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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 29,
2001
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, 2001:
$4,359,662,184
The number of shares outstanding of each of the registrant's classes of common
stock, as of November 24, 2001:
72,863,474 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 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Item 7a. Quantitative and Qualitative Factors about Market Risk 35
Item 8. Consolidated Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 79
Part III
Item 10. Directors and Executive Officers of the Registrant 79
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial Owners and
Management 79
Item 13. Certain Relationships and Related Transactions 79
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K
Signatures 79
Part I
Item 1. Business
Unless the context indicates otherwise, references to "International Game
Technology," "IGT," "we," "our" or "the Company" include International Game
Technology and our 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.
Forward Looking Statements
Risk Factors and Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 995
Throughout this Annual Report on Form 10-K we make "forward-looking" statements,
which are not historical facts, but are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to analyses and other information based on forecasts of future
results and estimates of amounts not yet determinable. These statements also
relate to our future prospects and proposed new products, services, developments
or 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," "continue," and
other similar terms and phrases, including references to assumptions.
Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed. Our future financial condition and
results of operations, as well as any forward-looking statements, are subject to
change and to inherent known and unknown risks and uncertainties. We do not
intend, and undertake no obligation, to update our forward-looking statements to
reflect future events or circumstances.
Specific risks and uncertainties of which you should be aware include, but are
not limited to, the following:
Our business is dependent on the gaming industry and would be adversely affected
by adverse changes in the gaming industry including:
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 reduced levels of gaming play on our gaming systems or customer demand for
our gaming machines as a result of declines in travel activity or customer
capital expenditures after the terrorist attacks of September 11, 2001;
we can not predict what impact the terrorist attacks of September 11, 2001
may have going forward on gaming play and customer demand for our gaming
machines but reduced levels of gaming play or customer capital expenditures
will adversely impact results of operations; and
o a decline in public acceptance of gaming.
Demand for our gaming machines would be adversely affected by:
o a decline in the demand for replacement machines;
o a decrease in the desire of established casinos to upgrade machines;
o a lack of consumer acceptance of new ticket-in/ticket-out voucher
technology; and
o a decline in the popularity of IGT's gaming products with players, a lack
of success in developing new products or an increase in the popularity of
competitors' games.
Our business is vulnerable to changing economic conditions, including:
o unfavorable changes in economic conditions;
o political or economic instability in developing international markets;
o changes in interest rates causing a reduction of investment income or in the
value of market interest rate sensitive investments; and
o fluctuations in foreign exchange rates, tariffs and other trade barriers.
Item 1. Business
Our business is subject to regulatory risks, including:
o unfavorable public referendums or anti-gaming legislation;
o unfavorable legislation affecting or directed at manufacturers or operators
of gaming products and systems;
o adverse changes in or findings of non-compliance with applicable
governmental gaming regulations;
o delays in approvals from regulatory agencies;
o a limitation, conditioning, suspension or revocation of any of our gaming
licenses; and
o unfavorable determinations or challenges of suitability by gaming regulatory
authorities with respect to our officers, directors or key employees.
Our intellectual property rights are subject to risks, including:
o the potential for there to be an inability to obtain and maintain patents
and copyrights to protect our newly developed games and technology;
o competitors' infringement upon IGT's existing trademarks, patents and
copyrights; and
o approval of competitors' patent applications that may restrict our ability
to compete effectively.
Our business operations are subject to other risks, including:
o the loss or retirement of our key executives or other key employees;
o adverse changes in the credit worthiness of parties with whom IGT has
forward currency exchange contracts;
o the loss of lessees on sublet properties no longer used in our operations;
o discovery of facts with respect to legal actions pending against IGT 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;
o an inability to generate sufficient cash flow to service debt obligations
for senior notes and other line of credit facilities;
o an inability to comply with debt covenant restrictions, which may trigger
payment acceleration provisions; and
o increased costs due to reliance on third-party suppliers and contract
manufactures.
In addition to the risks listed above, we are subject to certain risks arising
from our proposed acquisition of Anchor Gaming. The risks associated with the
Anchor transaction are more fully described on the next page and in the merger
proxy statement we filed with the Securities and Exchange Commission on
November 13, 2001.
Company Overview
IGT is one of the largest manufacturers of computerized casino gaming products
and operators of proprietary gaming systems in the world and was the first to
develop computerized video gaming machines. Since our 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 our production
in the United States, we currently manufacture our 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. IGT
provides gaming products in every significant legalized gaming jurisdiction in
the world.
International Game Technology was incorporated in December 1980 to acquire the
gaming licensee and operating entity, IGT, and to facilitate our initial public
offering. In addition to our 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); Sodak Gaming, Inc. (Sodak), and Silicon
Gaming, Inc. (Silicon).
Item 1. Business
Acquisitions and Divestiture
IGT has complemented its internal resources through strategic acquisitions over
the past few years. The primary goals of these acquisitions were to expand into
new product and geographic markets and to provide additional product design
capabilities. Recent completed and proposed business combinations are described
below.
In September 2001, IGT completed the purchase of the assets of Tennecom Gaming
Solutions, LLC (Tennecom), a maker of casino table game tracking software.
Tennecom created an information system consisting of a Player Tracking and Table
Games Information System, Table Inventory Tracking and Casino Management System.
In March 2001, IGT completed the purchase of Silicon. Previously headquartered
in Palo Alto, California, Silicon designed and manufactured innovative wagering
products and held a library of gaming patents.
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.
In September 1999, IGT completed the acquisition of Sodak. Sodak distributes IGT
gaming products and provides proprietary games to Native American casinos. Sodak
also provides financing for gaming ventures in Native American markets.
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. (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.
Proposed Anchor Gaming Acquisition
On July 8, 2001, we entered into an Agreement and Plan of Merger with Anchor,
pursuant to which Anchor will merge with a subsidiary of ours. Both our board of
directors and Anchor's board of directors unanimously approved the Agreement and
Plan of Merger. If the transaction is completed, Anchor shareholders will
receive one share of IGT common stock for each share of Anchor common stock that
they own, subject to certain adjustments.
If the IGT average closing price is less than $50.00 per share, Anchor may
terminate the merger agreement, subject to IGT's right to provide a higher
exchange ratio such that the value of IGT stock received by Anchor stockholders
equals $50.00 per share. Conversely, if the IGT average closing price exceeds
$75.00 per share, IGT may terminate the merger, subject to Anchor's right to
accept a lower exchange ratio such that the value of IGT stock received by
Anchor stockholders equals $75.00 per share. In addition, IGT will convert each
outstanding option to purchase Anchor common stock into the right to acquire on
the same terms and conditions a number of shares of IGT common stock based on
the merger exchange ratio.
Anchor is a diversified technology company with operations around the world.
Anchor operates in three complementary business segments: gaming machines,
gaming operations and gaming systems. The gaming machine segment focuses on the
development and placement of unique proprietary games. The gaming operations
segment operates a Native American casino in San Diego, two casinos in Colorado,
and manages gaming machine routes in Nevada. The gaming systems segment provides
equipment and related services to on-line lotteries, video lotteries, and
pari-mutuel organizations. IGT and Anchor have been working together since 1996
as joint venture partners. This combination will permit the companies to work
more closely together to develop new games and use their complementary resources
to benefit casinos and casino customers. In addition, Anchor has other
attractive businesses that IGT is not currently in, most notably the lottery
business, and the companies believe that their combined resources will make them
a more effective competitor in these businesses. The merger also provides access
to Anchor's key management talent.
Item 1. Business
If the merger is completed, as part of the transaction, Thomas J. Matthews,
Chairman, President and Chief Executive Officer of Anchor, will remain President
and Chief Executive Officer of Anchor and will become Chief Operating Officer of
IGT. Mr. Matthews and (upon obtaining required regulatory approvals) Richard
Burt, will become directors of IGT, occupying two newly created seats on the IGT
board of directors.
The merger is subject to the approval of both companies' stockholders and
certain outstanding regulatory approvals (including gaming authority approvals
or findings of suitability from the Nevada Gaming Control Board, the Nevada
Gaming Commission, the National Indian Gaming Commission and the Pala Gaming
Commission) and Hart-Scott-Rodino antitrust pre-clearance, as well as other
closing conditions. Subject to obtaining all required regulatory approvals,
Hart-Scott-Rodino antitrust pre-clearance and satisfaction of other closing
conditions, we anticipate that the merger will be completed prior to January 31,
2002.
Below is a summary of some of the primary risk factors associated with the
proposed merger with Anchor. A full discussion of the risks listed below that
are associated with the merger can be found in our joint proxy statement dated
November 13, 2001 filed with the Securities and Exchange Commission.
o the proposed merger may not occur;
o the value of our common stock to be issued in the merger will fluctuate
and will not be fixed at the date of our stockholder meeting at which the
merger is voted on;
o the merger agreement may be terminated if our share price falls or rises
substantially;
o stockholder approval confers broad discretion on our board with respect to
the merger;
o failure to complete the merger could negatively affect our relationship with
Anchor or our ability to enter into other third-party transactions;
o we may have difficulty integrating parts of the operations of Anchor;
o our success depends in part on our ability to retain key personnel after the
merger;
o the accounting treatment of the merger will result in future non-cash
charges to our operations;
o our pro-forma accounting for the merger reflected in the merger proxy
statement may change;
o the issuance of additional shares of our common stock in the merger may
reduce our share price; and
o we will assume significant additional debt upon consummation of the merger.
Lines of Business
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 (WAP) systems, stand-alone games, and gaming equipment
leasing, which we refer to as "Proprietary Gaming." This segment includes our
wholly-owned gaming operations and our unconsolidated joint venture activities
reported as earnings of unconsolidated affiliates. The table below presents our
business segment revenues and earnings of unconsolidated affiliates for the
years ended:
September 29, September 30, October 2,
2001 2000 1999
------------------------------------------------------------------------------------
(Dollars in thousands)
Product sales $ 824,267 $ 603,381 $576,598
Proprietary gaming
Gaming operations 374,942 295,023 277,508
Earnings of unconsolidated affiliates 142,630 105,991 75,556
---------- ---------- --------
Total proprietary gaming 517,572 401,014 353,064
---------- ---------- --------
Total $1,341,839 $1,004,395 $929,662
========== ========== ========
See Note 19 of Notes to Consolidated Financial Statements for additional
information concerning the revenues, operating results and identifiable assets
of our two principal lines of business and operations. The consolidated
financial statements include the accounts of International Game Technology and
all of our majority-owned subsidiaries. All material inter-company accounts and
transactions have been eliminated.
Item 1. Business
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 (AWP), casino-style, private club, 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 an estimated 64% share of the
installed base of casino 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.
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 license and
maintenance revenue for the use of the systems.
Proprietary Gaming
Proprietary Games
IGT's proprietary gaming segment includes our wholly-owned gaming operations and
our unconsolidated joint venture activities reported as earnings of
unconsolidated affiliates.
Approximately 7% of the domestic installed base of gaming machines generate
recurring revenue whereby the manufacturer participates in the revenue from the
machine on a percentage or flat fee basis. We collectively refer to machines of
this nature as "proprietary games", including linked WAP systems and stand-alone
machines, in both our wholly-owned gaming operations and our unconsolidated
joint venture operations. We have developed and operated WAP systems,
collectively referred to as MegaJackpots(TM), since 1986. In the North American
market, IGT estimates it holds more than a 66% share of the installed base of
recurring revenue machines. At September 29, 2001, IGT operated proprietary
games in 18 domestic jurisdictions, as well as one international system in
Iceland. Included among these jurisdictions is Native America, which encompassed
18 US States.
WAP systems are electronically linked, intercasino 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 the top
award winning combination. WAP systems are designed to increase gaming machine
play for participating casinos by giving players the opportunity to win larger
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 other non-linked machines on a casino floor. We also
supply certain proprietary games in a "stand alone" format. These games are
proprietary in nature but are not linked to a progressive system. These games
are either leased on a per machine per day basis or are operated under a revenue
sharing agreement. This format was created for the customer that didn't want to
contribute to a large jackpot, yet still wanted our proprietary games on the
floor.
IGT continually provides innovation and enhanced player appeal to its
proprietary 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 and incorporating popular themes, such as Austin
Powers(TM), Regis Cash Club(TM), The Price is Right(TM) and $1,000,000
Pyramid(TM), which were introduced in fiscal year 2001. New themed product
introductions planned for fiscal year 2002 include the Diamond Cinema Series(TM)
featuring Marilyn Monroe(TM), Humphrey Bogart(TM), Ingrid Bergman(TM) and James
Dean(TM), Harley-Davidson(R), Frank Sinatra(TM), Uno(R), Magic 8 Ball(R), and I
Love Lucy(R). Other currently installed proprietary game themes includes Regis'
Cash Club(TM), $1,000,000 Pyramid(TM), $25,000 Pyramid(TM), Austin Powers(TM),
The Price Is Right(TM), The Addams Family(TM), Spin Joker Poker(TM), Elvis (R),
Fabulous 50's(R), Five Play Draw
Item 1. Business
Poker(TM), High Rollers(TM), Jeopardy!(R), Megabucks(R), Nickelmania(R),
Nickels Deluxe(R), Party Time(R), Pokermania(R), Quartermania(R), Quarters
Deluxe(R), Slotopoly(TM), Super Nickelmania (TM), Totem Pole(R), Triple Play
Draw Poker(TM), Wheel of Fortune(R), Wheel of Gold(R), I Dream Of Jeannie(TM),
Power Slotto(TM), The Three Stooges(R) and Let's Make A Deal(R). These games may
be offered in different denominations in each jurisdiction.
IGT operates certain proprietary games under joint venture agreements or
strategic marketing alliances with other gaming companies, principally with
Anchor. The purpose of these strategic alliances is to combine the game
development efforts or licensed property rights of other companies with IGT's
systems technology, manufacturing, distribution, and marketing expertise.
Proprietary games operated though our Spin For Cash (SFC) joint venture with
Anchor include the highly successful Wheel of Fortune(R) game which began in
December 1996 and the I Dream of Jeannie(TM) wheel game introduced in fiscal
2001. At September 29, 2001, the SFC total installed base had grown to
approximately 14,100 machines. In addition, we entered into a licensing,
development and marketing agreement in fiscal year 2000 with Shuffle
Master to further develop their licensed intellectual properties, The
Three Stooges (R), The Honeymooners (TM) and Let's Make A Deal (R).
The Three Stooges(R) and Let's Make a Deal(R) games were introduced in fiscal
2001 with Honeymooners(TM) games planned for fiscal 2002. A similar agreement
was entered into with AC Coin to jointly distribute Power Slotto(TM) and a
Bewitched(TM) version of Slotto(R). Power Slotto(TM) was released in 2001, and
Bewitched(TM) Slotto(R) is slated for 2002. In fiscal 2001, IGT and Williams
Gaming, Inc. (WMS) entered into an agreement where WMS will design and market
slot machines based on the Survivor(TM) television show which will be
manufactured and placed by IGT. This system is planned for introduction in
fiscal 2002.
IGT, as the developer and current market leader in this business segment,
recognizes that all games, including our proprietary games systems, have a
finite life cycle. Because of the intense competition and accelerated pace of
proprietary games being introduced each year, this has inevitably shortened the
life cycle. As a result, IGT systematically replaces, either wholly or in part,
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 2001, IGT removed 20 proprietary game 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 MegaJackpots-Instant Winner(TM) 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
Under various technology provider license and lease agreements with state
lotteries and parimutuel facilities, we receive a percentage of the revenue for
the use and maintenance of machines and/or systems. We also sell machines with
attached royalty agreements, primarily with Action Gaming, where we receive a
monthly royalty fee. We also receive recurring revenue in various jurisdictions
from contracts for short-term rental or long-term lease of gaming machines.
Item 1. Business
Product Development
IGT's product development staff works to provide innovation in gaming machines
and related computer system technology. During fiscal year 2001, IGT invested
approximately $62.5 million in research and development. Developments from these
efforts increase our gaming machines' earning potential through enhancements in
entertainment value, ease of play, 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 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 2001, IGT debuted more than 35 new game
themes, addressing both the video reel and mechanical spinning reel markets. We
expect to debut an even greater number of games in fiscal year 2002. As with all
new games, these machines are subject to regulatory approval. Using
MegaTest(TM), our online 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. The MegaTest(TM) system uses a
central computer to monitor the performance of games placed in a representative
sample of casinos throughout Nevada. The MegaTest(TM) 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.
IGT's most recent innovations in slot technology provide flexibility and ease of
use to the player and the casino operator. 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 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 Play(TM) machines
will also enable the player to select any denomination he or she prefers
(Multi-Denomination(TM)). Our IVS(TM) product was 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
interested in maximizing the automation of accounting controls and other
functions. Initial customer response to this technology has been positive and we
believe these systems will be significant drivers of the system machine and
system sales over the next several years.
Multi-line, multi-coin video-based games are currently among the most popular
games on the casino 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. Our
current product lines include: The Game King(R) video platform, which offers a
single or multi-game format with a touch screen monitor utilizing the
iGame-Plus(TM) interactive video games with animated graphics and secondary
bonusing features; the Vision Series(R), 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.
Item 1. Business
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 United Kingdom with our casino-style machines
to add bonus features, and will continue to be marketed by IGT-Europe. In
Australia, two separate design teams (one in Sydney and one in Melbourne) create
innovative games for the club and casino markets in Australia and New Zealand.
IGT-Japan's engineering department has expanded in order to continue to develop
new technologies for the Pachisuro market and released a new platform at the end
of fiscal 2001.
In fiscal year 2001, IGT continued installing the IGT Gaming Systems (IGS(TM)),
which support casinos' control and information needs. The IGS (TM) product is an
integrated casino system featuring 14 modules including 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.
