reached in December 1999, all previously initiated
lawsuits involving the infringement of our Telnaes patent by WMS Gaming, Inc.
(WMS) were dismissed. WMS agreed to refrain from making, using, selling or
offering for sale any machine that infringes the Telnaes patent until February
24, 2002 when the Telnaes patent expires. IGT received $27.0 million in the
settlement that was included in other income in fiscal 2000, as well as $1.7
million in fees related to certain WMS operations previously conducted under
license from IGT.
On October 28, 1999, IGT filed a complaint in the United States District Court,
District of Nevada (Las Vegas) against WMS and three other defendants, including
Silicon, alleging infringement of a patent covering video gaming machines that
use a combination of push buttons on a panel and touch screens to perform the
same functions in the play of the game (the `397 Patent, entitled Gaming Machine
and Method Using Touch Screen). Subsequently, IGT's complaint was amended to
include only WMS and Silicon. In response, WMS filed its answer and counterclaim
on February 15, 2000. The counterclaim alleged, among other things, that IGT
engaged in unlawful conduct under the federal (the Sherman and Clayton Acts) and
state (the Nevada Unfair Trade Practices Act) antitrust laws and that IGT
tortuously interfered with WMS' contractual relationships and prospective
business advantage. WMS sought damages, including punitive damages of at least
$100 million in connection with the tortuous interference claim, declaratory and
injunctive relief. Silicon also filed a counterclaim asserting patent
invalidity. IGT and WMS executed a settlement agreement resolving all
outstanding claims in September 2000. The suit between IGT and Silicon is in the
early stages of discovery and no trial date has been set.
14. Income Taxes
SFAS No. 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred income taxes reflect the net tax
effects of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. We determine the
net current and noncurrent deferred tax assets or liabilities separately for
federal, state, and foreign jurisdictions.
The effective income tax rates differ from the statutory US federal income tax
rates as follows for the years ended:
September 30, October 2, September 30,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Taxes at federal statutory rate $85,745 35.0% $35,488 35.0% $ 82,086 35.0%
Foreign subsidiaries tax 2,410 0.9 3,657 3.6 591 0.3
State income tax, net 5,109 2.3 2,670 2.6 2,049 0.9
Research and development credits (750) (0.3) (2,192) (2.2) (247) (0.1)
Valuation allowance, IGT-Australia 2,063 0.7 6,067 6.0 - 0.0
Expiration of tax contingencies (850) (0.3) (5,344) (5.3) (1,163) (0.5)
Adjustment to estimated income tax accruals (3,010) (1.2) (3,306) (3.3) 272 0.1
Other, net (2,522) (1.1) (959) (0.8) (1,502) (0.7)
------- ---- ------- ---- -------- ----
Provision for income taxes $88,195 36.0% $36,081 35.6% $ 82,086 35.0%
======= ==== ======= ==== ======== ====
Notes to Consolidated Financial Statements
Components of our provision for income taxes were as follows for the years
ended:
September 30, October 2, September 30,
2000 1999 1998
------------------------------------------------------------------------
(Dollars in thousands)
Current
Federal $80,893 $(11,602) $106,431
State 5,645 358 4,657
Foreign 4,478 9,118 2,922
------- -------- --------
Total current 91,016 (2,126) 114,010
------- -------- --------
Deferred
Federal (2,270) 30,761 (30,862)
State 222 1,566 (2,149)
Foreign (773) 5,880 1,087
------- -------- --------
Total deferred (2,821) 38,207 (31,924)
------- -------- --------
Provision for income taxes $88,195 $ 36,081 $ 82,086
======= ======== ========
Significant components of IGT's deferred tax assets and liabilities are as
follows:
September 30, October 2,
2000 1999
-----------------------------------------------------------------------------
(Dollars in thousands)
Current deferred tax assets
Reserves not currently deductible $ 22,228 $ 18,819
Unrealized loss on currency translation
adjustments 4,582 -
Foreign subsidiaries 652 883
Unrealized loss on investment securities 327 542
Other 1,297 3,733
-------- --------
Net current deferred tax asset 29,086 23,977
-------- --------
Non-current deferred tax assets
Reserves not currently deductible 566 824
Reserve differential for gaming activities 69,869 64,669
Foreign subsidiaries 8,268 6,161
State income taxes 4,932 3,349
Amortization of goodwill 30,157 28,380
Other 1,246 3,111
Non-current deferred tax liabilities
Difference between book and tax basis of property (4,036) (7,027)
Amortization of goodwill (2,137) (1,599)
Other (3,065) (2,327)
-------- --------
Total net non-current deferred tax asset 105,800 95,541
Valuation allowance (a) (8,130) (6,067)
-------- --------
Net non-current deferred tax asset 97,670 89,474
-------- --------
Net deferred tax asset $126,756 $113,451
======== ========
(a) Our valuation allowance relates to the uncertainty of the realization
of certain deferred tax assets for IGT-Australia.