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(R) and S2000(TM)
o Technological improvements such as EZ Pay(TM)(ticket-in/ticket-out) and
Multi-Denomination(TM)
o Development and rollout of new proprietary games such as Diamond Cinema(TM),
Frank Sinatra(TM), Harley-Davidson(R), I Love Lucy(R), Beverly
Hillbillies(TM), Lifestyles of the Rich and Famous(R), Beetle Bailey(TM),
Uno(R)and Magic 8 Ball(R)games
o Additional game development on existing proprietary games such as The Price
Is Right(TM), Video Jeopardy!(R), The Addams Family(TM), and Quartermania(R)
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 Providing ongoing improvements and additional system functionality to our
IGS(TM) product line which answers industry demand for improved operational
efficiencies, and more effective customer service, and system tools
necessary for the casino to enhance the customers overall gaming experience
Product Demand
Demand for IGT's gaming products, whether sold, leased or operated on WAP
systems, is driven by 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.
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 and the increasing popularity of large theme-based casinos.
IGT's manufacturing capabilities along with its innovative products provide a
competitive advantage in providing new casinos with large numbers of machines.
Upon the opening of the California Native American gaming market in fiscal 2000,
we have supplied approximately 50% of the machines initially installed in this
market.
The replacement cycle in all gaming jurisdictions represents the most
significant portion of sales in any given year. The replacement cycle is driven
primarily by competition in each market to provide the customer with more
entertaining and sophisticated games. To maximize IGT's opportunities in the
replacement market, we increase the number of new games released each year and
focus our product development efforts on creating games that provide
Item 1. Business
enhances entertainment value as well as utilizing numerous popular game themes
and concepts. In addition, all of IGT's new 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 systems. We believe the
introduction of new, more sophisticated interactive games combined with added
cost savings, convenience and other benefits of ticket-in/ticket-out technology
will help stimulate the replacement machine market.
Demand for replacement products is also dependent, in part, upon the willingness
of operators to incur the costs associated with replacing existing gaming
machines with new machines. 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. As new games are installed, the earnings
disparity between the older and newer machines on the casino floor widens and
the replacement cycle is further stimulated.
Product Markets
The following schedule sets forth net revenues derived from gaming product sales
for the fiscal years ended:
September 29, September 30, October 2,
2001 2000 1999
----------------------------------------------------------------------------------
(Dollars in thousands)
Gaming products
Video products $436,584 $263,412 $189,625
Spinning reel slot 148,328 133,251 162,310
Amusement with prize 66,411 75,359 78,947
Pachisuro 16,849 34,787 55,328
Other gaming products(1) 156,095 96,572 90,388
-------- -------- --------
Total product sales $824,267 $603,381 $576,598
======== ======== ========
(1) Other gaming products include revenues from gaming systems, lottery systems,
parts, equipment and service.
IGT markets its gaming products to legalized gaming jurisdictions around the
world. While our most significant markets are in North America, we continue to
pursue additional market share in international areas. The opportunities and
challenges and ultimately, our successes vary across these jurisdictions. A
review of each market is provided below.
North American Markets
In the last decade, the 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, Nevadan and non-casino
government-sponsored gaming markets contributed to the expansion of the market
for gaming machines. As a result, the installed base of gaming machines has
increased over 225% since 1991, from an estimated 184,000 machines to
approximately 600,000 in 2001.
In the future, there is the potential for gaming to continue to expand into
other jurisdictions and/or areas in North America. Recently a bill was approved
in October 2001 by the governor of New York that would allow gaming devices at
five racetracks, the addition of Powerball(TM) to the state's lottery system and
potentially expand Native American casinos with slot machines. In addition to
New York, other states such as Ohio, Pennsylvania and New Hampshire are also
looking at similar legislation associated with gaming devices at racetracks.
Item 1. Business
IGT's machine sales in North America increased by approximately 20,000 units in
fiscal year 2001 as compared to fiscal 2000 due primarily to the strong
replacement market. We experienced 100% growth over the prior fiscal year in
replacement sales. Our traditional markets of Nevada and Atlantic City fueled
the replacement sales along with year-over-year growth in the Midwest markets of
Missouri and Illinois and the cruise ship market.
Nevada
As IGT continues to develop innovative gaming products, this stimulates the
demand for replacement machines in mature gaming jurisdictions such as Nevada.
The implementation of ticket-in/ticket-out or cashless systems, which provide
many benefits to both the operator and their customers, is an important
contributor to the demand for replacement sales. Nevada is a very strong market
for nickel games, in both the video reel and traditional poker machines. Because
of the volume of coins handled and paid out by these types of games, they are
excellent candidates for the ticket-in/ticket-out technology, thus driving the
implementation of ticket-in/ticket-out systems at a much faster pace than in
other jurisdictions.
In fiscal year 2001, we provided gaming machines to two new casinos in Southern
Nevada, the Palms Casino Resort and Green Valley Ranch, and to two new casinos
in Northern Nevada, the Siena Hotel Spa Casino and Tamarack Junction. Several
other Nevada properties underwent smaller-scale expansions. The majority of the
sales in fiscal year 2002 are expected to be for replacement machines as
operators continue to accept the cashless technology. Expansions are planned at
the Orleans Hotel & Casino and Palace Station during calendar 2002.
Midwest Gaming
Riverboat-style gaming began in Iowa in 1991 and currently is operating in
Illinois, Indiana, Iowa, Louisiana, Mississippi and Missouri. IGT shipped
machines to the new Isle of Capri in Boonville, Missouri, in 2001. The
replacement market in the Midwest region in 2001 saw the benefit from numerous
operator renovations by companies such as Ameristar, Harrah's, Argosy and Isle
of Capri.
Atlantic City
The Atlantic City market consists of 12 large casinos that are concentrated in
the mature boardwalk area and marina district. During fiscal year 2000, Boyd
Gaming and MGM Mirage began construction of the Borgata, a marina district
property, which is expected to open in 2003. Harrah's also has a hotel and
casino expansion underway, with an anticipated completion date in spring 2002.
Native American Gaming
Casino-style gaming continued to expand on Native American lands during fiscal
year 2001. 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 implementation, that the Native American tribe
and the state government in which the Native American lands are located to 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 the company. Sodak provides financing for
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
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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. During 2001, IGT's market share in the California
market was over 50% for new machine sales.
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 lottery system. We supply components to Sierra Design Group (SDG), which
manufactures and distributes terminals and systems designed specifically to
comply with the Washington compacts.
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. In fiscal 2000 we introduced leased games into Alberta, Nova Scotia,
Ontario, and Quebec casinos and in 2001 we increased our base of leased games by
over 500 units. The Canadian lease market is expected to continue to expand into
additional jurisdictions due to the demonstrated success of properties utilizing
leased IGT games. There were many firsts in Canada for IGT in fiscal year 2001:
(1) we introduced MegaJackpots(TM) into the Ontario market as the first
wide-area progressive system in Canada; (2) iGames(TM) were introduced; and (3)
an EZ Pay(TM) ticket-in/ticket-out system was installed. IGT shipped machines to
various new and expanded properties in Ontario, Quebec and British Columbia
during fiscal 2001.
A number of Canadian jurisdictions are planning the opening and/or expansion of
Native American gaming. Ontario, Manitoba, Saskatchewan and British Columbia all
have planned openings and there are potential openings in Alberta.
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 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). IGT
expects this area will continue to expand the installed base of VGTs.
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.
Australia and New Zealand
The 2001 fiscal year has again been characterized by intense competition between
manufacturers as a result of the limited market growth, regulatory changes and
uncertainty, together with further technological improvements to products.
Australia is the largest and most established market for gaming products outside
of North America and is primarily a video machine market. The gaming machines
sold in the Australian/New Zealand market are similar in appearance to those in
the US but have a different operating system and themes. The installed base for
machines is approximately 215,000 units in the casino, hotel, pub and club
markets in Australia and New Zealand. Our installed base in this region is
approximately 48,000 units or 22%. In fiscal year 2001, IGT achieved sales of
9,800 units compared to 6,700 units in fiscal 2000.
Item 1. Business
Combining popular game offerings and the performance of the GU4 machine platform
resulted in strong demand for our products in the jurisdictions of New South
Wales (NSW), Queensland, Tasmania and New Zealand throughout fiscal 2001. IGT
also successfully re-entered the Victorian market with a competitive product
after an absence of several years. IGT plans to launch this new platform along
with a number of successful games from other jurisdictions to the South
Australian market in the first quarter of fiscal 2002.
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 with the planned integration of Olympic,
changes in management, adverse changes in the regulatory environment, product
performance issues and new competition. As a result, we lost market share while
our competition prospered in this market. In the fourth quarter of fiscal 1999
we determined that the total unamortized balance of intangible assets was fully
impaired. See Note 8 of Notes to Consolidated Financial Statements. In an effort
to return IGT-Australia to a profitable operation, we developed a restructuring
plan during late 1999 and implemented the changes during fiscal year 2000. These
changes included narrowing product lines, downsizing our sales, service and
engineering departments and transferring manufacturing to Reno.
The regulatory environment in Australia has continued to create uncertainty with
operators. A limit on the number of gaming machines now exists in most
jurisdictions. NSW State Government announced its plan for gaming reform in
fiscal 2001. It is aimed at addressing concerns about the increasing number of
gaming machines in NSW, and further reducing any harm associated with problem
gaming. Specifically the reforms included a cap on the current number of gaming
machines in NSW together with reductions for some large venues, which will
effectively reduce the number of gaming machines in NSW over the ensuing years.
Other measures announced included a ban on 24 hour gaming (including an enforced
close down of gaming machines for 6 hours per day), bans on gaming machine
related advertising and restrictions on prizes. Further regulatory restrictions
are still being considered for NSW and include reducing the maximum bet from $10
to $1, reducing the reel spin time on the machines, and abolishing the use of
$50 and $100 currencies for gaming machines.
Measures announced recently in Queensland will also see the abolishment of $50
and $100 currencies for gaming machines beginning December 1, 2001. Other
jurisdictions are considering similar measures to those being considered by NSW.
We cannot determine the effect these changes will have on future sales.
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 AWP, club machines and top box products. An AWP
machine is a game of chance with minimal stake wagering for amusement with low
value cash prizes, typically under $25. In fiscal year 2001, our UK AWP market
share reached approximately 38%, up over the previous year of 29%. Our success
is built around access to five separate game development teams and our flexible
operations capable of delivering 1,200 machines per week against short
lead-times. We export to Europe through a strong distributor network and through
IGT-Europe, in order to maximize the opportunities in the casino market.
Item 1. Business
The AWP installed base in the 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. During fiscal
year 2001, the UK market for AWP machines was approximately 56,000 compared to
53,000 units in fiscal year 2000. The 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.
The strong improvement in the UK performance can be attributed directly to the
first full-year impact of the launch during fiscal year 2000 of two new design
centers: Vivid Gaming and Red Gaming. Vivid Gaming enjoyed particular success
with models such as Quick on the Draw, Pie Factory and Card Shark. Red Gaming's
key models were Aftershock, Red X and Top Dollar. Meanwhile, the core Barcrest
brand retained its market leadership position with strong games such as Big
Brother, The Addams Family(TM) and Battleaxe.
We also sell AWP products, through distributors, into Germany, The Netherlands
and other smaller European markets. During fiscal 2001, Barcrest ended its
relationship with its distributor in Spain and commenced to distribute direct to
customers from its own company based in Madrid. 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. During fiscal year
2000, UK manufacturers exported approximately 40,000 machines to Europe, up from
24,000, of which approximately 37% were Barcrest products. The market fell back
during the fiscal year 2001 to approximately 20,000 machines as the market
waited for the introduction of Euro currency due in January 2002 and
for legislation changes in the Netherlands and Norway. Barcrest's share of UK
manufacturers' exports during the fiscal year 2001 was approximately 34%. We
expect export sales to Europe to increase during fiscal 2002 due to the impact
of Euro notes and coins and legislation changes in key markets.
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 4,900 machines. In fiscal year 2001, our UK club market share was
approximately 29% and our most successful club game was Monty Python(TM).
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(R), to our joint
venture with Anchor for sale to the casino customer. The Party Time(R) top box
is used with IGT's domestic proprietary games.
Proposed changes to modernize the 1968 Gaming Act in the United Kingdom may
provide increased opportunities for IGT-Europe and Barcrest. Some of the changes
include an increase in the number of casinos, allowing bingo halls and clubs an
increase in the number of low jackpot and AWP machines, and allowing casinos to
have random slot machines and/or wide-area linked progressive jackpots. The
recommendations are currently in a three-month public consultation process.
Timing as to approval or implementation of any of the recommendations is not
certain but could be in 2003 or 2004.
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.
Item 1. Business
We estimate that throughout this region, the installed base of legal
casino-style gaming machines is approximately 68,000 units. Of these machines,
we estimate our share at 28% or approximately 19,000 machines. In fiscal year
2001, we sold approximately 3,000 machines in this market, compared to 3,300
machines in fiscal year 2000. The majority of our fiscal year 2001 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.
Japan
IGT-Japan was established in 1990 and serves the Japanese market with
engineering, sales, and administration from our head office in Tokyo and a
development and logistics office in Osaka. The Japanese market includes over
1,300,000 pachisuro machines installed in over 16,000 locations throughout the
country. 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.
The payout associated with this type of game is 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, sell for
approximately one-third of the price of our domestic machines and are licensed
for three years. However, they typically have a replacement cycle of less than
twelve months.
There are twenty-one manufacturers that are members of the Nichidenkyo
Manufacturer's Association (NDK) and licensed to sell in this market. IGT-Japan
became the first foreign member of NDK in 1992 and a full member in 1995.
Recently, the Managing Director of IGT-Japan was elected to the board of
directors of this association.
In Japan, we utilize a third-party manufacturer to produce our machines and
distributors and sales agents to sell our products. The distributors and sales
agents 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 the
Nagoya, Sendai and Tokyo areas.
During fiscal 2001, we sold 7,400 units in the Japanese market compared to
14,600 units in the prior fiscal period. The relatively short selling cycle of
two to three months for any one new game release makes success in this market
highly dependent upon the ability to regularly introduce popular new games. IGT
has taken steps over the past year to address the product development issues. We
have increased our product development efforts and plan on introducing a new
game every two months during fiscal 2002.
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 allocates a
total of 40 casino licenses among each of the nine provinces in South Africa.
All licenses are expected to be operational by the year 2003. There are
currently twenty-five operational casinos. Two casinos are planning to open in
April 2002, one in the Northern Province and one in the Northern Cape. Gaming in
other parts of Africa and the Indian Ocean Islands is expected to grow in fiscal
2002.
IGT-Africa was licensed as a manufacturer/supplier in eight of the nine
provinces as of the end of fiscal year 2001. The remaining province, North West,
has yet to call for licenses although there are five of the original casinos
operating.
During fiscal year 2001, IGT-Africa sold less than one thousand machines in the
South Africa casino market, compared to 1,500 units in fiscal year 2000. The
primary reason for the decline in unit sales was the delay of casino openings
due to budget constraints and delayed licensing. We rank second in market share
in this region with 30% of unit sales.
The limited payout market (LPM) in South Africa has not yet been opened. 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 $55. The National
Gambling Act and the provincial gambling acts govern these smaller venues which
include bars, taverns,
Item 1. Business
and social or sports clubs. It is still uncertain when the LPM will start
operating. Though the disputes over the Central Monitoring System license award
have been resolved, new delays may occur because of some provinces claiming the
right to run their own monitoring systems.
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
Venezuela distributor, Promotora Starwin C.A. During fiscal year 2001, IGT sold
approximately 2,000 machines in Latin America compared to 2,200 machines in the
previous fiscal year. Sales decreased due to government delays in granting new
operator licenses in Venezuela.
Operational Overview
Manufacturing and Suppliers
We manufacture gaming machines in the UK, 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. In 2001, IGT
produced over 11,000 of the IGT-Australia gaming machines in our Reno production
facility. The Reno facility has 736,000 square feet devoted to manufacturing,
warehousing, shipping and receiving.
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, 2001 and 2000, we had an estimated
$89.0 million and $196.4 million in backlog orders.
Sales and Distribution
Our products and services are sold to gaming operators and governmental entities
that conduct gaming operations. During fiscal year 2001, our ten largest
domestic customers accounted for 42% 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. 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 our customer service department an important aspect of the overall
marketing strategy and a key factor that differentiates IGT from our competitors
when casino operators purchase equipment. Customers are provided product
delivery and installation services, warranty services, after-market technical
services and new product support services. Equipment spare parts, product
retrofit and game conversion services are also provided. We typically provide a
90-day service and parts warranty program domestically and up to a 180-day
warranty service internationally for our gaming machines. We employ more than
800 trained service personnel for customer assistance and maintain 20 customer
service support centers domestically in 11 jurisdictions and internationally in
Argentina, Australia, Japan, New Zealand, Peru, South Africa, The Netherlands
and the UK.
Item 1. Business
We also provide extensive customer education and service through customer
product and employee training, technical employee certification programs,
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.
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 breadth of sales and service organizations,
financial stability of the manufacturer, and pricing.
Product Sales
US and foreign manufacturers which compete with IGT in the
domestic casino-style gaming machine market include Anchor; Ardent Gaming
(Ardent); Aristocrat Leisure Limited (Aristocrat); Bally Gaming Inc., a
subsidiary of Alliance Gaming Corp. (Bally); Atronic Casino Technology, Ltd.
(Atronics); Konami Co. Ltd. (Konami); Sigma Game, Inc.(Sigma); Universal
Distributing, Inc.; and 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 Acres Gaming, Inc.; Bally;
Casino Data Systems (CDS), which was acquired by Aristocrat in 2001; and several
other systems manufacturers.
We consider ourselves one of six primary competitors in the linked gaming market
along with Anchor; GTECH Holdings Corp. (GTECH); Scientific Games Inc.,
(Scientific); 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.
Proprietary Gaming
IGT's competitors in the progressive systems market are Bally and Aristocrat.
Our competitors in the stand-alone participation market are Anchor, Bally, CDS,
Mikohn Gaming Corp, and WMS. We provide substantial marketing and advertising
support for our proprietary gaming products and compete on the basis of our
extensive infrastructure, popular brand names, product appeal, jackpot awards,
player loyalty and technical and marketing experience.