Notes to Consolidated Financial Statements
15. Other Comprehensive Income (Loss)
The components of IGT's other comprehensive income (loss) are as follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended September 30, 2000
Unrealized holding gains (losses) arising during period $ 1,651 $ (578) $ 1,073
Reclassification adjustment to net income (1,038) 364 (674)
-------- ------ -------
Net unrealized gains (losses) 613 (214) 399
Foreign currency translation adjustments (1,900) 665 (1,235)
-------- ------ -------
Other comprehensive income (loss) $ (1,287) $ 451 $ (836)
======== ====== =======
Year ended October 2, 1999
Unrealized holding gains (losses) arising during period $ 1,989 $ (696) $ 1,293
Reclassification adjustment to net income (5,589) 1,956 (3,633)
-------- ------ -------
Net unrealized gains (losses) (3,600) 1,260 (2,340)
Foreign currency translation adjustments 897 (314) 583
-------- ------ -------
Other comprehensive income (loss) $ (2,703) $ 946 $(1,757)
======== ====== =======
Year ended September 30, 1998
Unrealized holding gains (losses) arising during period $ 1,747 $ (612) $ 1,135
Reclassification adjustment to net income (959) 336 (623)
-------- ------ -------
Net unrealized gains (losses) 788 (276) 512
Foreign currency translation adjustments (13,240) 4,634 (8,606)
-------- ------ -------
Other comprehensive income (loss) $(12,452) $4,358 $(8,094)
======== ====== =======
The components of our accumulated other comprehensive income (loss) are as
follows:
Unrealized Foreign Accumulated Other
Gains (Losses) Currency Comprehensive
on securities Translation Loss
--------------------------------------------
Balance at September 30, 1998 $ 1,334 $(8,554) $(7,220)
Current-period change (2,340) 583 (1,757)
------- ------- -------
Balance at October 2, 1999 (1,006) (7,971) (8,977)
Current-period change 399 (1,235) (836)
------- ------- -------
Balance at September 30, 2000 $ (607) $(9,206) $(9,813)
======= ======= =======
Notes to Consolidated Financial Statements
16. Employee Benefit Plans
Employee Incentive Plans
IGT provides the following employee incentive plans: profit sharing and 401(k)
plan, cash sharing, management bonus, and non-qualified deferred compensation.
Total annual contributions from operating profits for all plans were $38.6
million in fiscal 2000, $27.1 million in fiscal 1999 and $26.5 million in fiscal
1998.
The profit sharing and 401(k) plan was adopted for IGT employees working in the
US. IGT matches 75% of an employee's contributions up to $1,000. This allows for
maximum annual company matching contributions of $750 to each employee's
account. Participants are 100% vested in their contributions and IGT's matching
contributions. Additionally, IGT shares a portion of its' profits with eligible
employees. These profit sharing contributions vest over a seven year period of
employment.
The cash sharing plan is distributed semi-annually in May and November to all
non IGT-Australia and IGT-Japan employees. The management bonuses are paid out
annually to key employees throughout the Company.
IGT implemented a non-qualified deferred compensation plan in September 1999 to
provide an unfunded incentive compensation arrangement for eligible management
and highly compensated employees. Participants may elect to defer up to 50% of
their annual base salary, 50% of cash sharing, 50% of discretionary management
bonus and 50% of commissions with a minimum deferral of $2,000. Distributions
can be paid out as short-term payments or at retirement. Retirement benefits can
be paid out as a lump sum or in annual installments over a term of up to 15
years.