Patents, Trademarks, Copyrights and Trade Secrets
IGT believes that our patents, trademarks, copyrights and trade secrets
(intellectual property rights) are significant assets. We seek to protect our
investment in research and development and the unique and distinctive features
of our products and services by perfecting and maintaining our intellectual
property rights. IGT has obtained patent rights protection covering many of our
products. We have 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, gaming systems, 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 that are significant to us. The value of IGT's intellectual
property assets is enhanced and complemented by the highly favorable associated
goodwill.
Item 1. Business
The following are trademarks, service marks, and/or federally registered
trademarks of International Game Technology or our wholly-owned subsidiaries:
Diamond Cinema, Dollars Deluxe, Dynamite, EZ Pay, Fabulous 50's, Game King, High
Rollers, IGS, iGame, iGame Plus, IVS, Megabucks, MegaJackpots,
MegaJackpots-Instant Winner, Multi-Denomination, Nickelmania, Nickels, Nickels
Deluxe, Party Time, Pokermania, Popper King, Quartermania, Quarters Deluxe,
S2000, S-Plus, SAMS, Slotopoly, Super Nickelmania, Super Vision, 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.; Jeopardy! is a registered
trademark of Jeopardy Productions, Inc.; Wheel of Fortune is a registered
trademark of Califon Productions, Inc.; Regis' Cash Club is a game developed in
conjunction with Philbin Enterprises; $1,000,000 Pyramid and $25,000 Pyramid are
trademarks of CPT Holdings, Inc.; I Dream of Jeannie is a trademark of CPT
Holdings, Inc.; 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, which is
registered in the US and is pending elsewhere, and is used under license;
Beverly Hillbillies is a trademark of CBS Worldwide Inc.; Lifestyles of the Rich
and Famous is a trademark of Rysher Entertainment, Inc.; The Munsters is a
trademark of Universal Studios, licensed by Universal Studios Licensing, Inc.;
American Bandstand is a trademark of dick clark productions, inc.; Wheel of Gold
and Totem Pole are registered trademarks of Anchor Gaming (Anchor); Five Play
Draw Poker, Multi Hand Poker, Triple Play Draw Poker and Triple Play Poker are
trademarks of Action Gaming, Inc (Action Gaming).; Survivor is a trademark of
Survivor Productions, LLC; Austin Powers is a trademark of New Line Productions,
Inc.; The Price Is Right is a trademark of Pearson Television Operations BV
based on the Fremantle Media television programme "The Price Is Right
and licensed by Fremantle Brand Licensing; Power Slotto is a trademark
of AC Coin and Slot Service Co., Inc.; Slotto is a registered trademark of AC
Coin and Slot Services Co., Inc.; Bewitched is a trademark of CPT Holdings,
Inc.; and Beetle Bailey is a trademark of the Hearst Corporation.
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 29, 2001, IGT, including all subsidiaries, employed
approximately 4,000 persons, including 770 in administrative positions, 370 in
sales and 770 in engineering. Of the total employees, our North American
operation accounted for 2,900; IGT-Australia, 300; IGT-UK, 400; and
approximately 400 employees at other subsidiaries. The total number of employees
increased in fiscal year 2001 by approximately 11% compared to the number of
employees at September 30, 2000.
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.
Item 1. Business
Various gaming regulatory agencies have issued licenses allowing IGT to
manufacture and/or distribute our products and operate WAP systems. IGT and our
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 or for use
outside Nevada are subject to extensive state and local laws, regulations and
ordinances of the Nevada Gaming Commission (Commission), the State Gaming
Control Board (GCB), and various county and municipal regulatory authorities
(collectively referred to as the Nevada gaming authorities). 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 gaming authorities 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 gaming authorities,
(iv) prevent cheating and fraudulent practices, and (v) provide a source of
state and local revenues through taxation and licensing fees. Changes in these
laws, regulations, procedures, and judicial or regulatory interpretations could
have an adverse effect on our gaming operations.
Our subsidiaries that conduct the manufacturer, sale, and distribution of gaming
devices in Nevada or for use outside Nevada, as well as the operation of slot
machine routes and other gaming activities in Nevada, are each required to be
licensed by the Nevada gaming authorities. Our licenses must be renewed
periodically and the Nevada gaming authorities have broad discretion with regard
to such renewals. Licenses are not transferable. Each type of machine we sell in
Nevada must first be approved by the Commission and may require subsequent
machine modification. Our gaming subsidiaries licensed in Nevada must also
report substantially all loans, leases, sales of securities and similar
financing transactions of a material nature to the GCB and/or have them approved
by the Commission. We believe we have obtained all required licenses and/or
approvals necessary to carry on our business in Nevada.
The Company is registered with the Commission as a publicly-traded corporation
and is required periodically to submit detailed financial and operating reports
to the Commission and to furnish any other information that the Commission may
require. No person may become a stockholder of or receive any percentage of
profits from our licensed gaming subsidiaries, without first obtaining licenses
and approvals from the Nevada gaming authorities.
Our officers, directors and key employees who are actively engaged in the
administration or supervision of gaming and/or directly involved in gaming
activities of our licensed gaming subsidiaries may be required to file
applications with the Nevada gaming authorities and may be required to be
licensed or found suitable by them. Officers, directors, and certain key
employees of our licensed gaming subsidiaries must file applications with the
Nevada gaming authorities and may be required by them to be licensed or found
suitable.
In addition, anyone having a material relationship or involvement with us or any
of our licensed gaming subsidiaries may be required to be found suitable or
licensed and to pay to the GCB all of its investigation costs and fees. The
Commission may deny an application for licensure or finding of suitability for
any cause deemed reasonable. A finding of suitability is comparable to licensing
and both require submission of detailed personal and financial information
followed by a thorough background investigation. We must report changes in
licensed positions to the Commission. The Commission may disapprove any change
in position by one of our officers, directors, or key employees, or require us
to suspend or dismiss officers, director or other key employees and
sever relationships with other persons who
Item 1. Business
refuse to file appropriate applications or whom the Nevada gaming 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.
We are required to submit detailed financial and operating reports to the
Commission. If the Commission determines that we are in violation of any gaming
laws, our gaming licenses can be limited, conditioned, suspended or revoked. In
addition, the Company, our licensed gaming subsidiaries and any persons involved
may be subject to substantial fines for each separate violation of the gaming
laws at the discretion of the Commission. The Commission also has the power to
appoint a supervisor to operate our gaming properties 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
our gaming licenses or the appointment of a supervisor could (and revocation of
our gaming licenses would) materially and adversely affect our gaming
operations.
The Commission may 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 GCB 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 more
than 5% of the Company's voting securities must report this to the Commission.
Any person who becomes a beneficial owner of more than 10% of our voting
securities must apply for a finding of suitability within 30 days after the
chairman of the GCB mails the written notice requiring this finding of
suitability.
Under certain circumstances, an Institutional Investor, as this term is defined
in the Nevada gaming regulations, which acquires more than 10%, but not more
than 15%, of our voting securities may apply to the Commission for a waiver of
these 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 its business. Our voting securities must not be acquired for the purpose of
causing, directly or indirectly (i) the election of a majority of our board of
directors, (ii) any change in our corporate charter, bylaws, management,
policies or operations, or (iii) any other action which the Commission finds to
be inconsistent with holding our voting securities for investment purposes only.
The Commission considers voting on all matters voted on by stockholders and the
making of financial and other informational inquiries of the type normally made
by securities analysts, to be consistent with investment intent.
The Commission has the power to investigate any person who holds our debt or
equity securities. 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 of a security holder. The applicant stockholder is required to
pay all costs of such investigation. Our bylaws provide for us to pay these
costs that are related to our 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 Commission or the
chairman of the GCB may be found unsuitable. The same restrictions apply to a
record owner who fails to identify the beneficial owner, if requested to do so.
Any stockholder found unsuitable and who holds, directly or indirectly, any
beneficial ownership of our common stock beyond such period of time as may be
prescribed by the Commission may be guilty of a criminal offense. We are subject
to disciplinary action, and possible loss of our approvals, if, after we receive
notice that a person is unsuitable to be a stockholder or to have any other
relationship with us or any of our licensed gaming subsidiaries, we (i) pay that
person any dividend or interest upon our voting securities, (ii) allow that
person to exercise, directly or indirectly, any voting right conferred through
securities held by that person, (iii) give remuneration in any form to that
person, for services rendered or otherwise, or (iv) fail 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 licensee.
Item 1. Business
The Commission may, in its discretion, require the holder of our debt securities
to file an application, be investigated and be found suitable to own any or our
debt securities. If the Commission determines that a person is unsuitable to own
any of these securities, then pursuant to the Nevada gaming laws, we can be
sanctioned, including the loss of our approvals, if without prior Commission
approval, we: (i) pay to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognize any voting right by such unsuitable
person in connection with such securities; (iii) pay the unsuitable person
remuneration in any form; or (iv) make any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
We are required to maintain a current stock ledger in Nevada which may be
examined by the Commission at any time. If any of our 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 Commission. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. We are also
required to render maximum assistance in determining the identity of the
beneficial owner. The Commission has the power at any time to require our stock
certificates to bear a legend indicating that the securities are subject to the
Nevada gaming laws and the regulations of the Commission. To date, the
Commission has not imposed this requirement on us.
We may not make a public offering of our securities without the prior approval
of the Commission if the securities or their proceeds 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 Commission or the GCB
as to the accuracy or adequacy of the prospectus or the investment merits of the
securities. Any representation to the contrary is unlawful.
In July 2001, the Commission granted us prior approval to make public offerings
for a period of two years, subject to certain conditions (referred to as a shelf
approval). The chairman of the GCB may rescind the shelf approval for good cause
without prior notice upon the issuance of an interlocutory stop order. The shelf
approval does not constitute a finding, recommendation, or approval by the
Commission or the GCB as to the accuracy or adequacy of the prospectus or the
investment merits of the securities offered. 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 GCB and approval of the
Commission. Entities seeking to acquire control of us must satisfy the GCB and
the Commission in a variety of stringent standards prior to assuming control.
The 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 Nevada gaming licensees, and publicly-traded corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Commission has established a regulatory scheme to guard
against 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 Commission
before we can make exceptional repurchases of voting securities above their
current market price and before a corporate acquisition opposed by management
can be consummated. Nevada's gaming laws and regulations also require prior
approval by the Commission if we were to adopt a plan of recapitalization
proposed by our board of directors in opposition to a tender offer made directly
to our stockholders for the purpose of acquiring control of us.
License fees and taxes are imposed by the Nevada gaming authorities and are
either payable quarterly or annually. The fees and taxes are computed in various
ways depending on the type of activity involved by our subsidiaries and the
cities and counties where our subsidiaries conduct operations. Annual fees are
payable to the GCB to renew our licenses as a manufacturer, distributor, and
operator of a slot machine route. Nevada law also requires persons providing
gaming
Item 1. Business
machines in Nevada to casino customers on a revenue participation basis to pay
their proportionate share of the taxes imposed on gaming revenues generated by
the participation gaming machines.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively referred
to as licensees), and who proposes to participate in the conduct of gaming
operations outside of Nevada is required to deposit with the GCB, and thereafter
maintain, a revolving fund in the amount of $10,000 to pay the expenses of
investigation by the GCB of the licensee's participation in foreign gaming. This
revolving fund is subject to increase or decrease at the discretion of the
Commission. As a licensee, we are required to comply with certain reporting
requirements imposed by the Nevada laws. We are also subject to disciplinary
action by the Commission if we knowingly violate any laws of the foreign
jurisdiction pertaining to our foreign gaming operation, fail to conduct our
foreign gaming operations in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees,
or employ a person in the foreign operation who has been denied a license or
finding of suitability in Nevada on the grounds of personal unsuitability.
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 record keeping 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, which 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. As of September 29, 2001, we are authorized to sell gaming
machines and components to Native American casinos in 17 states.
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.
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 UK. We have obtained the required licenses to manufacture
and distribute our products in the various foreign jurisdictions where we do
business.
Item 2. Properties
Square Owned/
Location Footage Leased Use
----------------------------------------------------------------------------------------------------------
Reno, Nevada 1,044,000 Owned Manufacturing, warehousing, sales, administration
Reno, Nevada 196,000 Leased Warehouse, sales, administration
Las Vegas, Nevada 192,000 Leased Warehousing, sales, administration
Rapid City, South Dakota 94,000 Owned Warehousing, sales, administration
Sydney, Australia 157,000 Leased Assembly, warehousing, sales, administration
Ashton, UK 122,300 Owned Manufacturing
Ashton, UK 17,200 Leased Manufacturing
Wellington, New Zealand 12,000 Owned Warehousing, sales, administration
Other domestic 238,900 Leased Warehousing, sales, administration
Other international 174,800 Leased Warehousing, sales, administration
We increased the square footage in the Reno, Nevada manufacturing facility by
44,000 square feet with the construction of a mezzanine completed in November
2001. At September 29, 2001, we also sublet certain properties that we no longer
used in operations: (1) 66,000 square feet in Reno, Nevada and (2) 16,000 square
feet in Palo Alto, California that we acquired with the purchase of Silicon.
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 14 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
None
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 2001 High Low
------------------------------------------------
First Quarter $48.50 $32.81
Second Quarter 56.75 43.87
Third Quarter 65.31 47.35
Fourth Quarter 64.11 38.90
Fiscal 2000 High Low
------------------------------------------------
First Quarter $20.63 $17.56
Second Quarter 22.44 17.44
Third Quarter 28.56 20.25
Fourth Quarter 34.50 26.88
As of November 24, 2001, there were approximately 3,124 record holders of IGT's
common stock. The closing price of the common stock was $62.00 on that date.
We declared no quarterly dividends in fiscal 2001 or 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, 63 Madison Avenue,
8th Floor, New York, NY 10016, (212) 503-4279.
Item 6. Selected Financial Data
The following information has been derived from our consolidated financial
statements as of and for the years ended:
September 29, September 30, October 2, September 30,
------------------------
2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
Selected Income Statement Data
Total revenues $1,199,209 $ 898,404 $ 854,106 $ 758,942 $ 730,799
Earnings of unconsolidated affiliates $ 142,630 $ 105,991 $ 75,556 $ 65,181 $ 13,171
Income from operations $ 395,279 $ 267,528 $ 116,318 $ 218,877 $ 191,437
Income before extraordinary item $ 213,935 $ 156,792 $ 65,312 $ 152,446 $ 137,247
Net income $ 213,935 $ 156,792 $ 62,058 $ 152,446 $ 137,247
Basic earnings per share
Income before extraordinary item $ 2.90 $ 2.05 $ 0.65 $ 1.35 $ 1.14
Net income $ 2.90 $ 2.05 $ 0.62 $ 1.35 $ 1.14
Diluted earnings per share
Income before extraordinary item $ 2.80 $ 2.00 $ 0.65 $ 1.33 $ 1.13
Net income $ 2.80 $ 2.00 $ 0.62 $ 1.33 $ 1.13
Cash dividends declared per common
share $ - $ - $ 0.03 $ 0.12 $ 0.12
Weighted average common shares
outstanding 73,851 76,586 99,461 113,064 120,715
Weighted average common and potential
shares outstanding 76,525 78,229 100,238 114,703 121,829
Selected Balance Sheet Data
Working capital $ 596,775 $ 555,233 $ 739,753 $ 470,003 $ 406,958
Total assets $1,923,439 $1,623,716 $1,765,060 $1,543,628 $1,215,052
Long-term notes payable and capital
lease obligations $ 984,742 $ 991,507 $ 990,436 $ 322,510 $ 140,713
Stockholders' equity $ 296,113 $ 96,585 $ 242,218 $ 541,276 $ 519,847
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, which we refer to as "Product
Sales"; and the development, marketing and operation of WAP systems, stand-alone
games and gaming equipment leasing, which we refer to as "Proprietary Gaming."
Our proprietary gaming segment includes our wholly-owned gaming operations and
our unconsolidated joint venture activities reported as earnings of
unconsolidated affiliates.
Fiscal 2001 Compared to Fiscal 2000
Fiscal year 2001 net income reached a record of $213.9 million or $2.80 per
diluted share compared to $138.4 million or $1.77 per diluted share for fiscal
2000, excluding one-time items discussed below. Fiscal 2000 net income of $156.8
million or $2.00 per diluted share included the effects of the following
one-time events:
o a gain of $27.0 million ($17.3 million net of tax) or $0.22 per diluted
share from a legal settlement;
o a 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 a 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.
Operating Income
Fiscal 2001 operating income totaled $395.3 million, a 48% increase over fiscal
2000 operating income of $267.5 million. Operating margins were 33% and 30% for
fiscal 2001 and 2000. This substantial growth was driven by improved margins in
both the product sales and proprietary gaming segments.
Revenues, Earnings of Unconsolidated Affiliates and Gross Profit Margins
Total revenues for fiscal 2001 grew to $1.2 billion compared to $898.4 million
for the prior fiscal year. Product sales and gaming operations posted
substantial gains, increasing 37% and 27% over the prior year. Both areas also
contributed to the overall gross profit of $534.9 million for the current fiscal
year versus $397.8 million in fiscal 2000.
Product sales reached an all-time high of $824.3 million on shipments of 120,000
units worldwide for fiscal 2001. Comparatively, fiscal 2000 sales totaled $603.4
million on shipments of 107,000 units. A 44% increase in domestic shipments
drove this improvement, with 64,500 units in fiscal 2001 compared to 44,700 in
the prior year. Replacement sales of 38,000 machines domestically represented a
100% increase over fiscal 2000. Replacement sales were especially strong in the
Nevada, Midwestern and Native American markets. IGT innovations in slot
technology such as Multi-Denomination(TM) games and EZ Pay(TM) games and systems
along with strong player acceptance of new games helped stimulate these
replacement sales. Fiscal 2001 sales of 11,900 machines into the new California
Native American market contributed significantly to the increase. IGT also
provided gaming machines to several new casinos during the current year
including the Texas Casino, Palms Casino and Green Valley Ranch in Las Vegas,
and the San Manuel in California.