Stock-Based Compensation Plans
IGT has three stock-based compensation plans, which are described below.
Employee Stock Purchase Plan
In 1987, IGT adopted a Qualified Employee Stock Purchase Plan. Under this Plan,
each eligible employee may be granted an option to purchase a specific number of
shares of IGT's common stock. The term of each option is 12 months, and the
exercise date is the last day of the option period. Employees who have completed
90 days of service with IGT are eligible. Highly compensated employees receiving
more than $80,000 in annual compensation were excluded from participating in the
Plan in prior years. In March 1999, the shareholders approved an amendment to
the Plan to allow highly compensated employees to participate in the Plan.
Employees who are 5% or more shareholders and employees of certain subsidiaries
are excluded.
An aggregate of 2.4 million shares may be made available under this plan.
Employees may participate in this plan through payroll deductions up to a
maximum of 10% of their base pay. The option price is equal to the lesser of 85%
of the fair market value of the common stock on the date of grant or on the date
of exercise. At September 30, 2000, there were 484,000 shares available under
this plan.
In January 2000, 300,000 shares of common stock were made available to the
Barcrest Savings Related Share Option Scheme (ShareSave). Each year employees
may sign up for ShareSave and must elect a contract that will vest over three,
five, or seven years. Employees may contribute up to (pound)3,000 annually. At
September 30, 2000 there were 275,000 shares available under this plan.
Restricted Stock Awards
In March 1996, 600,000 shares were issued to six employees at a price of $.01
per share. In February 1997, IGT amended the 1993 Stock Option Plan to permit
the grant of restricted stock awards of a fixed number of shares to participants
determined by IGT's Board of Directors. In May 1997, 200,000 shares were awarded
to four employees. IGT has the option to repurchase the unvested shares issued
to the employees at $.01 per share if the employees terminate employment with
IGT before the shares have vested. Restricted stock awarded to a participant may
not be
Notes to Consolidated Financial Statements
voluntarily or involuntarily sold, assigned, transferred, pledged or encumbered
during the restricted period. The shares vest in increments over a five year
period.
No shares were awarded to participants in fiscal year 2000. Shares awarded to
participants in fiscal 1999 and 1998 totaled 50,000 and 10,000, at a price of
$.01 per share. The compensation expense that has been charged against income
for the restricted stock award plan totaled $1.2 million, $1.0 million and $2.0
million for fiscal 2000, 1999 and 1998.
Stock Option Plans
In 1981, IGT adopted a Stock Option Plan where non-qualified and incentive stock
options may be granted to domestic and foreign employees. Under this Plan, there
were 27.1 million shares available for grant. The Plan expired in December 1996.
In 1993, IGT adopted an additional Stock Option Plan which permits non-qualified
and incentive stock option awards for up to 5.0 million shares and additional
non-qualified stock option awards to non-employee directors for up to 250,000
shares. In March of 1999, shareholders approved an increase in the number of
awards permitted under the 1993 plan to 8.5 million shares.
Options have been granted at fair market value on the date of grant and, except
for non-employee director options, typically vest ratably over five years and
expire 10 years subsequent to the grant.
At September 30, 2000, options to purchase 3.2 million shares were available for
grant under the plans.