International shipments declined 11% to 55,300 units in fiscal 2001 versus
62,300 units during fiscal 2000. Japanese shipments slowed to 7,400 compared to
14,600 in the prior year due to difficulties experienced in bringing popular new
games to the market. Australia realized improvements from the standardization of
its product line resulting in unit sales of 9,800, a 47% increase over the prior
year. Slight declines were experienced by the UK, Europe and Africa, with
offsetting improvements in Latin America.
Product sales margins rose to 40% during fiscal 2001 compared to 38% in fiscal
2000 as a result of volume efficiencies and a higher percentage of domestic
sales.
Proprietary gaming, which includes our wholly-owned gaming operations and our
unconsolidated joint venture activities reported as earnings of unconsolidated
affiliates, also reached record levels in fiscal 2001. This business segment
produced revenues and earnings of unconsolidated affiliates totaling $517.6
million during the current year compared to $401.0 million in fiscal 2000. The
combination of the ongoing popularity of our established proprietary games, such
as
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Wheel of Fortune(R), and the successful introduction of new games again drove
positive financial results. The newest games in our proprietary games family,
Jeopardy!(R) Video Slots, The Addams Family (TM), Austin Powers(TM), The Price
is Right(TM) and the $1,000,000 Pyramid(TM) along with the joint venture game I
Dream of Jeannie(TM), contributed significantly to the overall improvement. The
total installed base of our proprietary games, including joint venture and
strategic alliance games, topped 26,200 units, a growth rate of 36% over the
prior year's installed base of 19,200 games.
Gross margin contributions from proprietary gaming totaled $346.5 million in
2001, 25% higher than the $276.2 million recorded in fiscal 2000. The resulting
gross profit percentage declined two percentage points in fiscal 2001 to 67%.
Significant interest rate cuts during the current year adversely impacted our
cost of funding jackpot payments. The fiscal 2001 installed base also had a
larger percentage of "theme" games, which entailed additional royalty costs.
In recognition that all games have a finite lifecycle, IGT systematically
replaces legacy proprietary games experiencing declining play levels with new
games incorporating enhanced entertainment value and improved player appeal.
During fiscal 2001, we removed 20 proprietary systems games in eight
jurisdictions. At September 29, 2001, IGT operated proprietary games in 18
domestic jurisdictions, as well as one international system in Iceland versus 17
domestic jurisdictions and one international location at the end of fiscal 2000.
Operating Expenses
Operating expenses, excluding impairment and restructuring charges, totaled
$283.4 million or 24% of total revenues in fiscal 2001 versus $236.3 million or
26% of revenues for the prior year. Selling, general, and administrative
expenses increased $31.5 million as a result of higher variable commission and
incentive costs, along with additional legal and compliance costs in support of
stronger sales volumes. Depreciation and amortization expense, not included in
cost of sales, declined slightly to $20.3 million.
Research and development expenses for fiscal 2001 were $62.5 million as compared
to $55.2 million in 2000. Additional personnel and related costs to support our
commitment to innovative game development resulted in this increase. Bad debt
expense increased $8.9 million related to increased sales volume and specific
reserves related to international receivables.
Other Income and Expense
Other expense, net, totaled $55.8 million for the current year compared to $22.5
million for the prior year. The primary difference in the two periods relates to
the aforementioned legal settlement received in fiscal 2000. Additionally, gains
on investments declined $4.1 million based on corporate cash investment timing
and market conditions.
Our worldwide tax rate increased to 37% in fiscal 2001 from 36% in fiscal 2000.
We expect our tax rate for fiscal 2002 to fluctuate between 37% and 37.5%.
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 grew to $169.1 million or 21% of related revenues
for the fiscal year 2001 compared to $95.5 million or 16% for fiscal 2000. This
significant improvement reflects the growth in domestic sales partially offset
by increased research and development costs.
In fiscal 2001, operating profit for the proprietary gaming segment reached
$251.6 million, an increase of $60.7 million or 32% over the prior year. This
improvement resulted from the growth of the installed base of our proprietary
machines and
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
the popularity of both the established games such as Wheel of Fortune(R) and our
newer proprietary games themes. This improvement was slightly offset by the
increased cost of funding jackpot payments and higher royalty costs as discussed
previously.
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. Fiscal 2000 net income of $156.8 million or $2.00 per
diluted share included the effects of the following one-time events:
o a gain of $27.0 million ($17.3 million net of tax)or $0.22 per diluted share
from a legal settlement;
o a 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 a 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 an 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 14 of Notes to Consolidated Financial Statements.
In the fourth quarter of fiscal 1999, we determined that the total unamortized
balance of intangible assets related to the Olympic acquisition was fully
impaired. We recorded an impairment charge of $86.8 million. See Note 8 of Notes
to Consolidated Financial Statements for a discussion of the reasons for the
impairment charge. 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 the fourth quarter of 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. Although our Australian
subsidiary recorded an operating loss for the year, the financial results
continued to improve each quarter culminating with a profit recorded in the
fourth quarter, the first profitable quarter in several years.
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 at 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.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operating Income
Fiscal 2000 operating income, before impairment and restructuring charges, grew
25% to $267.5 million or 30% of revenues compared to $214.4 million or 25% of
revenues for the prior year. This improvement was due to the increased gross
profit margins in both product sales and gaming operations and gains in the
earnings of our unconsolidated affiliates, partially offset by higher operating
expenses, as discussed below.
Revenues, Earnings of Unconsolidated Affiliates and Gross Profit Margins
Total revenues for fiscal 2000 improved to $898.4 million over fiscal 1999
revenues of $854.1 million, reflecting a 5% increase in product sales and a 6%
increase in gaming operations. This improvement was due to continued growth in
our domestic revenues, which increased by 11% over the prior year. Gross profit
on total revenues for fiscal 2000 increased by 15% to $397.8 million compared to
$345.7 million for fiscal 1999. This improvement was attributable to growth in
profitability year-over-year for both product sales and gaming 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 fiscal 2000 from
41,100 units in fiscal 1999, predominantly due to sales of approximately 5,000
units into the new California Native American market. Fiscal 2000 domestic
shipments to new casinos also included Suncoast in Nevada, Hollywood Casino in
Louisiana, Belterra Resort in Indiana, and Greektown Casino 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.
The gross profit percentage on product sales improved to 38% for fiscal 2000
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.
Gaming operations revenue, for the year ended September 30, 2000 improved to
$295.0 million compared to $277.5 million in fiscal 1999. The gross profit
performance in gaming operations climbed to $170.2 million or 58% for fiscal
2000 from $135.0 million or 49% in fiscal 1999. The inclusion of Sodak's gaming
operations revenues and the impact of higher interest rates, which lowered the
cost of funding jackpot payments were the most significant contributors to this
margin growth.
Earnings of unconsolidated affiliates, a separate component of operating income
reported net of expenses for accounting purposes, boosted by the continued
popularity of the Wheel of Fortune(R) games, grew 40% to $106.0 million in
fiscal 2000 compared to $75.6 million in fiscal 1999.
Performance of our proprietary gaming segment, which includes our wholly-owned
gaming operations and our unconsolidated joint venture activities, accelerated
markedly in fiscal 2000 due to significant placements of our newest and most
popular game themes. The installed base of our proprietary games, including
placement under joint ventures, at September 30, 2000 experienced 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.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Also contributing to the overall growth in proprietary gaming were the successes
of Multi-Hand Poker(TM), Party Time(R), Elvis(R) and The Addams Family (TM)
games. Fiscal 2000 brought the installation of new feature rich proprietary
games with second event bonusing, incorporating popular themes such as The
Addams Family (TM) and Jeopardy!(R) Video. During fiscal 2000, we discontinued
19 proprietary game systems in eight jurisdictions. As of September 30, 2000,
our proprietary games operated in 17 domestic jurisdictions and one
international location versus 11 domestic jurisdictions and one international
location at the end of fiscal 1999.
Operating Expenses
Fiscal 2000 operating expenses, excluding impairment and restructuring charges,
totaled $236.3 million or 26% of total revenue compared to $206.8 million or 24%
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
fiscal 2000, primarily as a result of engineering expenses related to new game
development. Bad debt expense increased $2.0 million over fiscal 1999 primarily
due to fluctuations in sales volumes.
Other Income and Expense
Other expense, net, for fiscal 2000 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.
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 proprietary gaming segment totaled
$190.9 million, an increase of $46.5 million or 32% compared to the prior year.
This improvement resulted from the growth of our installed base and excellent
player acceptance of our new proprietary games, the continued popularity of the
joint venture 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.
Foreign Operations
Approximately 16% of our revenues and earnings from unconsolidated affiliates in
fiscal 2001, 24% in fiscal 2000, and 28% in fiscal 1999 were derived outside of
North America. To date, we have not experienced significant translation or
transaction losses related to foreign exchange fluctuations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
Capital Resources
One of IGT's fundamental financial strengths is our ability to generate cash
from operations to reinvest in our business. We anticipate that our operating
activities in fiscal 2002 will continue to provide us with cash flows to assist
in our business expansion and to meet our financial commitments. Our sources of
capital also include, but are not limited to, 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 and acquisitions, and share repurchases. Our sources of capital
afford us the financial flexibility to target acquisitions of businesses that
offer opportunities to implement our operating strategies, increase our rates of
return, and improve shareholder value.
Operating Activities
Cash provided by operations in fiscal 2001 totaled $198.2 million, an increase
of 54% from 2000, primarily as the result of favorable operating performance
discussed earlier. Fiscal 2000 cash provided by operations totaled $128.8
million, a decrease of 51% from 1999. Fiscal 1999 operating cash flow benefited
from the one-time realization of accumulated deferred tax assets related to the
timing of the jackpot payments for tax purposes, as the result of federal
legislation passed in October 1998. This new law allowed previous, as well as
future, jackpot winners to elect to receive lump sum discounted payments in lieu
of future annual installments.
Net Cash Flow from Proprietary Progressive Jackpot Systems
Our proprietary progressive jackpot systems provide cash through collections
from systems to fund jackpot liabilities and from maturities of US government
securities purchased to fund future annual jackpot payments. Cash is used to
make payments to jackpot winners for jackpot liabilities or to purchase US
government securities to fund future jackpot payments. The purchase of and
proceeds from the US government securities are classified as investing
activities. Collections from systems to fund jackpot liabilities and payments on
jackpot liabilities are classified as financing activities. Net cash flows from
these activities represent timing differences between the growth in liabilities
for jackpots and the actual payments to the winners during the period.
Fluctuations in net cash flows from systems occur based on the timing of the
jackpot cycles and the volume of play across all of our proprietary progressive
jackpot systems. Net cash flow from these activities collectively provided cash
of $18.2 million in fiscal 2001 and used cash of $23.2 million and $21.3 million
in fiscal 2000 and fiscal 1999.
Investing Activities
In 2001, investing activities used an additional $89.1 million in cash compared
to 2000. This increase was the result of business acquisition costs during 2001
and a decrease in proceeds from disposals of investments and other assets.
Fiscal 2000 included $43.0 million in proceeds from sale of the Miss Marquette
riverboat, a held-for-sale asset acquired in the purchase of Sodak in fiscal
1999. Fiscal 2000 provided cash from investing of $18.4 million compared to a
use of investing cash in 1999 of $89.0 million primarily related to business
acquisitions. See Note 2 of Notes to Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Total capital expenditures for property, plant and equipment and the percentage
distribution by geographic operating segment for fiscal 2001, 2000, and 1999 are
as follows:
Fiscal Years
----------------------------------
2001 2000 1999
------------------------------------------------------------------
(Amounts in thousands)
Capital Expenditures $34,651 $18,460 $17,751
Domestic 88% 77% 60%
International 12% 23% 40%
The increase in fiscal 2001 spending is primarily due to investments to improve
the productivity of operations. A portion of fiscal 2001 spending was used to
update our internal software systems with an enterprise resource planning (ERP)
solution and software to support our engineering activities. The ERP project is
expected to be phased in over the next two years.
Financing Activities
Net cash flow from financing activities used $9.1 million in 2001, $332.1
million in 2000, and provided cash of $81.2 million in 1999. The change between
2001 and 2000 was primarily due to decreased purchases of treasury stock. The
fluctuation between 2000 and 1999 was primarily due to increased borrowings
related to our $1 billion Senior Notes issued in May 1999.
Stock Repurchase Plan
Our Board of Directors originally authorized IGT's stock repurchase plan in
October 1990. As of November 24, 2001, the remaining share repurchase
authorization, as amended, totaled 8.2 million additional shares. During fiscal
2001, we repurchased 2.5 million shares for an aggregate price of $100.7
million. During fiscal 2000, we repurchased 15.7 million shares for an aggregate
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 price of $361.4 million.
Credit Facilities and Indebtedness
Our domestic and foreign borrowing facilities totaled $275.0 million at
September 29, 2001. Of this amount, $5.0 million was drawn, $6.6 million was
reserved for letters of credit and the remaining $263.4 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 29, 2001, 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 (1) increasing our vulnerability to general adverse
economic and industry conditions; (2) limiting our ability to obtain additional
financing to fund future working capital, capital expenditures, acquisitions and
other general corporate requirements; (3) 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;
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(4) limiting our flexibility in planning for, or reacting to, changes in our
business and the industry; and (5) disadvantaging us compared to competitors
with less indebtedness. The indenture contains a number of covenants, which
restricts our ability to incur indebtedness, create or incur liens on our
assets, or enter into sale/leaseback transactions. At September 29, 2001, we
were in compliance with all applicable covenants.
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 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. At September 29, 2001, we had $984.7 million outstanding in
long-term debt, net of unamortized discount compared to $991.5 million at
September 30, 2000.
Financial Condition
September 29, September 30,
2001 2000
------------------------------------------------------------------
(Amounts in thousands)
Total assets $1,923,439 $1,623,716
Total liabilities 1,627,326 1,527,131
Total stockholders' equity 296,113 96,585
Total assets increased $299.7 million or 18% during fiscal 2001 primarily due to
increases in cash, receivables, and inventories related to higher sales volumes
and timing. Intangible assets grew predominantly due to the acquisition of
Silicon in March 2001. See Note 2 of Notes to Consolidated Financial Statements.
Property, plant, and equipment increased due to capital expenditures during the
year, net of depreciation expense, and from the non-cash transfer of machines
from inventory to gaming systems equipment. The increase in other assets related
to increased royalty prepayments.
Total liabilities at September 29, 2001 increased $100.2 million or 7% primarily
related to sales volume and payment timing. Lower interest rates also
contributed to increased jackpot liabilities. Other liabilities increased
related to marketing commitments and accrued income taxes. Long-term notes
payable decreased related to the repurchase of $8.0 million of our Senior Notes.
Total stockholders' equity increased $199.5 million predominantly related to net
income generated during the year, offset by treasury stock repurchases.
Additional paid in capital increased as the result of employee stock plans.
Impact of Inflation
Inflation has not had a significant effect on IGT's operations during the last
three fiscal years.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recently Issued Accounting Standards
On June 30, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities and on June 30, 2000, SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an Amendment of SFAS No. 133. These statements establish accounting
and reporting standards for derivative instruments and hedging activities. We
adopted SFAS 133 on October 1, 2000. Adoption of this statement did not have a
material impact on our financial condition or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB 101 clarifies existing accounting principles related to revenue recognition
in financial statements and was effective beginning with our fourth quarter of
fiscal 2001. Adoption of SAB 101 did not have a material impact on our financial
condition or results of operations.
In June 2001, the FASB issued two new standards, SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. Together
these statements will change the accounting for business combinations and
goodwill. SFAS 141 requires the purchase method of accounting for all business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. SFAS 142 changes the accounting for goodwill and
indefinite lived intangible assets from an amortization method to an impairment
only approach. Thus, amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of SFAS 142. Amortization
will still be required for identifiable intangible assets with finite lives. The
provisions of SFAS 142 are required to be applied starting with fiscal years
beginning after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the first
interim financial statements have not previously been issued. We are required to
adopt SFAS 142 at the beginning of our fiscal year 2003. We have not yet
completed our analysis of the impact that SFAS 141 and SFAS 142 will have on our
financial condition or results of operations.
In July 2001, the SEC issued SAB No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. SAB 102 gives guidance on the
documentation and methodologies used in the determination of loan loss
allowances. We believe that the adoption of this bulletin will not have a
material impact on our financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment and
Disposal of Long-Lived Assets. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001, which
would be IGT's fiscal 2003. We have not yet completed our analysis of the impact
that SFAS 144 will have 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.
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.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Our operating subsidiaries affected by the euro conversion have established and
are implementing 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.
Item 7a. Quantitative and Qualitative Factors about Market Risk
Market Risk
In the normal course of business, IGT is exposed to market risk from changes in
foreign currency exchange rates and interest rates. We address these risks
through a risk management program that includes the use of derivative financial
instruments. The program is operated pursuant to documented corporate risk
management policies. The counter parties to these instruments are major
financial institutions and we believe that credit loss in the event of
nonperformance is remote. We do not enter into any derivative transactions for
speculative purposes.
Foreign Currency Risk
We routinely use forward exchange contracts to hedge our net exposures, by
currency, related to the non-functional currency monetary assets and liabilities
of our operations. The primary business objective of this hedging program is to
minimize the impact to our earnings resulting from exchange rate changes. We had
forward contracts totaling $40.5 million and $63.5 million at the end of fiscal
2001 and 2000 to hedge currency exposures of $44.6 million and $58.0 million. 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. There were no firm commitment hedges at the
end of the current or prior year periods.
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 $1.5 million
in the current fiscal year compared to less than $1.0 million in the prior year.
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 used to fund liabilities to jackpot
winners. We record expense for future jackpots based on these rates, which are
impacted by market interest rates and other economic conditions. Therefore, the
gross profit on our proprietary gaming segment decreases when interest rates
decline. We estimated that a 10% decline in interest rates would have impacted
gaming operations gross profit by $6.1 million in fiscal 2001 and $8.6 million
in 2000. We also estimated that a 10% decline in interest rates would have
impacted earnings of unconsolidated affiliates by $3.7 million in fiscal 2001
and $1.5 million in 2000. IGT currently does not manage this exposure with
derivative financial instruments.