Number Weighted Average
of Shares Exercise Price
-------------------------------------------------------------------
Outstanding at September 30, 1997 5,556,737 $14.56
Granted 809,617 $23.30
Forfeited or expired (170,984) $17.63
Exercised (617,742) $10.27
----------
Outstanding at September 30, 1998 5,577,628 $16.19
Granted 500,499 $17.83
Forfeited or expired (280,822) $17.57
Exercised (179,636) $20.09
----------
Outstanding at October 2, 1999 5,617,669 $16.43
Granted 456,208 $21.98
Forfeited or expired (236,767) $19.99
Exercised (718,485) $15.76
----------
Outstanding at September 30, 2000 5,118,625 $16.85
==========
Options exercisable at:
September 30, 2000 3,341,790 $15.44
October 2, 1999 3,217,047 $15.14
September 30, 1998 2,540,732 $14.25
Notes to Consolidated Financial Statements
The following table summarizes information for stock options outstanding and
exercisable at September 30, 2000 in order to assess the number and timing of
shares that may be issued and the cash that may be received as a result of
options exercised:
Outstanding Exercisable
------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------- ------------- ---------------- -------------- ----------- --------------
$ 7.8750 - $13.2500 1,969,119 5.2 $12.97 1,832,264 $12.99
13.6250 - 15.5000 619,540 6.1 15.26 518,204 15.37
15.6250 - 18.8750 1,218,283 7.4 17.90 388,186 17.73
19.0000 - 30.3125 1,311,683 7.3 22.47 603,136 21.46
--------- ---------
$ 7.8750 - $30.3125 5,118,625 6.4 $16.85 3,341,790 $15.44
========= =========
Valuation of Stock-Based Compensation Plans
IGT adopted SFAS No. 123,"Accounting for Stock-Based Compensation" on October 1,
1996. As permitted by SFAS No. 123, the Company continues to apply Accounting
Principles Board Opinion No. 25 to its stock-based compensation. Accordingly, no
compensation expense has been recognized for the stock option and employee stock
purchase plans. SFAS No. 123 requires compensation expense to be measured based
on the fair value of the equity instrument awarded.
If compensation expense for IGT's three stock-based compensation plans had been
determined in accordance with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts shown below
for the years ended:
September 30, October 2, September 30,
2000 1999 1998
---------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Net income
As reported $156,792 $62,058 $152,446
Pro forma 153,495 57,793 146,948
Basic earnings per share
As reported $ 2.05 $ 0.62 $ 1.35
Pro forma 2.00 0.58 1.30
Diluted earnings per share
As reported $ 2.00 $ 0.62 $ 1.33
Pro forma 1.96 0.58 1.28
Weighted average fair value of options
granted during the year $ 10.06 $ 7.76 $ 8.27
Weighted average fair value of restricted stock
awards granted during the year $ - $ 17.82 $ 23.75
The fair value for stock-based compensation was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2000, 1999 and 1998: interest rates (zero-coupon US government
issues with an average remaining life of 1.90 years) of 6.5%, 5.5% and 5.6%;
dividend yields of .0%, .14% and .47%; volatility factors of the expected market
price of IGT's common stock of .43, .45 and .35; weighted-average expected life
of stock options of 1.90 years and an expected life of 1.0 years for employee
stock purchases.
Notes to Consolidated Financial Statements
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
IGT's employee stock based compensation has characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in our opinion,
the existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock based compensation.
17. Related Party Transactions
Joint Ventures
We operate certain MegaJackpots(TM) systems under joint marketing alliances with
various gaming or gaming related companies. Activities of these alliances
include placement of progressive system and other participation games and
pursuit of video lottery opportunities. Additionally, IGT-UK designs games under
a joint venture agreement with its main European distributor. We own a 50% share
in each of these joint ventures.
The following is a table of our transactions with joint ventures as of and for
the years ended:
September 30, October 2, September 30,
2000 1999 1998
------------------------------------------------------------------------------
(Dollars in thousands)
Net revenues recognized $109,428 $78,270 $65,181
Asset and expense transfers 68,273 27,253 45,390
Capital contributions - 22,275 1,422
Accounts receivable balance 5,007 29,700 6,902
Largest amount of indebtedness
outstanding at anytime during the year 9,615 29,700 25,513
We apply the equity method of accounting to the joint ventures. The following is
summarized financial information from the Spin for Cash Wide Area Progressive
Joint Venture with Anchor Gaming (the "Anchor joint venture"), our largest joint
venture partner, as of and for the years ended:
September 30, October 2, September 30,
2000 1999 1998
---------------------------------------------------------------------
(Dollars in thousands)
Revenues $375,379 $293,460 $246,851
Expenses 168,716 145,572 117,294
Operating income 206,663 147,888 129,557
Net income 211,932 149,958 130,979
Total assets $253,064 $199,943 $171,742
Total liabilities 112,311 123,133 107,815
Total equity 140,753 76,810 63,927
Notes to Consolidated Financial Statements
Other Related Parties
A member of our Board of Directors was also a director and officer of the parent
company of additional Nevada gaming businesses. In Iowa, our progressive jackpot
systems are administered by a trust that we manage from which net profits are
transferred to IGT. We recorded the following transactions from these related
parties as of and for the years ended:
September 30, October 2, September 30,
2000 1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands)
Revenues recognized $10,289 $20,748 $19,813
Contracts and accounts receivable balance 1,067 3,685 1,307
Largest amount of indebtedness
outstanding at any time during the year 3,704 4,562 2,047
18. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not reflected in the
consolidated statements of cash flows.
We manufacture gaming machines which are used on our proprietary systems and are
leased to customers under operating leases. Transfers between inventory and
fixed assets resulted in an increase to property, plant and equipment of $15.6
million in fiscal 2000, $32.9 million in fiscal 1999 and $17.3 million in fiscal
1998.
Dividends declared, but not yet paid, totaled $3.3 million at September 30,
1998.
The tax benefit of stock options and the employee stock purchase plan totaled
$2.4 million in fiscal 2000, $570,000 in fiscal 1999 and $ 3.2 million in fiscal
1998.
Payments of interest were $99.3 million in fiscal 2000, $42.6 million in fiscal
1999 and $41.2 million in fiscal 1998. Payments for income taxes were $107.2
million in fiscal 2000, $28.0 million in fiscal 1999 and $101.2 million in
fiscal 1998.
In conjunction with acquisitions of businesses during fiscal 1999 (see Note 2),
the fair value of assets acquired totaled $130.9 million and the fair value of
liabilities assumed totaled $43.9 million. In conjunction with acquisitions of
businesses during fiscal 1998, the fair value of assets acquired totaled $100.1
million and the fair value of liabilities assumed totaled $23.6 million.
Notes to Consolidated Financial Statements
19. Business Segments
IGT operates principally in two lines of business: the development,
manufacturing, marketing and distribution of gaming products, which we refer to
as "Product Sales," and the development, marketing and operation of wide-area
progressive systems and gaming equipment leasing, which we refer to as "Gaming
Operations." The table below presents information as to our operations by these
lines of business as of and for the years ended:
September 30, October 2, September 30,
2000 1999 1998
-------------------------------------------------------------------------
(Dollars in thousands)
Revenues
Product sales $ 603,381 $ 576,598 $ 477,024
Gaming operations 401,014 353,064 347,099
---------- ---------- ----------
Total $1,004,395 $ 929,662 $ 824,123
========== ========== ==========
Operating Profit (Loss)
Product sales $ 95,549 $ (2,495) $ 121,192
Gaming operations 190,852 144,384 133,943
---------- ---------- ----------
Total 286,401 141,889 255,135
---------- ---------- ----------
Other non-allocated expense,
including interest (41,414) (40,496) (20,603)
---------- ---------- ----------
Income Before Income Taxes and
Extraordinary Item $ 244,987 $ 101,393 $ 234,532
========== ========== ==========
Depreciation and Amortization
Product sales $ 5,294 $ 5,681 $ 4,816
Gaming operations 28,196 31,812 21,043
Corporate 20,897 23,955 18,635
---------- ---------- ----------
Total $ 54,387 $ 61,448 $ 44,494
========== ========== ==========
Identifiable Assets
Product sales $ 690,219 $ 700,684 $ 638,618
Gaming operations 651,070 594,964 754,849
Corporate 282,427 469,412 150,161
---------- ---------- ----------
Total $1,623,716 $1,765,060 $1,543,628
========== ========== ==========
Additions to Long-Lived Assets
Product sales $ 6,670 $ 6,591 $ 4,013
Gaming operations 34,765 48,641 35,789
Corporate 10,009 10,367 11,084
---------- ---------- ----------
Total $ 51,444 $ 65,599 $ 50,886
========== ========== ==========
Notes to Consolidated Financial Statements
The table below presents information as to our operations by geographical
regions as of and for the years ended:
September 30, October 2, September 30,
2000 1999 1998
--------------------------------------------------------------------------
(Dollars in thousands)
Revenues
Domestic
Unaffiliated customers $ 764,035 $ 666,685 $ 634,695
Inter-area transfers 87,082 39,395 36,809
International
Unaffiliated customers 240,360 262,977 189,428
Inter-area transfers 8,107 10,935 7,023
Eliminations (95,189) (50,330) (43,832)
---------- ---------- ----------
Total $1,004,395 $ 929,662 $ 824,123
========== ========== ==========
Identifiable Assets
Domestic $1,434,062 $1,528,934 $1,235,868
International 189,654 236,126 307,760
---------- ---------- ----------
Total $1,623,716 $1,765,060 $1,543,628
========== ========== ==========
Additions to Long-Lived Assets
Domestic $ 45,869 $ 58,137 $ 46,318
International 5,575 7,462 4,568
--------- ---------- ----------
Total $ 51,444 $ 65,599 $ 50,886
========== ========== ==========
On a consolidated basis we do not recognize intersegment revenues or expenses
upon the transfer of gaming products between subsidiaries. Operating profit is
revenue and interest income related to investments to fund jackpot liabilities,
less cost of sales and operating expenses, including related depreciation and
amortization, provisions for bad debts, interest expense, and an allocated
portion of selling, general and administrative and research and development
expenses. Other expense not allocated to an operating segment includes interest
expense, interest income and gain (loss) on sale of assets.