Item 7a. Quantitative and Qualitative Factors about Market Risk
IGT grants customers extended payment terms under contracts of sale secured by
the equipment sold and occasionally provides loans to customers for other than
gaming equipment. These contracts and notes are generally for terms of one to
ten years, with interest recognized at prevailing rates. Within our portfolio,
we have both fixed and variable rate notes and contracts receivable. If interest
rates decreased by 10%, we estimated the interest income for our variable rate
notes and contracts would be impacted by approximately $691,000 in fiscal 2001
and $525,000 in 2000. If interest rates increased by 10%, we estimated the fair
value of the fixed rate notes and contracts would have decreased by
approximately $753,000 at the end of fiscal year 2001 and $3.9 million at the
end of 2000.
Our outstanding Senior Notes carry interest at fixed rates. If interest rates
increased by 10%, the fair market value of these notes would have decreased
approximately $33.2 million at September 29, 2001 and $40.1 million at September
30, 2000.
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Financial Statements Page
Independent Auditors' Report 38
Consolidated Statements of Income
for the years ended September 29, 2001, September 30, 2000 and
October 2, 1999 39
Consolidated Balance Sheets
at September 29, 2001 and September 30, 2000 40
Consolidated Statements of Cash Flows
for the years ended September 29, 2001, September 30, 2000 and
October 2, 1999 42
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 29, 2001, September 30, 2000 and
October 2, 1999 45
Notes to Consolidated Financial Statements 46
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 29, 2001 and
September 30, 2000, 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 29, 2001. 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 29,
2001 and September 30, 2000, and the results of its operations and its cash
flows for each of the three years in the period ended September 29, 2001, 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 16, 2001
Consolidated Statements of Income
Years ended
----------------------------------------------
September 29, September 30, October 2,
2001 2000 1999
- --------------------------------------------------------------------------------------------------------
(Amounts in thousands except per share amounts)
Revenues
Product sales $ 824,267 $ 603,381 $576,598
Gaming operations 374,942 295,023 277,508
---------- --------- --------
Total revenues 1,199,209 898,404 854,106
---------- --------- --------
Costs and expenses
Cost of product sales 493,201 375,750 365,948
Cost of gaming operations 171,087 124,806 142,497
Selling, general and administrative 181,521 150,051 129,211
Depreciation and amortization 20,252 20,897 23,955
Research and development 62,526 55,204 45,462
Provision for bad debts 19,073 10,153 8,153
Impairment (recoveries) of assets and restructuring (1,100) 6 98,118
---------- --------- --------
Total costs and expenses 946,560 736,867 813,344
---------- --------- --------
Earnings of unconsolidated affiliates 142,630 105,991 75,556
---------- --------- --------
Income from operations 395,279 267,528 116,318
---------- --------- --------
Other income (expense)
Interest income 49,819 50,977 55,525
Interest expense (102,039) (102,170) (72,764)
Gain on investments 438 4,553 5,438
Loss on the sale of assets (26) (917) (562)
Other (3,999) 25,016 (2,562)
---------- --------- --------
Other expense, net (55,807) (22,541) (14,925)
---------- --------- --------
Income before income taxes and
extraordinary item 339,472 244,987 101,393
Provision for income taxes (125,537) (88,195) (36,081)
---------- --------- --------
Income before extraordinary item 213,935 156,792 65,312
Extraordinary loss on early redemption of
debt, net of income tax benefit of $1,640 - - (3,254)
---------- --------- --------
Net income $ 213,935 $ 156,792 $ 62,058
========== ========= ========
Basic earnings per share
Income before extraordinary item $ 2.90 $ 2.05 $ 0.65
Extraordinary loss - - (0.03)
---------- --------- --------
Net income $ 2.90 $ 2.05 $ 0.62
========== ========= ========
Diluted earnings per share
Income before extraordinary item $ 2.80 $ 2.00 $ 0.65
Extraordinary loss - - (0.03)
---------- --------- --------
Net income $ 2.80 $ 2.00 $ 0.62
========== ========= ========
Weighted average common shares outstanding 73,851 76,586 99,461
Weighted average common and potential
shares outstanding 76,525 78,229 100,238
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Balance Sheets
September 29, September 30,
2001 2000
- -----------------------------------------------------------------------------------------------
(Amounts in thousands, except shares and par value)
Assets
Current assets
Cash and cash equivalents $ 364,234 $ 244,907
Investment securities, at market value 13,085 21,473
Accounts receivable, net of allowances for doubtful
accounts of $15,944 and $13,831 249,410 219,948
Current maturities of long-term notes and contracts
receivable, net of allowances 62,977 76,320
Inventories, net of allowances for obsolescence
of $28,887 and $24,304:
Raw materials 71,835 98,081
Work-in-process 3,093 4,593
Finished goods 80,962 44,315
---------- ----------
Total inventories 155,890 146,989
---------- ----------
Investments to fund liabilities to jackpot winners 29,286 27,939
Deferred income taxes 30,053 29,086
Prepaid expenses and other 62,739 47,564
---------- ----------
Total current assets 967,674 814,226
---------- ----------
Long-term notes and contracts receivable,
net of allowances and current maturities 90,606 76,888
---------- ----------
Property, plant and equipment, at cost
Land 19,597 19,889
Buildings 78,677 75,891
Gaming operations equipment 122,613 87,918
Manufacturing machinery and equipment 139,084 121,512
Leasehold improvements 5,164 4,996
---------- ----------
Total 365,135 310,206
Less accumulated depreciation and amortization (159,788) (143,297)
---------- ----------
Property, plant and equipment, net 205,347 166,909
---------- ----------
Investments to fund liabilities to jackpot winners 233,669 229,726
Deferred income taxes 133,728 97,670
Intangible assets, net 179,634 143,738
Investments in unconsolidated affiliates 74,659 70,601
Other assets 38,122 23,958
---------- ----------
Total assets $1,923,439 $1,623,716
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Balance Sheets
September 29, September 30,
2001 2000
- ---------------------------------------------------------------------------------------------------
(Amounts in thousands, except shares and par value)
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes payable $ 5,023 $ 4,621
Accounts payable 125,164 76,387
Jackpot liabilities 85,109 55,942
Accrued employee benefit plan liabilities 41,452 31,425
Accrued interest 30,884 31,369
Other accrued liabilities 83,267 59,249
----------- ------------
Total current liabilities 370,899 258,993
Long-term notes payable, net of current maturities 984,742 991,507
Long-term jackpot liabilities 258,457 267,985
Other liabilities 13,228 8,646
----------- ------------
Total liabilities 1,627,326 1,527,131
----------- ------------
Commitments and contingencies (See Notes 10 and 14)
Stockholders' Equity
Common stock, $.000625 par value; 320,000,000
shares authorized; 156,633,430 and 153,739,686
shares issued 98 96
Additional paid-in capital 365,233 278,825
Retained earnings 1,257,119 1,043,184
Treasury stock; 83,700,984 and 81,170,767 shares, at cost (1,316,444) (1,215,707)
Accumulated other comprehensive loss (9,893) (9,813)
----------- ------------
Total stockholders' equity 296,113 96,585
----------- ------------
Total liabilities and stockholders' equity $ 1,923,439 $ 1,623,716
=========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
Years ended
---------------------------------------------
September 29, September 30, October 2,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities
Net income $213,935 $156,792 $ 62,058
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 63,348 54,387 61,448
Amortization of discounts and deferred offering costs 2,939 2,457 879
Provision for bad debts 19,073 10,153 8,153
Provision for inventory obsolescence 21,088 16,001 19,185
Gain on investment securities and fixed assets (412) (3,636) (4,876)
Stock plan compensation costs 1,269 1,216 1,005
(Increase) decrease in operating assets,
net of acquisitions:
Receivables (21,330) (32,878) 17,257
Inventories (94,687) (67,430) (32,403)
Prepaid expenses and other (19,139) (5,993) (21,867)
Other assets (19,553) (8,458) (8,864)
Net accrued and deferred income taxes, net of
tax benefit of employee stock plans 19,931 (17,394) 38,165
Increase in accounts payable and accrued liabilities,
net of acquisitions 16,425 44,610 13,481
Impairment (recoveries) of assets and restructuring (1,100) 6 98,118
Extraordinary loss on debt retirement - - 4,894
Earnings of unconsolidated affiliates (in excess of)
less than distributions (3,637) (20,993) 4,806
-------- -------- --------
Total adjustments (15,785) (27,952) 199,381
-------- -------- --------
Net cash provided by operating activities 198,150 128,840 261,439
-------- -------- --------
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
Years ended
----------------------------------------------
September 29, September 30, October 2,
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from investing activities
Cash advanced on loans receivable (40,179) (25,327) -
Payments received on loans receivable 29,652 3,519 -
Investment in property, plant and equipment (34,651) (18,460) (17,751)
Proceeds from sale of property, plant and equipment 1,402 11,503 2,988
Investments:
Purchases (3,891) (14,034) (12,510)
Proceeds 13,891 12,758 11,957
Investments to fund liabilities to jackpot winners:
Purchases (33,098) (25,202) (43,589)
Proceeds 27,814 30,469 194,957
Proceeds from sale of other assets - 43,249 -
Investment in unconsolidated affiliates (420) (55) (26,229)
Acquisition of businesses, net of cash acquired (31,177) - (198,860)
----------- ------------ ----------
Net cash provided by (used in) investing activities (70,657) 18,420 (89,037)
----------- ------------ ----------
Cash flows from financing activities
Long-term debt:
Proceeds 5,093 12,008 1,636,276
Principal payments (18,604) (10,408) (1,013,484)
Jackpot liabilities:
Collections from systems 91,596 82,769 89,184
Payments to winners (68,106) (111,251) (261,899)
Proceeds from employee stock plans 43,726 13,287 3,693
Purchases of treasury stock (62,807) (318,473) (361,419)
Penalties paid on early retirement of debt - - (4,658)
Payments of cash dividends - - (6,474)
----------- ------------ ----------
Net cash provided by (used in) financing activities (9,102) (332,068) 81,219
----------- ------------ ----------
Effect of exchange rate changes on cash
and cash equivalents 936 3,372 (2,691)
----------- ------------- -----------
Net increase (decrease) in cash
and cash equivalents 119,327 (181,436) 250,930
Cash and cash equivalents at:
Beginning of year 244,907 426,343 175,413
----------- ------------- -----------
End of year $ 364,234 $ 244,907 $ 426,343
=========== ============= ===========
The accompanying notes are an integral part of these consolidated
financial statements.
Supplemental Cash Flows Information
Certain non-cash investing and financing activities described below are not
reflected in the consolidated statements of cash flows. Depreciation and
amortization reflected in the statements of cash flows includes the amounts
presented separately on the statements of income, plus depreciation that is
classified as a component of cost of product sales and cost of gaming
operations.
Years ended
-----------------------------------------------
September 29, September 30, October 2,
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Increase in property, plant, and equipment
related to net transfers between inventory
and gaming operations equipment $53,844 $ 15,598 $ 32,879
Treasury stock acquired for options exercised 2,650 - -
Tax benefit of employee stock plans 38,765 2,381 570
Payments of interest 99,584 99,330 42,608
Payments of income taxes 115,472 107,216 28,004
Acquisitions (see Note 2):
Fair value of assets acquired 53,218 - 130,887
Fair value of liabilities assumed 22,041 - 43,888
Excess of purchase price over net assets acquired - - 111,861
Accrued investing and financing transactions where
cash did not settle until after September 29, 2001
included:
Investment purchases 1,838 - -
Principal payments on debt 8,000 - -
Purchases of treasury stock 35,280 - -
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Changes in Stockholders' Equity
Years ended
------------------------------------------
September 29, September 30, October 2,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Common stock
Balance at beginning of year
153,740; 152,871; and 152,587 shares $ 96 $ 96 $ 95
Employee stock plans
2,893; 869; and 284 shares 2 - 1
----------- ----------- ----------
Balance at end of year
156,633 shares at 2001 $ 98 $ 96 $ 96
=========== =========== ==========
Additional paid-in capital
Balance at beginning of year $ 278,825 $ 261,941 $ 256,656
Employee stock plans 46,374 13,287 3,710
Stock plan compensation costs 1,269 1,216 1,005
Tax benefit of employee stock plans 38,765 2,381 570
----------- ----------- ----------
Balance at end of year $ 365,233 $ 278,825 $ 261,941
=========== =========== ==========
Retained earnings
Balance at beginning of year $ 1,043,184 $ 886,392 $ 827,542
Dividends declared - - (3,208)
Net income 213,935 156,792 62,058
----------- ----------- ----------
Balance at end of year $ 1,257,119 $ 1,043,184 $ 886,392
=========== =========== ==========
Treasury stock
Balance at beginning of year $(1,215,707) $ (897,234) $(535,797)
Purchases of treasury stock (100,737) (318,473) (361,437)
----------- ----------- ---------
Balance at end of year $(1,316,444) $(1,215,707) $(897,234)
=========== =========== =========
Accumulated comprehensive loss (a)
Balance at beginning of year $ (9,813) $ (8,977) $ (7,220)
Other comprehensive loss (80) (836) (1,757)
----------- ----------- ---------
Balance at end of year $ (9,893) $ (9,813) $ (8,977)
=========== =========== =========
Summary of total comprehensive income (a)
Net income $ 213,935 $ 156,792 $ 62,058
Other comprehensive loss (80) (836) (1,757)
----------- ----------- ---------
Comprehensive income $ 213,855 $ 155,956 $ 60,301
=========== =========== =========
(a) All items of comprehensive income and other comprehensive income are
displayed net of tax effects (see Note 16).
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, Company, we, our and
us) is one of the largest manufacturers of computerized casino gaming products
and operators of proprietary gaming systems in the world and was the first to
develop computerized video gaming machines. Since our founding in 1980, IGT has
principally served the casino gaming industry in the United States. In 1986, we
began expanding our business internationally, and in addition to our production
in the United States, we currently manufacture our 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. IGT
provides gaming products in every significant legalized gaming jurisdiction in
the world.
International Game Technology was incorporated in December 1980 to acquire the
gaming licensee and operating entity, IGT, and to facilitate our initial public
offering. In addition to our 100% ownership of IGT, International Game
Technology has the following direct or indirect 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); Sodak Gaming, Inc. (Sodak), and Silicon
Gaming, Inc. (Silicon).
Lines of Business
IGT operates principally in two lines of business: the development,
manufacturing, marketing and distribution of gaming products referred to as
"Product Sales" and the development, marketing and operation of wide-area
progressive (WAP) systems, stand-alone games, and gaming equipment leasing,
referred to as "Proprietary Gaming." Our proprietary gaming segment includes our
wholly-owned gaming operations and our unconsolidated joint venture activities
reported as earnings of unconsolidated affiliates.
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 club, 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 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.
Proprietary Gaming
IGT's proprietary gaming segment includes our wholly-owned gaming operations and
our unconsolidated joint venture activities reported as earnings of
unconsolidated affiliates.
Notes to Consolidated Financial Statements
Proprietary Games
Approximately 7% of the domestic installed base of gaming machines generates
recurring revenue whereby the manufacturer participates in the revenue from the
machine on a percentage or flat fee basis. We collectively refer to machines of
this nature as "proprietary games," including linked WAP systems and stand-alone
machines, in both our wholly-owned gaming operations and our unconsolidated
joint venture operations.
We have developed and operated WAP systems, collectively referred to as
MegaJackpots(TM), since 1986. WAP 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 the top award winning combination. WAP
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.
We also supply certain proprietary games in a "stand alone" format. These games
are proprietary in nature but not linked to a progressive system. These games
are either leased on a per machine per day basis or are operated under a revenue
sharing agreement. This format was created for the customer that didn't want to
contribute to a large jackpot, yet still wanted our proprietary games on the
floor.
IGT operates certain proprietary games under joint venture agreements or joint
marketing alliances with other gaming companies, principally with Anchor. The
purpose of these strategic alliances is to combine the game development efforts
or license property rights of other companies with IGT's WAP systems,
manufacturing, distribution, and marketing expertise.
At September 29, 2001, IGT operated proprietary games in 18 domestic
jurisdictions, as well as one international system in Iceland. Included among
these jurisdictions is Native America, which encompassed 18 US States. These
games may be offered in different denominations in each jurisdiction.
Lease and Other Gaming Operations
Under various technology provider license and lease agreements with state
lotteries and pari-mutuel facilities, we receive a percentage of the revenue for
use and maintenance of machines and/or systems. We also sell machines with
attached royalty agreements, primarily with Action Gaming, where we receive a
monthly royalty fee. We also receive recurring revenue in various jurisdictions
from contracts for short-term rental or long-term lease of gaming machines.
Principles of Consolidation and Revenue Recognition
The consolidated financial statements include the accounts of International Game
Technology and all of its majority-owned subsidiaries. Investments in
unconsolidated affiliates, which are 50% or less owned joint ventures, are
accounted for using the equity method. Joint marketing alliances for which no
legal entity exists are accounted for on a pro-rata basis whereby our
proportionate share of assets, liabilities, revenues, and expenses are included
in our financial statements. All material inter-company accounts and
transactions have been eliminated.
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.
Notes to Consolidated Financial Statements
Proprietary Gaming
The following table shows the revenues from gaming operations and earnings of
unconsolidated affiliates:
Years ended
------------------------------------------
September 29, September 30, October 2,
2001 2000 1999
-------------------------------------------------------------------------------------
(Dollars in thousands)
Gaming operations
Proprietary games $ 323,853 $ 249,952 $ 244,808
Lease operations 51,089 45,071 32,700
---------- ---------- ----------
Total gaming operations 374,942 295,023 277,508
Earnings of unconsolidated affiliates 142,630 105,991 75,556
---------- ---------- ----------
Total proprietary gaming $ 517,572 $ 401,014 $ 353,064
========== ========== ==========
Gaming operations revenues consist of revenues relating to the operation of
proprietary games, either connected to progressive jackpot systems or in
stand-alone formats, and the lease and rental of gaming and video lottery
machines. Revenues from proprietary WAP games are recognized monthly based on a
percentage of the revenue, or "coin in." Revenues from proprietary games in
stand-alone format are recognized monthly based on the net win that the game
generates for the operator. Lease and rental revenue is recognized with the
passage of time.