Notes to Consolidated Financial Statements
20. Selected Quarterly Financial Data (Unaudited)
First Qtr Second Qtr Third Qtr Fourth Qtr
-----------------------------------------------------------------------------------
(Dollars in thousands, except per share amount and stock prices)
2000
Total revenues $206,517 $218,053 $263,670 $316,155
Gross profit 105,006 109,909 131,928 156,996
Income from operations 49,636 54,163 72,167 91,562
Net income 42,404 24,760 37,627 52,001
Diluted earnings per share $ 0.49 $ 0.33 $ 0.51 $ 0.70
Stock price
High $20.6250 $22.4375 $28.5625 $34.5000
Low $17.5625 $17.4375 $20.2500 $26.8750
1999
Total revenues $221,706 $220,871 $258,859 $228,226
Gross profit 96,319 101,223 118,761 104,914
Income (loss) from operations 48,394 50,429 63,334 (45,839)
Net income (loss) 34,444 33,831 34,267 (40,484)
Diluted earnings (loss) per share $ 0.32 $ 0.32 $ 0.36 $ (0.45)
Stock price
High $24.5000 $23.4375 $19.5000 $19.2500
Low $16.5000 $14.3750 $14.6875 $16.1875
1998
Total revenues $165,011 $182,090 $222,982 $254,040
Gross profit 75,800 89,398 106,954 114,103
Income from operations 42,786 53,223 60,210 62,658
Net income 29,665 35,492 45,595 41,694
Diluted earnings per share $ .26 $ .31 $ .40 $ .37
Stock price
High $26.8125 $26.1875 $28.5625 $28.8750
Low $21.8750 $23.1875 $23.6250 $18.5000
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
The information required by Items 10, 11, 12 and 13 is incorporated by reference
from the Proxy Statement to be filed with the Securities and Exchange Commission
within 120 days of the end of the fiscal year covered by this report.
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(a)(1) Consolidated Financial Statements:
Reference is made to the Index to Financial Statements and
Related Information under Item 8 in Part II hereof where these
documents are listed.
(a)(2) Consolidated Financial Statement Schedule: Page
----
II Valuation and Qualifying Accounts 68
Other financial statement schedules are either not required or
the required information is included in the Consolidated
Financial Statements or Notes thereto.
Parent Company Financial Statements - Financial Statements of
the Registrant only are omitted under Rule 3-05 as modified by
ASR 302.
(a)(3) Exhibits:
3.1 Articles of Incorporation of International Game Technology, as amended
(incorporated by reference to Exhibit 3.1 to Registrants Report on Form
10-K for the year ended September 30, 1995).
3.2 Second Restated Code of Bylaws of International Game Technology, dated
November 11, 1987 (incorporated by reference to Exhibit 3.2 to
Registrants Report on Form 10-K for the year ended September 30, 1995).
4.1 Note Agreement for the 7.84% Senior Notes due September 1, 2004
(incorporated by reference to Exhibit 4.1 to Registrant's Report on
Form 10-K for the year ended September 30, 1995).
4.2 Indenture, dated as of May 19, 1999 by and between International Game
Technology and The Bank of New York (incorporated by reference to
Exhibit 4.2 to Registration Statement No. 333-81257, Form S-4 filed by
Registrant).
4.3 Registration Rights Agreement, dated as of May 11, 1999, by and among
International Game Technology, Salomon Smith Barney Inc., BNY Capital
Markets, Inc., Goldman, Sachs & Co., Lehman Brothers Inc. and Merrill
Lynch, Pierce, Fenner & Smith, Incorporated (incorporated by reference
to Exhibit 4.3 to Registration Statement No. 333-81257, Form S-4 filed
by Registrant).
10.1 Stock Option Plan for Key Employees of International Game Technology,
as amended (incorporated by reference to Exhibit 10.26
to Registration Statement No. 33-12610 filed by Registrant).
10.2 Employee Stock Purchase Plan (incorporated by reference to Exhibit A
to the Proxy Statement for the 1998 Annual Meeting of Shareholders).
10.3 Employment Agreement with Robert A. Bittman, Executive Vice President,
Product Development dated March 12, 1996 (incorporated by reference to
Exhibit 10.9 to Registrants Report on Form 10-K for the year ended
September 30, 1996).
10.4 Form of officers and directors indemnification agreement (incorporated
by reference to Exhibit 10.10 to Registrants Reporton Form 10-K for the
year ended September 30, 1996).
10.5 Credit Agreement by and among International Game Technology and the
Bank of New York, Wells Fargo and other banks, dated May 22, 1997
(incorporated by reference to Exhibit 10.11 to Registrant's Report on
Form 10-Q for the quarter ended June 30, 1997).
10.5A Amendment No. 1 to Credit Agreement by and among International Game
Technology, The Bank of New York, Wells Fargo and other banks, dated
August 19, 1997 (incorporated by reference to Exhibit 10.7A to
Registration Statement No. 333-81257, Form S-4 filed by Registrant).
10.5B Amendment No. 2 to Credit Agreement by and among International Game
Technology, The Bank of New York, Wells Fargo and other banks, dated
January 16, 1998 (incorporated by reference to Exhibit 10.7B to
Registration Statement No. 333-81257, Form S-4 filed by Registrant).
10.5C Amendment No. 3 to Credit Agreement by and among International Game
Technology, The Bank of New York, Wells Fargo and other banks, dated
April 20, 1999 (incorporated by reference to Exhibit 10.7C to
Registration Statement No. 333-81257, Form S-4 filed by Registrant).
10.5D Amendment and Restatement of Credit Agreement by and among
International Game Technology, The Bank of New York, Wells Fargo and
other banks, dated April 30, 1999 (incorporated by reference to Exhibit
10.7D to Registration Statement No. 333-81257, Form S-4 filed by
Registrant).
10.6 Facility Agreement between I.G.T. (Australia) Pty. Limited and National
Australia Bank Limited, dated March 18, 1998; guarantee from
International Game Technology to National Australia Bank Limited, dated
March 18, 1998 (incorporated by reference to Exhibit 10.9 to
Registrant's Report on Form 10-Q for the quarter ended March 31, 1998).
10.7 Joint Venture Agreement, dated December 3, 1996 by and between
International Game Technology and Anchor Games, a d.b.a. of Anchor Coin
(incorporated by reference to Exhibit 10.10 to Registrant's Report on
Form 10-K for the year ended September 30, 1998).
10.8 IGT Profit Sharing Plan (As Amended and Restated as of December 31,
1998) (incorporated by reference to Exhibit 10.11 to Registrant's
Report on Form 10-Q for the quarter ended April 3, 1999).
10.9 Agreement and Plan of Merger, dated March 10, 1999, among International
Game Technology, SAC, Inc. and Sodak Gaming, Inc.(incorporated by
reference to Registrant's Report on Form 8-K dated March 12, 1999).
10.10 Amendment Notes between Silver Club and CMS-El Capitan and
International Game Technology dated November 5, 1999.(incorporated in
reference to Exhibit 10.12 to Registrant's Report on Form 10-K for the
year ended October 2, 1999)
10.11 Barcrest Savings Related Share Option Scheme (incorporated by reference
to Registration Statement No. 333-94349, Form S-8 filed by Registrant
on January 10, 2000).
10.12 IGT Deferred Compensation Plan
10.13 Employment Agreement with G. Thomas Baker, Chief Executive Officer,
President, and Chief Operating Officer dated December 6, 2000.