The operation of linked progressive systems varies among jurisdictions as a
result of different gaming regulations. In all jurisdictions, the jackpot on WAP
systems increases based on the coin-in. The casinos pay a percentage of the
coin-in to IGT, an administrator or a trust to administer and fund the
progressive jackpot. This percentage of coin-in (contribution) is recognized as
revenue. Concurrently, IGT, the administrator or the trust recognize a liability
for jackpots not yet won and jackpot expense (as a component of the cost of
gaming operations) for the cost to fund these jackpots in the future.
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 may elect to receive the discounted value of the
jackpot in lieu of annual installments. Jackpots on some of our MegaJackpots(TM)
games, referred to as MegaJackpots-Instant Winner(TM) systems, 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 the Iowa trust profits.
IGT operates several proprietary games under a joint venture agreement,
principally with Anchor, that are accounted for using the equity method. Because
the nature of the operations of our joint ventures are the same as our gaming
operations and these activities are an integral part of our business, the
earnings from unconsolidated affiliates is included as a component of income
from operations. In accordance with the equity method, IGT's portion of joint
venture income is recorded net of expenses and is presented on the income
statement under a separate caption titled "Earnings of Unconsolidated
Affiliates."
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.
Notes to Consolidated Financial Statements
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.
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
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 8).
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 deferred offering costs related to
Senior Notes issued in May 1999 (see Note 9), prepaid and deferred royalty costs
and deposits.
Earnings Per Share
Earnings per share is computed based on the weighted average number of common
and potential shares outstanding.
Notes to Consolidated Financial Statements
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.
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.
Recently Issued Accounting Standards
On June 30, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities and on June 30, 2000, SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an Amendment of SFAS No. 133. These statements establish accounting
and reporting standards for derivative instruments and hedging activities. We
adopted SFAS 133 on October 1, 2000. Adoption of this statement did not have a
material impact on our financial condition or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB 101 clarifies existing accounting principles related to revenue recognition
in financial statements and was effective beginning with our fourth quarter of
fiscal 2001. Adoption of SAB 101 did not have a material impact on our financial
condition or results of operations.
In June 2001, the FASB issued two new standards, SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. Together
these statements will change the accounting for business combinations and
goodwill. SFAS 141 requires the purchase method of accounting for all business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. SFAS 142 changes the accounting for goodwill and
indefinite lived intangible assets from an amortization method to an impairment
only approach. Thus, amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of SFAS 142. Amortization
will still be required for identifiable intangible assets with finite lives. The
provisions of SFAS 142 are required to be applied starting with fiscal years
beginning after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the first
interim financial statements have not previously been issued. We are required to
adopt SFAS 142 at the beginning of our fiscal year 2003. We have not yet
completed our analysis of the impact that SFAS 141 and SFAS 142 will have on our
financial condition or results of operations.
In July 2001, the SEC issued SAB No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. SAB 102 gives guidance on the
documentation and methodologies used in the determination of loan loss
allowances. We believe that the adoption of this bulletin will not have a
material impact on our financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment and
Disposal of Long-Lived Assets. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001, which
would be IGT's fiscal 2003. We have not yet completed our analysis of the impact
that SFAS 144 will have on our financial condition or results of operations.
Notes to Consolidated Financial Statements
Derivatives and Hedging Activities
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.
With the adoption of SFAS 133 on October 1, 2000, we recognize all derivatives
as either assets or liabilities on the balance sheet at the fair value of the
instruments. Accounting for changes in the fair value of derivatives depends on
the intended use and resulting designation. During fiscal 2001, we entered into
forward exchange contracts to hedge our net exposure, by currency, related to
the monetary assets and liabilities of our operations denominated in
non-functional currency. These forward exchange contracts were not designated as
hedging instruments under SFAS 133 and gains and losses were recognized in
current earnings.
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 and Divestiture
Acquisitions
Anchor
On July 8, 2001, IGT and Anchor entered into an Agreement and Plan of Merger,
pursuant to which Anchor will merge with a subsidiary of IGT. Both companies'
board of directors unanimously approved the Agreement and Plan of Merger. If the
transaction is completed, Anchor shareholders will receive one share of IGT
common stock for each share of Anchor common stock that they own, subject to
certain adjustments. If the IGT average closing price is less than $50.00 per
share, Anchor may terminate the merger agreement, subject to IGT's right to
provide a higher exchange ratio such that the value of IGT stock received by
Anchor stockholders equals $50.00 per share. Conversely, if the IGT average
closing price exceeds $75.00 per share, IGT may terminate the merger, subject to
Anchor's right to accept a lower exchange ratio such that the value of IGT stock
received by Anchor stockholders equals $75.00 per share. In addition, IGT will
convert each outstanding option to purchase Anchor common stock into the right
to acquire on the same terms and conditions a number of shares of IGT common
stock based on the merger exchange ratio. The merger is subject to the approval
of both companies' shareholders and certain regulatory approvals, including
gaming regulatory approvals and Hart-Scott-Rodino antitrust pre-clearance.
Anchor is a diversified technology company with operations around the world.
Anchor operates in three complementary business segments: gaming machines,
gaming operations and gaming systems. The gaming machine segment focuses on the
development and placement of unique proprietary games. The gaming operations
segment operates a Native American casino in San Diego and two casinos in
Colorado, and manages gaming machine routes in Nevada. The gaming systems
segment provides equipment and related services to on-line lotteries, video
lotteries, and pari-mutuel organizations. IGT and Anchor have been working
together since 1996 as joint venture partners. The proposed combination will
permit the companies to work more closely together to develop new games and use
Notes to Consolidated Financial Statements
their complementary resources to benefit casinos and casino customers. In
addition, Anchor has attractive businesses that IGT is not currently in, most
notably the lottery business. The companies believe that their combined
resources will make them a more effective competitor in these businesses.
The transaction will be accounted for as a purchase under the newly issued SFAS
141, Business Combinations. The transaction will be a stock for stock exchange
subject to a collar mechanism and IGT will assume indebtedness of approximately
$366.7 million. Under the terms of the collar contained in the merger agreement,
each share of Anchor common stock will be converted into one share of IGT common
stock subject to a collar from $50.00 to $75.00 per share. If IGT's share value
exceeds $75.00, IGT will have the right to terminate the merger agreement,
subject to Anchor's right to elect to accept a lower exchange ratio. If IGT's
share value is less than $50.00, Anchor will have the right to terminate the
merger agreement, subject to IGT's right to provide a higher exchange ratio.
Share value means the average closing stock price for IGT's common stock as
reported on the New York Stock Exchange during the 20 consecutive trading days
ending on the third business day preceding the date of Anchor's shareholder
meeting to vote on the merger, so long as the closing date occurs within five
business days of the Anchor shareholder meeting or, if the closing date is more
than five business days after the Anchor shareholder meeting, the date that is
the third business day preceding the closing date.
At the close of this transaction, Thomas J. Mathews will join IGT as its Chief
Operating Officer, as well as continuing as President and Chief Executive
Officer of Anchor. Upon the completion of the merger, Mr. Mathews will be one of
two new directors added to the IGT Board of Directors.
We filed a registration statement, as amended on November 13, 2001, on Form S-4
to register with the SEC the IGT common stock that we will issue to the Anchor
stockholders in the merger. The business combination is expected to be completed
prior to January 31, 2001 conditioned upon regulatory approvals, shareholder
approvals and satisfaction of other customary closing conditions.
Tennecom
In September 2001, IGT completed the purchase of the assets of Tennecom Gaming
Solutions, LLC (Tennecom), a maker of casino table game tracking software.
Tennecom created an information system consisting of a Player Tracking and Table
Games Information System, Table Inventory Tracking and Casino Management System.
Silicon
In March 2001, we completed the purchase of Silicon. Silicon, previously
headquartered in Palo Alto, California, designed and manufactured innovative
wagering products and held a library of game applications. The purchase method
of accounting for business combinations was applied to this acquisition. The
purchase price of $34.0 million was allocated to cash of $2.8 million and net
assets of $31.2 million based on the estimated fair values of tangible and
intangible assets and liabilities at the date of acquisition. There was no
excess purchase price over the net assets acquired. The acquisition was funded
with cash on hand. Subsequent to the acquisition in fiscal 2001, we paid off
Silicon's long-term debt of $13.4 million. Results of Silicon subsequent to the
closing of the acquisition are included in our results of operations. Intangible
assets acquired from Silicon consist primarily of patent rights valued at $35.0
million to be amortized over their useful lives of 15 to 17 years.
Sodak
In September 1999, we completed the purchase of Sodak, a South Dakota-based
distributor of casino gaming products and software systems to Native American
casinos 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 net assets of $87.0
million based on the 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 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 have been included in our results of operations.
Notes to Consolidated Financial Statements
The following unaudited pro forma financial information is presented as if the
Sodak acquisition had been made at the beginning of fiscal 1999:
October 2,
1999
----------------------------------------------------------
(Dollars in thousands, except per share amounts)
Total revenues $887,881
Income before extraordinary item 65,698
Net income 62,444
Earnings per share:
Basic $ 0.63
Diluted $ 0.62
Access
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.
Barcrest and Olympic
In March 1998, we purchased Barcrest Limited, 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 these acquisitions. The
aggregate purchase price of $181.8 million was allocated to net assets of $76.5
million based on the 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. These acquisitions
were funded primarily with additional borrowings on our line of credit, as well
as long-term borrowings by IGT-Australia. See Note 8 for a further discussion
regarding Olympic.
Divestiture
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.
Notes to Consolidated Financial Statements
3. Investment Securities
Available-for-sale investment securities consisted of the following:
Net Gross Unrealized Market
----------------------
Cost Gains Losses Value
----------------------------------------------------------------------------------
(Dollars in thousands)
September 29, 2001
US government obligations $ 3,000 $ 35 $ - $ 3,035
Equity securities 11,663 225 (1,838) 10,050
--------- ----- --------- --------
Total investment securities $ 14,663 $ 260 $ (1,838) $ 13,085
========= ===== ========= ========
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
========= ===== ========= ========
At September 29, 2001, the US government obligations had maturity dates ranging
from three to 22 months.
Below is a summary of sales of available-for-sale securities for the years
ended:
September 29, September 30, October 2,
2001 2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
Proceeds from sales $ 13,891 $12,758 $11,957
Gross realized gains 548 1,441 5,852
Gross realized losses (110) (403) (27)
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:
Amortized Gross Unrealized Market
----------------
Cost Gains Losses Value
-------------------------------------------------------------------------
(Dollars in thousands)
September 29, 2001
US government obligations $262,955 $32,065 $(2,368) $292,652
======== ======= ======= ========
September 30, 2000
US government obligations $257,665 $13,584 $(4,006) $267,243
======== ======= ======= ========
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 29, September 30, October 2,
2001 2000 1999
-----------------------------------------------------------------------
(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 29, 2001:
Fiscal Year Estimated Receipts
--------------------------------------------------
(Dollars in thousands)
2002 $ 62,977
2003 62,759
2004 13,446
2005 1,278
2006 1,072
Thereafter 12,051
--------
$153,583
========
At September 29, 2001 and September 30, 2000, the following allowances for
doubtful notes and contracts were netted against current and long-term
maturities:
September 29, September 30,
2001 2000
----------------------------------------------------------------
(Dollars in thousands)
Current $15,480 $14,607
Long-term 11,461 3,426
------- -------
$26,941 $18,033
======= =======
In September 1993, we sold our equity ownership interest in CMS-International
(CMS) to Summit Casinos-Nevada, Inc., whose owners included senior management of
CMS. 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 with a maturity date
of December 31, 2008. The notes remain collateralized by the respective casino
properties. At September 29, 2001, the outstanding balances of these notes
totaled $13.4 million.
Notes to Consolidated Financial Statements
Occasionally, IGT has provided loans, other than for gaming equipment, to
customers. With the acquisition of Sodak and the restructuring of CMS, our
portfolio of this type of loan has increased. Included in total notes and
contracts receivable were loans of $80.9 million at September 29, 2001 and $49.4
million at September 30, 2000. Allowances for doubtful loans were $5.7 million
at September 29, 2001, and $60,000 at September 30, 2000. These loans are
generally for terms of one to ten years with interest at prevailing rates.
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 29, 2001, we had bank deposits in
excess of insured limits of approximately $44.9 million.
Our revenues and 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 that exceeded 10% of revenues during fiscal 2001,
2000 or 1999. Accounts, contracts, and notes receivable by region as a
percentage of total receivables at September 29, 2001 were as follows:
Domestic Region
Native American casinos 38%
Nevada 24%
Riverboats (greater Mississippi River area) 6%
Atlantic City (distributor and other) 6%
Other US regions (individually less than 3%) 10%
----
Total domestic 84%
----
International Region
Europe 5%
Latin America 5%
Australia 4%
Other international 2%
----
Total international 16%
----
Total 100%
====
7. Intangible Assets
Intangible assets consisted of the following:
September 29, September 30,
2001 2000
------------------------------------------------------------------------
(Dollars in thousands)
Intellectual property $ 42,636 $ 1,650
Excess of cost over net assets acquired 148,609 148,631
-------- --------
191,245 150,281
Less accumulated amortization (11,611) (6,543)
-------- --------
$179,634 $143,738
======== ========
Intangible assets increased in fiscal 2001 primarily related to patents acquired
from Silicon valued at $35.0 million (See Note 2). Other current year additions
included purchased patents in the amount of $3.3 million, including $2.9 million
for table game player-tracking software acquired from Tennecom, as well as $2.7
million in capitalized patent application costs.
Notes to Consolidated Financial Statements
8. Impairment of Assets and Restructuring Costs
IGT - Australia
Acquisition of Olympic
As discussed in Note 2, IGT-Australia acquired the assets of Olympic in March
1998. The acquisition price was $110.5 million. The goal of the Olympic
acquisition was to make our Australian operation a stronger and more efficient
competitor in the Australian market place and enhance our profitability through
the integration of our Australian operation and that of Olympic.
The Olympic purchase price was allocated to net tangible assets of $8.4 million,
identifiable intangibles of $40.2 million, and $61.9 million to excess of cost
over net assets acquired or goodwill. Net tangible assets were comprised of
accounts receivable, raw materials, and manufacturing machinery and equipment,
offset by accrued liabilities. The identifiable intangible assets represented
intellectual property consisting of technology, designs, know-how, patents,
trademarks, brand names, and copyrights.
Due to events and difficulties we experienced related to the acquisition of
Olympic, as described below, we recorded an impairment charge of $86.8 million
in the fourth quarter of fiscal 1999.
Operational and Other Issues Encountered after Acquisition
After the acquisition, several unforeseen events negatively impacted our
Australian operations and resulted in financial results much below those
anticipated. Factors contributing to the unfavorable financial results included
failure of the planned integration of our existing operations and those of
Olympic, changes in our Australian management, adverse changes in the regulatory
environment, product performance issues, and new competition. As discussed
below, we experienced problems following the acquisition in March 1998 through
September 1999. In the fourth quarter of fiscal 1999, management made the
decision to abandon the Olympic product line and determined there was no current
or future benefit in the identifiable assets acquired from Olympic. Impairment
charges were recorded at that time.
In May 1998, the workers at the Olympic manufacturing facility in Melbourne went
on strike. We were forced to combine manufacturing for both IGT and Olympic
products in the existing Sydney plant much sooner than anticipated in the
original integration plan. Additionally, several key staff of Olympic declined
to relocate to Sydney. As a result, we experienced severe difficulty processing
orders, manufacturing machines, and servicing customers.
Australian management began focusing on the day-to-day product issues and the
overall integration plans were not the priority. In June 1998, IGT-Australia's
Managing Director who played a key role in the acquisition resigned. Turnover at
this level of management hampered the execution of the integration plan and
adversely affected the performance of the acquired operations.
In October 1998, new Australian regulations required that the approval process
for new gaming machines and products use self-testing followed by a final review
by regulators assigned to the individual gaming suppliers. When IGT and Olympic
combined, we were given one regulatory approval channel instead of maintaining
the two that the companies had before the acquisition. The implementation of the
new self-testing processes combined with the decrease in regulatory resources
resulted in delays in product approval, slowed the release of new products and
adversely affected sales. In addition, we identified performance issues with the
acquired product line. Olympic had developed two gaming machine platforms, the
OA2 and the OA3, along with the Sentinel gaming system product. The OA2 machine
hardware and operating system and the OA3 base platform were unstable, resulting
in customer complaints and costly retrofits. The Sentinel product had technical
problems that would have required additional investments to resolve. In March
1999, IGT-Australia's second Managing Director along with the IGT-Australia's
Sales Director resigned. Competitors capitalized on our performance problems
during this period and increased sales while our sales declined.
Notes to Consolidated Financial Statements
We continued to experience turnover in key positions when the Operations Manager
resigned in the third quarter of 1999 and the IGT-Australia's Game Development
Manager, Marketing Director, and Business Development Director resigned during
the fourth quarter of 1999. Although the newest IGT-Australia's Managing
Director had developed a revised business plan and implemented positive changes
in the sales department, these improvements were not enough to overcome the
problems that had developed from the time of the acquisition through the end of
September 1999. Also in the fourth quarter of fiscal 1999, IGT management made
the decision to abandon the OA2, OA3, and the Sentinel products acquired. We did
not realize any benefit from what we thought would be complimentary products.
The financial results during fiscal 1999 did not meet our expectations and our
market share in Australia following the acquisition had declined instead of
increased.
Development of Restructuring Plan and Recognition of Impairment
In the fourth quarter of fiscal 1999, management considered the available facts
in determining a go-forward strategy for IGT-Australia. Given the unfavorable
operating results, poor product performance, loss of customer confidence and
market share, personnel turnover and changes in the regulatory operating
environment in Australia, we believed we would not attain our original
acquisition goals. Management concluded that it was in our best interest as a
global gaming supplier to continue pursuing the Australian market and develop a
comprehensive restructuring plan with several strategic initiatives aimed at
stabilizing the Australian operations, reducing the overall complexity of the
business and improving its operating performance. In connection with this plan,
restructuring costs of $6.0 million were recognized in the fourth quarter of
fiscal 1999, comprised 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 related to the elimination of
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.