10.14 International Game Technology 1993 Stock Option Plan (Amended and
Restated Effective as of August 27, 1996) (Composite Plan Document
Incorporating Amendments 1998-I and 1998-II)
21 Subsidiaries
23 Independent Auditors' Consent
24 Power of Attorney (see page 67 hereof)
27 Financial data schedule
(b) Reports on Form 8-K
None
99.1 Financial statements of Spin for Cash Wide Area Progressive Joint
Venture for the years ended September 30, 2000, 1999 and 1998.
Power of Attorney
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 15 day of December,
2000.
International Game Technology
By:/s/ G. Thomas Baker
-----------------------------------------
G. Thomas Baker
President, Chief Executive Officer,
Chief Operating Officer, and
Chief Financial Officer
Each person whose signature appears below hereby authorizes G. Thomas Baker and
Sara Beth Brown, or either of them, as attorneys-in-fact to sign on his behalf,
individually, and in each capacity stated below, and to file all amendments
and/or supplements to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Charles N. Mathewson Chairman of the Board of Directors December 15, 2000
- -----------------------------
Charles N. Mathewson
/s/ G. Thomas Baker President, Chief Executive Officer, December 15, 2000
- -----------------------------
G. Thomas Baker Chief Operating Officer,
Chief Financial Officer, Treasurer
and Director
/s/ Albert J. Crosson Director and Vice Chairman of the December 15, 2000
- -----------------------------
Albert J. Crosson Board of Directors
/s/ Robert A. Bittman Director December 15, 2000
- -----------------------------
Robert A. Bitman
/s/ Wilbur K. Keating Director December 15, 2000
- -----------------------------
Wilbur K. Keating
/s/ Robert Miller Director December 15, 2000
- -----------------------------
Robert Miller
/s/ Frederick B. Rentschler Director December 15, 2000
- -----------------------------
Frederick B. Rentschler
/s/Rockwell A. Schnabel Director December 15, 2000
- -----------------------------
Rockwell A. Schnabel
SCHEDULE II - Consolidated Valuation and Qualifying Accounts
Balance at Increase (Decrease) Balance
Beginning in at End
of Period Provisions Unrealized Gains of Period
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Valuation Allowance on
Investment Securities:
Year ended 09/30/98 $ 1,265 $ - $ 788 $ 2,053
======== ====== ======= =======
Year ended 10/02/99 $ 2,053 $ - $(3,600) $(1,547)
======== ====== ======= =======
Year ended 09/30/00 $ (1,547) $ - $ 613 $ (934)
======== ====== ======= =======
Balance at Recoveries Accounts Balance
Beginning and Written at End
of Period Provisions Reclassifications Off of Period
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
Allowance for
Doubtful Accounts:
Year ended 09/30/98 $5,899 $ 927 $ 351 $1,665 $ 5,512
====== ====== ======= ====== =======
Year ended 10/02/99 $5,512 $3,959 $ 6 $ 573 $ 8,904
====== ====== ======= ====== =======
Year ended 09/30/00 $8,904 $1,902 $10,418 $7,393 $13,831
====== ====== ======= ====== =======
Allowance for
Doubtful Notes and
Contracts Receivable:
Year ended 09/30/98 $18,229 $3,808 $ 246 $5,555 $16,728
======= ====== ======= ====== =======
Year ended 10/02/99 $16,728 $4,194 $ 291 $1,559 $19,654
======= ====== ======= ====== =======
Year ended 09/30/00 $19,654 $8,251 $(5,605) $4,267 $18,033
======= ====== ======= ====== =======
Balance at Disposed Balance
Beginning of and at End
of Period Provisions Written Off of Period
- ----------------------------------------------------------------------------
(Dollars in thousands)
Obsolete Inventory Reserve:
Year ended 09/30/98 $ 14,881 $ 9,173 $ 5,480 $ 18,574
========= ========= ======== ========
Year ended 10/02/99 $ 18,574 $ 19,185 $ 13,858 $ 23,901
========= ========= ======== ========
Year ended 09/30/00 $ 23,901 $ 16,001 $ 15,598 $ 24,304
========= ========= ======== ========