During the fourth quarter of 1999, due to the events and circumstances that had
occurred since the acquisition of Olympic described above, we prepared a
financial analysis to determine if, and to what extent, the identifiable
intangible assets and goodwill recorded in connection with the acquisition of
Olympic were impaired. In accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," we
estimated the projected future cash flows of the business based on reasonable
and supportable assumptions and projections. This financial analysis indicated
the expected discounted and undiscounted future cash flows were less than the
carrying amounts of the intangible assets and goodwill, and the assets were
fully impaired. These intangible assets held no remaining value and did not
provide any future potential benefit.
The eventual success of the restructuring plan hinged on our ability to develop
a simplified product plan incorporating hardware designs and software platforms
not yet developed and a suite of games utilizing the new platform. Given our
experiences with the pace of regulatory approval, there was uncertainty as to
the actual time frame required to implement this initiative. Market acceptance
of the reduced product set and player acceptance of the new games would be
equally important. The plan included producing machines for the Australia market
in the United States in order to achieve cost improvements. This would also
require regulatory approval, which was again a significant uncertainty. Finally,
the significant changes in management created an uncertainty whether these
strategic initiatives could be successfully implemented.
Given the financial analysis, consideration of the risks and uncertainties of
the restructuring plan along with the abandonment of all Olympic product lines,
software, trademarks and brand names, we determined the total unamortized
balance of intangible assets including intellectual property and goodwill was
fully impaired. In accordance with SFAS 121, we recorded an impairment charge of
$86.8 million in the fourth quarter of fiscal 1999.
Notes to Consolidated Financial Statements
IGT - Brazil
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. We received
payments of $1.1 million in fiscal 2001 and $1.9 million in fiscal 2000 for
receivables and inventories previously considered fully impaired.
9. Notes Payable
Notes payable consisted of the following:
September 29, September 30,
2001 2000
--------------------------------------------------------------------------------------
(Dollars in thousands)
Senior notes, net of unamortized discount $984,742 $991,507
Credit facilities 5,023 4,621
-------- --------
Total 989,765 996,128
Less current maturities (5,023) (4,621)
-------- --------
Long-term notes payable, net of current maturities $984,742 $991,507
======== ========
The following table represents the future fiscal year principal payments of our
notes payable at September 29, 2001:
Fiscal Year Principal Payments
-------------------------------------------------------------
(Dollars in thousands)
2002 $ 5,023
2003 -
2004 400,000
2005 -
2006 -
2007 and after 592,000
--------
Total principal payments 997,023
Less unamortized discount (7,258)
--------
Net notes payable $989,765
========
Senior Notes
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) 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. This bond indenture contains a number of covenants that restrict
IGT's ability to incur indebtedness, create or incur liens on our assets, or
enter into sale/leaseback transactions. At September 29, 2001, we were in
compliance with all applicable covenants.
Notes to Consolidated Financial Statements
Credit Facilities
Our domestic and foreign borrowing facilities totaled $275.0 million at
September 29, 2001. Of this amount, $5.0 million was drawn with an average
interest rate of 1.06%, $6.6 million was reserved for letters of credit and the
remaining $263.4 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 29, 2001, we were in compliance with all applicable covenants.
10. Commitments
We lease certain of our facilities and equipment under various agreements for
periods through the year 2007. The following table shows the future minimum
rental payments required under these operating leases that have initial or
remaining non-cancelable lease terms in excess of one year as of September 29,
2001. 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.
Operating
Fiscal Year Leases
-------------------------------------------------
(Dollars in thousands)
2002 $ 7,417
2003 5,310
2004 3,232
2005 1,848
2006 938
2007 and after 259
-------
Total minimum payments $19,004
=======
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. At September 29, 2001, we had approximately one-third of this facility
sublet to third parties, calling for future receipts of $1.3 million. We
previously accrued for the total lease payments, net of anticipated sublease
receipts. During fiscal 2001, we began using a portion of this previously
abandoned facility for service operations overflow. Costs incurred related to
our usage were included in operating expenses.
In March 2001, we acquired Silicon's Palo Alto facility lease and sublease
agreements with terms that extend through November 30, 2005 and related payments
are included in the schedule above. The fair value of these agreements was a net
asset of $2.0 million at September 29, 2001. The sublease agreement calls for
future receipts of $3.2 million.
Our total rental expense was approximately $5.4 million for fiscal 2001, $5.9
million for fiscal 2000, and $6.0 million for fiscal 1999.
Notes to Consolidated Financial Statements
11. Jackpot Liabilities
IGT receives a percentage of the amounts wagered or fees for machine rental and
service from the linked WAP 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 29, 2001:
Fiscal Year Payments
------------------------------------------------------
(Dollars in thousands)
2002 $ 32,197
2003 29,243
2004 29,115
2005 29,115
2006 29,115
2007 and after 263,670
--------
$412,455
========
Jackpot liabilities include discounted payments due to winners for jackpots
previously won, as well as amounts accrued for the cost of funding jackpots not
yet won that are contractual obligations of IGT. Jackpot liabilities consist of
the following:
September 29, September 30,
2001 2000
---------------------------------------------------------------------------------------
(Dollars in thousands)
Gross payments due to jackpot winners $ 412,455 $ 412,653
Unamortized discount on payments to jackpot winners (144,944) (151,472)
Accrual for jackpots not yet won 76,055 62,746
--------- ---------
Total jackpot liabilities 343,566 323,927
Less current liabilities (85,109) (55,942)
--------- ---------
Long-term jackpot liabilities $ 258,457 $ 267,985
========= =========
We amortize the discounts on the jackpot liabilities to interest expense. During
fiscal 2001, we recorded interest expense on jackpot liabilities of $17.1
million, $17.3 million in fiscal 2000, and $25.9 million in fiscal 1999. We were
required to maintain cash and investments relating to systems liabilities
totaling $42.2 million at September 29, 2001 and $38.8 million at September 30,
2000.
12. Financial Instruments
In the first quarter of fiscal 2001, IGT adopted SFAS 133, Accounting for
Derivatives and Hedging Activities. SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. The accounting for changes in fair value of a
derivative depends on the intended use of the derivative and the resulting
designation.
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.
Notes to Consolidated Financial Statements
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. In the current fiscal year, these forward exchange contracts were not
designated as hedging instruments under SFAS 133 and gains/losses were
recognized in current earnings. We had forward contracts totaling $40.5 million
and $63.5 million at the end of fiscal 2001 and 2000 to hedge currency exposures
of $44.6 million and $58.0 million. 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. There were no firm
commitment hedges at the end of the current or prior year periods.
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 $2.1 million at September 29, 2001 and $2.2 million at
September 30, 2000. 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 9), totaling $6.6 million
at September 29, 2001 and $2.8 million at September 30, 2000, which were issued
to insure payment by IGT to certain vendors and governmental agencies. We do not
expect any material losses to result from these off balance sheet instruments.
The following table presents the carrying amount and estimated fair value of
IGT's financial instruments:
September 29, September 30,
2001 2000
---------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Cash and cash equivalents $364,234 $ 364,234 $244,907 $244,907
Investment securities 13,085 13,085 21,473 21,473
Notes and contracts receivable 153,583 139,456 153,208 139,086
Investments to fund jackpot payments 262,955 292,652 257,665 267,243
Liabilities
Jackpot liabilities 343,566 373,264 323,927 333,505
Notes payable obligations 989,765 1,009,034 996,128 981,141
Foreign currency contracts 40,536 40,536 63,467 61,481
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
Notes to Consolidated Financial Statements
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. The estimated fair value of foreign
currency contracts is based on quoted market prices for an instrument with
similar terms. With the adoption of SFAS 133 in fiscal 2001, all foreign
currency derivatives are now recorded at fair value on the balance sheet.
13. 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 29, September 30, October 2,
2001 2000 1999
--------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Income before extraordinary item $213,935 $156,792 $ 65,312
======== ======== ========
Weighted average common shares outstanding 73,851 76,586 99,461
Dilutive effect of stock options outstanding 2,674 1,643 777
-------- -------- --------
Weighted average common and potential
shares outstanding 76,525 78,229 100,238
======== ======== ========
Basic earnings per share $ 2.90 $ 2.05 $ 0.65
Diluted earnings per share $ 2.80 $ 2.00 $ 0.65
Number of common shares excluded from
diluted EPS because option exercise price
was greater than average market price 91 358 1,300
Stock Repurchase Plan
Our Board of Directors originally authorized IGT's stock repurchase plan in
October 1990. As of November 16, 2001, the remaining share repurchase
authorization, as amended, totaled 8.2 million additional shares. During fiscal
2001, we repurchased 2.5 million shares for an aggregate purchase price of
$100.7 million. 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.
14. 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.
Poulos
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. Caesars
World, Inc.,et al, and two filed in the United States District Court of
Florida, Orlando Division, entitled Poulos v. Caesars World, Inc., et al. and
Ahern v. Caesars 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
Notes to Consolidated Financial Statements
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
consolidated answer to the Consolidated Amended Complaint on February 11, 1998.
On November 15, 2001, in Las Vegas, Nevada, United States District Court Judge
Ezra heard oral arguments regarding the issue of certification of the plaintiff
class. A decision on whether the case can proceed as a class action is expected
in early 2002.
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.
Acres
In February 1999, the Spin for Cash Wide Area Progressive Joint Venture (Joint
Venture), to which IGT and Anchor are partners, and Anchor filed an action in US
District Court, District of Nevada against Acres Gaming, Inc. (Acres). IGT is
not a party to this action. The complaint alleges, among other things,
infringement of certain secondary event patents owned by Anchor and licensed to
the Joint Venture. In April 1999, Acres responded by filing an answer and
counterclaim against the Joint Venture and Anchor. In addition, in April 1999,
Acres filed an action in Oregon state circuit court against the Joint Venture
and Anchor alleging wrongful use of Acres' intellectual property. The Oregon
state circuit court action has been removed to the US District Court, District
of Oregon, and has been stayed pending the outcome of the Nevada actions.
Motions for summary judgment have been filed by the parties.
Collins
In 1994, a lawsuit was filed in South Carolina against IGT by Collins Music Co.
(Collins), a distributor for IGT in South Carolina. In the action Collins
alleged that IGT agreed, but subsequently failed, to renew a Distributorship
Agreement with Collins. Collins also alleged that equipment sold to it was not
the latest IGT product available to the marketplace. IGT counterclaimed for the
unpaid invoices for machines delivered to Collins, for violations of the South
Carolina Unfair Trade Practices Act, for breach of the Distributorship Agreement
accompanied by fraudulent acts and denied all the other allegations. The jury
trial in this matter began on July 23, 2001. On August 2, 2001, the jury found
that IGT breached its agreement with Collins and awarded Collins $15.0 million
in compensatory damages. IGT filed motions or post-trial relief that were denied
by the trial court. Thereafter, IGT will file a Notice of Appeal and anticipates
that the appellate court will order a new trial.
Kraft
On July 18, 2001, an individual, Mary Kraft, filed a complaint in the Wayne
County Circuit Court in Detroit, Michigan, against IGT, Anchor and the three
operators of casinos in Detroit, Michigan. IGT was never served with the
complaint and was voluntarily dismissed from the litigation on July 27, 2001. On
September 26, 2001, International Game Technology filed a motion to intervene as
a party defendant, which was granted on October 26, 2001. The plaintiff claims
the bonus wheel feature of the Wheel of Fortune(R) and I Dream of Jeannie(TM)
slot machines, which are manufactured, designed and programmed by IGT and/or
Anchor, are deceptive and misleading. Specifically, plaintiff alleges that the
bonus wheels on these games do not randomly land on a given dollar amount but
are programmed to provide a predetermined frequency of pay-outs. The complaint
alleges violations of the Michigan Consumer Protection Act, common law fraud and
unjust enrichment and asks for unspecified compensatory and punitive damages,
disgorgement of profits, injunctive and other equitable relief, and costs and
attorney's fees. The plaintiff seeks to certify a class of any individual in
Michigan who has played either of these games since June of 1999. The Michigan
Gaming Control Board, the administrative agency responsible for policing the
Detroit casinos, approved the machines and their programs for use.
Notes to Consolidated Financial Statements
15. 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 carry forwards. 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 29, September 30, October 2,
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Taxes at federal statutory rate $118,815 35.0 % $85,745 35.0 % $35,488 35.0 %
Foreign subsidiaries tax 3,615 1.1 2,410 0.9 3,657 3.6
State income tax, net 5,307 1.5 5,109 2.3 2,670 2.6
Research and development credits (3,167) (0.9) (750) (0.3) (2,192) (2.2)
Valuation allowance, foreign subsidiaries 2,769 .8 2,063 0.7 6,067 6.0
Expiration of tax contingencies - - (850) (0.3) (5,344) (5.3)
Adjustment to estimated income tax accruals - - (3,010) (1.2) (3,306) (3.3)
Other, net (1,802) (0.5) (2,522) (1.1) (959) (0.8)
------- ---- ------- ---- ------- -----
Provision for income taxes $125,537 37.0 % $88,195 36.0 % $36,081 35.6 %
======== ==== ======= ==== ======= ====
Components of our provision for income taxes were as follows for the years
ended:
September 29, September 30, October 2,
2001 2000 1999
----------------------------------------------------------------------------
(Dollars in thousands)
Current
Federal $127,611 $80,893 $(11,602)
State 8,652 5,645 358
Foreign 4,698 4,478 9,118
-------- ------- --------
Total current 140,961 91,016 (2,126)
-------- ------- --------
Deferred
Federal (14,162) (2,270) 30,761
State (1,631) 222 1,566
Foreign 369 (773) 5,880
-------- ------- --------
Total deferred (15,424) (2,821) 38,207
-------- ------- --------
Provision for income taxes $125,537 $88,195 $ 36,081
======== ======= ========
Notes to Consolidated Financial Statements
Significant components of our deferred tax assets and liabilities are detailed
in the table below. Our valuation allowance relates to uncertainty of
realization on deferred tax assets in IGT-Australia and IGT-Japan.
September 29, September 30,
2001 2000
-----------------------------------------------------------------------------------------
(Dollars in thousands)
Current deferred tax assets
Reserves not currently deductible $ 20,267 $ 22,228
Unrealized loss on currency translation adjustments 5,408 4,582
Foreign subsidiaries 138 652
Unrealized loss on investment securities 552 327
Other 3,688 1,297
-------- --------
Net current deferred tax assets 30,053 29,086
-------- --------
Non-current deferred tax assets
Reserves not currently deductible - 566
Reserves for proprietary gaming 95,639 69,869
Foreign subsidiaries 11,182 8,268
State income taxes 6,563 4,932
Goodwill and other intangibles 25,766 28,020
Net operating loss carry forwards 9,801 -
Other 2,276 1,246
Non-current deferred tax liabilities
Difference between book and tax basis of property (4,950) (4,036)
Other (1,650) (3,065)
-------- --------
Total net non-current deferred tax assets 144,627 105,800
Valuation allowance (10,899) (8,130)
-------- --------
Net non-current deferred tax assets 133,728 97,670
-------- --------
Net deferred tax assets $163,781 $126,756
======== ========
Notes to Consolidated Financial Statements
16. Other Comprehensive Income (Loss)
The components of IGT's other comprehensive loss are as follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended September 29, 2001
Unrealized holding gains (losses) arising during period $ (205) $ 72 $ (133)
Reclassification adjustment to net income (438) 153 (285)
------- ------ -------
Net unrealized gains (losses) (643) 225 (418)
Foreign currency translation adjustments 520 (182) 338
------- ------ -------
Other comprehensive income (loss) $ (123) $ 43 $ (80)
======= ====== =======
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)
======= ====== =======
The components of our accumulated other comprehensive loss are as follows:
Unrealized Foreign Accumulated Other
Gains (Losses) Currency Comprehensive
on Securities Translation Loss
-----------------------------------------------------------------------------------------
(Dollars in thousands)
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)
Current-period change (418) 338 (80)
------- ------- -------
Balance at September 29, 2001 $(1,025) $(8,868) $(9,893)
======= ======= =======
Notes to Consolidated Financial Statements
17. 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 $63.9
million in fiscal 2001, $38.6 million in fiscal 2000 and $27.1 million in fiscal
1999.
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, we share a portion of our profits with eligible
employees. These profit sharing contributions vest over a seven year period of
employment. Cash sharing is distributed semi-annually in May and November to all
eligible employees. Management bonuses are paid out annually to key employees
throughout IGT.
IGT implemented a non-qualified deferred compensation plan in September 1999.
This Plan provides 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. 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 85% of the fair market value of the common stock on the date of grant
or on the date of exercise, which ever is less. At September 29, 2001, there
were 341,523 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). Eligible employees may
sign up for ShareSave each year and must elect a contract that will vest over
three, five, or seven years. The option price is equal to 80% of the fair market
value of the common stock on the date of grant or on the date of exercise, which
ever is less. Employees may contribute up to (pounds) 3,000 annually. At
September 29, 2001 there were 220,958 shares available under this plan.
Notes to Consolidated Financial Statements
Restricted Stock Awards
Restricted stock awards of a fixed number of common stock shares at a specified
price were issued to participants determined by our Board of Directors as
follows:
Fiscal Year Restricted Shares
-------------------------------------------
1996 600,000
1997 200,000
1998 10,000
1999 50,000
2000 -
2001 -
These awards are subject to vesting over two to five years and other
restrictions. Restricted stock awarded to a participant may not be voluntarily
or involuntarily sold, assigned, transferred, pledged or encumbered during the
restricted period. Restricted stock awards were incorporated into our amended
1993 Stock Option Plan in February 1997. Non-cash compensation expense for
restricted stock awards totaled $261,000, $1.2 million, and $1.0 million for
fiscal 2001, 2000, and 1999.
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, 27.1
million shares were made available for grant. The Plan expired in December 1996.
In 1993, IGT adopted an additional Stock Option Plan that 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 are 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 after the
grant. As a result of certain stock option modifications during fiscal 2001, we
recognized $1.0 million in non-cash compensation expense.
Notes to Consolidated Financial Statements
At September 29, 2001, options to purchase 867,000 shares were available for
grant under the plans.
Number Weighted Average
of Shares Exercise Price
----------------------------------------------------------------------------
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
Granted 2,431,000 $46.14
Forfeited or expired (65,141) $23.12
Exercised 2,751,575) $16.08
---------
Outstanding at September 29, 2001 4,732,909 $32.27
=========
Options exercisable at:
September 29, 2001 1,365,361 $16.00
September 30, 2000 3,341,790 $15.44
October 2, 1999 3,217,047 $15.14
Notes to Consolidated Financial Statements
The following table summarizes information for stock options outstanding and
exercisable at September 29, 2001. This presentation assesses 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
- -------------------- -------------- ---------------- --------------- ----------- --------------
$10.7500 - $17.6250 1,289,542 4.9 $14.51 1,055,342 $14.01
17.6875 - 44.7500 1,232,367 7.5 24.68 304,019 22.14
45.0000 - 46.4500 1,982,000 9.4 45.93 - -
46.6250 - 64.3200 229,000 9.5 54.96 6,000 55.78
--------- ---------
$10.7500 - $64.3200 4,732,909 7.7 $32.37 1,365,361 $16.00
========= =========
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, IGT continues to apply Accounting Principles Board Opinion No. 25
to its stock-based compensation. Accordingly, we do not recognize compensation
expense 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 were
determined in accordance with SFAS No. 123, IGT's net income and earnings per
share would be reduced to the following pro forma amounts. The fair value for
stock-based compensation was estimated at the date of grant using a
Black-Scholes option pricing model with the weighted-average assumptions noted
at the bottom of the table below.
Years Ended
-----------------------------------------
September 29, September 30, October 2,
2001 2000 1999
--------------------------------------------------------------------------------------------------------
(Amounts in thousands, except earnings per share and assumptions)
Net income
As reported $213,935 $156,792 $62,058
Pro forma 203,947 153,495 57,793
Basic earnings per share
As reported $ 2.90 $ 2.05 $ 0.62
Pro forma 2.76 2.00 0.58
Diluted earnings per share
As reported $ 2.80 $ 2.00 $ 0.62
Pro forma 2.67 1.96 0.58
Weighted average fair value of options
granted during the year $ 16.74 $ 10.06 $ 7.76
Weighted average fair value of restricted stock
awards granted during the year $ - $ - $ 17.82
Weighted-average assumptions:
Interest rates 4.30% 6.50% 5.50%
Dividend yields 0.00% 0.00% 0.14%
Volatility factors of the expected market
price of common stock .41 .43 .45
Weighted-average expected life of stock options (years) 3.85 4.81 4.59
Expected life of employee stock purchase (years) 1.00 1.00 1.00
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. Option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. IGT's employee stock
based compensation has characteristics significantly different from those of
traded options, and 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 IGT's
employee stock based compensation.
18. Related Party Transactions
Joint Ventures
We operate certain proprietary games under joint venture agreements with various
gaming or gaming related companies. Activities of these joint ventures include
placement of proprietary games and the pursuit of video lottery opportunities.
During fiscal 2001 we had three joint ventures of this nature.
The following is a table of our transactions with joint ventures as of and for
the years ended:
September 29, September 30, October 2,
2001 2000 1999
-----------------------------------------------------------------------------------------
(Dollars in thousands)
Net earnings of unconsolidated affiliates $142,630 $105,991 $75,556
Asset and expense transfers 40,359 46,516 27,253
Capital contributions 420 - 22,275
Accounts receivable (payable) balance (139) 5,007 29,700
Largest amount receivable
at anytime during the year 16,345 9,615 29,700
The following is summarized financial information from our largest joint
venture, the Spin for Cash Wide Area Progressive Joint Venture (Spin for Cash)
with Anchor, as of and for the years ended:
September 29, September 30, October 2,
2001 2000 1999
------------------------------------------------------------------------
(Dollars in thousands)
Revenues $504,321 $375,379 $293,460
Costs and expenses 225,459 168,716 145,572
Operating income 278,862 206,663 147,888
Net income 283,425 211,932 149,958
Current assets $173,499 $143,461 $103,367
Non-current assets 127,282 109,603 96,576
-------- -------- --------
Total assets $300,781 $253,064 $199,943
======== ======== ========
Current liabilities $ 50,127 $ 30,736 $ 56,936
Non-current liabilities 102,176 81,575 66,197
-------- -------- --------
Total liabilities $152,303 $112,311 $123,133
======== ======== ========
Notes to Consolidated Financial Statements
Other Related Parties
We also recorded transactions from other related parties. A member of our Board
of Directors was a director and officer of the parent company of additional
Nevada gaming businesses during fiscal 2000 and 1999. During fiscal 2001 a
member of our Board of Directors was a partner in a law firm that we retain as
outside counsel. In Iowa, our progressive jackpot systems are administered by a
trust that we manage from which net profits are transferred to IGT. During
fiscal 2001, we participated in three joint marketing alliances for which we
recorded our proportionate share of assets, liabilities, revenues, and expenses.
During the first quarter of fiscal 2000 and the latter half of fiscal 1999, we
held a minority equity investment in Access that we accounted for under the
equity method. Additionally, Barcrest designs games under an expense sharing
agreement with its main European distributor. We recorded the following
transactions with these related parties as of and for the years ended:
September 29, September 30, October 2,
2001 2000 1999
-----------------------------------------------------------------------------------------
(Dollars in thousands)
Revenues $ 4,572 $10,289 $20,748
Expenses 83 - -
Other income (expense) - 388 (512)
Asset and expense transfers 10,619 317 -
Capital contributions - 55 3,954
Contracts and accounts receivable balance 3,332 1,067 3,685
Accounts payable balance 4 - -
Largest amount receivable
at any time during the year 4,001 3,728 4,562
Largest amount payable
at any time during the year 15 - -
19. Business Segments
IGT operates principally in two lines of business: the development,
manufacturing, marketing and distribution of gaming products, referred to as
"Product Sales" and the development, marketing and operation of WAP systems,
stand-alone games and gaming equipment leasing, referred to as "Proprietary
Gaming." The proprietary gaming segment includes our wholly-owned gaming
operations and our unconsolidated joint venture activities reported as earnings
of unconsolidated affiliates. Gaming operations and joint venture activities are
viewed as a single business segment because the nature of the products in the
joint ventures are the same as the products in our wholly-owned gaming
operations. The same management group monitors all activities of the proprietary
gaming segment. The joint venture is an integral part of our proprietary gaming
segment.
Earnings of unconsolidated affiliates are recorded net of expenses using the
equity method of accounting. Depreciation and amortization expenses are part of
earnings of unconsolidated affiliates reported on our income statement and
represent our 50% share of these joint venture expenses. Assets of our
unconsolidated affiliates presented below represent our investment in
unconsolidated affiliates as recorded on our balance sheet. The additions to
long-lived assets for the joint venture activities are recorded on the Spin for
Cash financial statements. See Note 18.
Notes to Consolidated Financial Statements
The table below presents information of our business segments as of and for the
years ended:
September 29, September 30, October 2,
2001 2000 1999
---------------------------------------------------------------------------------------------
(Dollars in thousands)
Revenues and
Earnings of Unconsolidated Affiliates
Product sales $ 824,267 $ 603,381 $576,598
Proprietary gaming
Gaming operations 374,942 295,023 277,508
Unconsolidated affiliates 142,630 105,991 75,556
---------- ---------- --------
Total proprietary gaming 517,572 401,014 353,064
---------- ---------- --------
Total 1,341,839 1,004,395 929,662
Less unconsolidated affiliates (142,630) (105,991) (75,556)
---------- ---------- --------
Total revenues $1,199,209 $ 898,404 $854,106
========== ========== ========
Operating Profit (Loss)
Product sales $ 169,099 $ 95,549 $ (2,495)
Proprietary gaming
Gaming operations 134,877 106,521 83,024
Unconsolidated affiliates 116,689 84,331 61,360
---------- ---------- --------
Total proprietary gaming 251,566 190,852 144,384
---------- ---------- --------
Total 420,665 286,401 141,889
Other non-allocated expense (81,193) (41,414) (40,496)
---------- ---------- --------
Income Before Income Taxes and
Extraordinary Item $ 339,472 $ 244,987 $101,393
========== ========== ========
Interest Income
Product sales $ 17,568 $ 14,955 $ 13,712
Proprietary gaming
Gaming operations 21,993 22,648 31,840
Unconsolidated affiliates 5,023 4,889 3,153
Corporate 10,258 13,374 9,973
---------- ---------- --------
Total 54,842 55,866 58,678
Less unconsolidated affiliates (5,023) (4,889) (3,153)
---------- ---------- --------
Total interest income $ 49,819 $ 50,977 $ 55,525
========== ========== ========
Interest Expense
Product sales $ 14,109 $ 14,145 $ 14,491
Proprietary gaming
Gaming operations 23,928 24,098 28,462
Unconsolidated affiliates 2,694 2,247 2,117
Corporate 64,002 63,927 29,811
---------- ---------- --------
Total 104,733 104,417 74,881
Less unconsolidated affiliates (2,694) (2,247) (2,117)
--------- ---------- --------
Total interest expense $ 102,039 $ 102,170 $ 72,764
========== ========== ========
Notes to Consolidated Financial Statements
September 29, September 30, October 2,
2001 2000 1999
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Depreciation and Amortization
Product sales $ 4,385 $ 5,294 $ 5,681
Proprietary gaming
Gaming operations 38,711 28,196 31,812
Unconsolidated affiliates 16,959 12,640 10,351
Corporate 20,252 20,897 23,955
---------- ---------- ----------
Total 80,307 67,027 71,799
Less unconsolidated affiliates (16,959) (12,640) (10,351)
---------- ---------- ----------
Total depreciation and amortization $ 63,348 $ 54,387 $ 61,448
========== ========== ==========
Assets
Product sales $ 768,403 $ 690,219 $ 700,684
Proprietary gaming
Gaming operations 620,237 580,469 544,968
Unconsolidated affiliates 74,659 70,601 49,996
Corporate 460,140 282,427 469,412
---------- ---------- ----------
Total assets $1,923,439 $1,623,716 $1,765,060
========== ========== ==========
Additions to Long-Lived Assets
Product sales $ 8,532 $ 6,670 $ 6,591
Proprietary gaming
Gaming operations 84,042 34,765 48,641
Unconsolidated affiliates - - -
Corporate 24,535 10,009 10,367
---------- ---------- ----------
Total additions to long-lived assets $ 117,109 $ 51,444 $ 65,599
========== ========== ==========
Notes to Consolidated Financial Statements
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. The table below presents information as to our
operations by geographical regions as of and for the years ended:
September 29, September 30, October 2,
2001 2000 1999
----------------------------------------------------------------------------------------------
(Dollars in thousands)
Revenues and
Earnings of Unconsolidated Affiliates
Domestic
Unaffiliated customers $1,120,937 $ 764,035 $ 666,685
Inter-area transfers 171,655 87,082 39,395
International
Unaffiliated customers 220,902 240,360 262,977
Inter-area transfers 6,405 8,107 10,935
Eliminations (178,060) (95,189) (50,330)
---------- ---------- ----------
Total 1,341,839 1,004,395 929,662
Less unconsolidated affiliates (142,630) (105,991) (75,556)
---------- ---------- ----------
Total revenues $1,199,209 $ 898,404 $ 854,106
========== ========== ==========
Identifiable Assets
Domestic $1,604,144 $1,324,787 $1,420,827
International 139,661 155,191 192,197
---------- ---------- ----------
Total identifiable assets $1,743,805 $1,479,978 $1,613,024
========== ========== ==========
Additions to Long-Lived Assets
Domestic $ 112,843 $ 45,869 $ 58,137
International 4,266 5,575 7,462
---------- ---------- ----------
Total additions to long-lived assets $ 117,109 $ 51,444 $ 65,599
========== ========== ==========
On a consolidated basis we do not recognize inter-segment revenues or expenses
upon the transfer of gaming products between subsidiaries. Operating profit is
revenue, earnings of unconsolidated affiliates, 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, and an allocated portion of selling, general and administrative and
research and development expenses. Other expense not allocated to an operating
segment includes certain interest and income 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)
2001
Total revenues $270,429 $ 312,745 $320,134 $295,901
Gross profit 121,171 136,741 137,511 139,498
Earnings of unconsolidated
affiliates 31,302 34,163 38,584 38,581
Income from operations 88,668 99,550 103,374 103,687
Net income 48,191 53,556 56,718 55,470
Diluted earnings per share $ 0.64 $ 0.70 $ 0.73 $ 0.73
Stock price
High $ 48.50 $ 56.75 $ 65.31 $ 64.11
Low $ 32.81 $ 43.87 $ 47.35 $ 38.90
2000
Total revenues $185,651 $ 193,284 $236,030 $283,439
Gross profit 84,140 85,140 104,288 124,280
Earnings of unconsolidated
affiliates 20,866 24,769 27,640 32,716
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 $ 20.63 $ 22.44 $ 28.56 $ 34.50
Low $ 17.56 $ 17.44 $ 20.25 $ 26.88
Notes to Consolidated Financial Statements
First Qtr Second Qtr Third Qtr Fourth Qtr
----------------------------------------------------------------------------------------
(Dollars in thousands, except per share amount and stock prices)
1999
Total revenues $202,855 $203,083 $239,723 $208,445
Gross profit 77,468 83,435 99,625 85,133
Earnings of unconsolidated
affiliates 18,851 17,788 19,136 19,781
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 $ 24.50 $ 23.44 $ 19.50 $ 19.25
Low $ 16.50 $ 14.38 $ 14.69 $ 16.19
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 83
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 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).
4.2 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 Report on 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).
10.5E Amended and Restated Credit Agreement by and among International Game
Technology, The Bank of New York, Wells Fargo and other banks, dated
August 10, 2001.
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 Gaming, Inc., 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 by
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 (incorporated by reference to Exhibit
10.12 to Registrant's Report on Form 10K/A for the year ended
September 30, 2000).
10.13 Employment Agreement with G. Thomas Baker, Chief Executive Officer,
President, and Chief Operating Officer dated December 6, 2000
(incorporated by reference to Exhibit 10.12 to Registrant's Report on
Form 10K/A for the year ended September 30, 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, 1998-II and 2000-I) (incorporated by
reference to Exhibit 10.15 to Registrant's Report on Form 10Q/A for the
quarter ended March 31, 2001.)
10.15 Employment agreement with Maureen Mullarkey, Senior Vice President and
Chief Financial Officer dated January 12, 2001 (incorporated by
reference to Exhibit 10.16 to Registrant's Report on Form 10-Q/A for
the quarter ended March 31, 2001).
10.16 Agreement and Plan of Merger, dated as of July 8, 2001, by and among
International Game Technology, NAC Corporation, and Anchor Gaming
(incorporated by reference to Exhibit 2 to Form 8-K/A, File number
001-10684, filing date July 12, 2001).
21 Subsidiaries
23 Independent Auditors' Consent
24 Power of Attorney (see page 82 hereof)
(b) Reports on Form 8-K
We filed current reports on Form 8-K related to the Anchor acquisition
on the following dates: July 11, 2001; July 12, 2001; August 3, 2001;
August 29, 2001; and November 9, 2001.
99.1 Financial statements of Spin for Cash Wide Area Progressive Joint
Venture for the years ended September 30, 2001, 2000 and 1999.
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 amendment to report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 12th
day of December, 2001.
International Game Technology
By:/s/ Maureen T. Mullarkey
-----------------------------------------
Maureen T. Mullarkey
Chief Financial Officer, and Sr. Vice
President, Finance (Principal Financial
Accounting Officer), and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to report has been signed below by the following persons in the
capacities and on the dates indicated.
Each person whose signature appears below hereby authorizes G. Thomas Baker,
Maureen Mullarkey and Sara Beth Brown, or any 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.
Signature Title Date
/s/ Chairman of the Board of Directors December 12, 2001
- ------------------------------------
Charles N. Mathewson
/s/ G. Thomas Baker President, Chief Executive Officer, December 12, 2001
- ----------------------------------- Chief Operating Officer,
G. Thomas Baker and Director (Principal
Executive Officer)
/s/ Maureen T. Mullarkey Chief Financial Officer, and Sr. Vice December 12, 2001
- ----------------------------------- President, Finance (Principal Financial
Maureen T. Mullarkey Accounting Officer), and Treasurer
/s/ Director December 12, 2001
- ------------------------------------
Robert A. Bittman
/s/ Director December 12, 2001
- -----------------------------------
Wilbur K. Keating
/s/ Director December 12, 2001
- -----------------------------------
Robert Miller
/s/ Director December 12, 2001
- -----------------------------------
Frederick B. Rentschler
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 10/02/99 $ 2,053 $ - $ (3,600) $(1,547)
======== ======= ======== =======
Year ended 09/30/00 $(1,547) $ - $ 613 $ (934)
======= ======= ======== =======
Year ended 09/29/01 $ (934) $ - $ (644) $(1,578)
======= ======= ======== =======
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 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
========= ======== ========= ======= =========
Year ended 09/29/01 $ 13,831 $ 5,201 $ (401) $(2,687) $ 15,944
========= ======== ========= ======= =========
Allowance for
Doubtful Notes and
Contracts Receivable:
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
========= ======== ========= ======= =========
Year ended 09/29/01 $ 18,033 $ 13,872 $ 41 $(5,005) $ 26,941
========= ======== ========= ======= =========
Balance at Disposed Balance
Beginning of or at End
of Period Provisions Written Off of Period
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Obsolete Inventory Reserve:
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
========= ========= ======== ========
Year ended 09/29/01 $ 24,304 $ 21,088 $(16,505) $ 28,887
========= ========= ======== ========