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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 29, 2002
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File Number 001-10684
INTERNATIONAL GAME TECHNOLOGY
(Exact name of registrant as specified in charter)
Nevada 88-0173041
(State of Incorporation) (IRS Employer Identification No.)
9295 Prototype Drive, Reno, Nevada 89511
(Address of principal executive offices)
(775) 448-7777
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 27, 2002
----- ----------------------------
Common Stock
par value $.000625 per share 86,652,041
International Game Technology
Table of Contents
Part I - Financial Information
Page
Item 1. Financial Statements:
Unaudited Condensed Consolidated Statements of Income -
Three and Nine Months Ended June 29, 2002 and June 30, 2001....3
Unaudited Condensed Consolidated Balance Sheets -
June 29, 2002 and September 29, 2001 ..........................5
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine Months Ended June 29, 2002 and June 30, 2001..............7
Unaudited Notes to Condensed Consolidated Financial Statements...10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......37
Part II - Other Information
Item 1. Legal Proceedings................................................39
Item 2. Changes in Securities............................................39
Item 3. Defaults Upon Senior Securities..................................39
Item 4. Submission of Matters to a Vote of Security Holders..............39
Item 5. Other Information................................................39
Item 6. Exhibits and Reports on Form 8-K.................................39
Signature...................................................................40
Part I - Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Income
Quarter Ended Nine Months Ended
------------------------ -------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Revenues
Product sales $222,429 $222,715 $ 628,359 $636,222
Gaming operations 261,190 97,419 618,039 267,086
Lottery and pari-mutuel systems 38,748 - 78,341 -
-------- -------- ---------- --------
Total revenues 522,367 320,134 1,324,739 903,308
-------- -------- ---------- --------
Costs and Expenses
Cost of product sales 128,140 135,446 362,864 385,350
Cost of gaming operations 119,489 47,177 283,241 122,537
Cost of lottery and pari-mutuel systems 26,515 - 54,543 -
Selling, general and administrative 65,319 47,943 171,561 134,789
Depreciation and amortization 13,242 5,131 32,622 14,675
Research and development 18,645 15,026 55,953 44,590
Acquired in-process research and development - - 1,000 -
Provision for bad debts 4,001 4,621 15,042 14,926
Impairment of assets and restructuring
charges (recoveries) - - - (1,100)
-------- -------- ---------- --------
Total costs and expenses 375,351 255,344 976,826 715,767
-------- -------- ---------- --------
Earnings (Losses) of Unconsolidated Affiliates (345) 38,584 32,772 104,049
-------- -------- ---------- --------
Income from Operations 146,671 103,374 380,685 291,590
-------- -------- ---------- --------
Other Income (Expense)
Interest income 14,085 11,707 37,994 36,124
Interest expense (31,074) (25,843) (88,427) (76,326)
Gain (loss) on the sale of assets (213) (20) (223) 445
Other 1,522 811 (42) (303)
-------- -------- ---------- --------
Other expense, net (15,680) (13,345) (50,698) (40,060)
-------- -------- ---------- --------
Income from Continuing Operations Before Tax 130,991 90,029 329,987 251,530
Provision for Income Taxes 49,484 33,311 124,405 93,066
-------- -------- ---------- --------
Income from Continuing Operations 81,507 56,718 205,582 158,464
Income from Discontinued Operations, net of tax 2,030 - 3,645 -
-------- -------- ---------- ------
Income before Extraordinary Item 83,537 56,718 209,227 158,464
Extraordinary loss on early redemption of debt,
net of tax benefit of $550 (909) - (909) -
-------- -------- ---------- --------
Net Income $ 82,628 $ 56,718 $ 208,318 $158,464
======== ======== ========== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Income
Quarter Ended Nine Months Ended
------------------------ -------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Basic Earnings Per Share
Continuing operations $ 0.91 $ 0.76 $ 2.45 $ 2.16
Discontinued operations 0.02 - 0.04 -
Extraordinary item (0.01) - (0.01) -
-------- -------- ---------- --------
Net income $ 0.92 $ 0.76 $ 2.48 $ 2.16
======== ======== ========== ========
Diluted Earnings Per Share
Continuing operations $ 0.90 $ 0.73 $ 2.41 $ 2.07
Discontinued operations 0.02 - 0.04 -
Extraordinary item (0.01) - (0.01) -
-------- -------- ---------- --------
Net income $ 0.91 $ 0.73 $ 2.44 $ 2.07
======== ======== ========== ========
Weighted Average Common Shares Outstanding 89,490 74,297 83,889 73,523
Weighted Average Common and Potential
Shares Outstanding 90,832 77,232 85,402 76,390
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Unaudited Condensed Consolidated Balance Sheets
June 29, September 29,
2002 2001
- ------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except shares and par value)
Assets
Current assets
Cash and cash equivalents $ 525,447 $ 364,234
Investment securities at market value 15,524 13,085
Accounts receivable, net of allowances for doubtful
accounts of $19,224 and $15,944 303,306 249,410
Current maturities of long-term notes and contracts
receivable, net of allowances 67,384 62,977
Inventories, net of allowances for obsolescence of
$24,009 and $28,887:
Raw materials 74,680 71,835
Work-in-process 6,780 3,093
Finished goods 72,407 80,962
---------- ----------
Total inventories 153,867 155,890
---------- ----------
Investments to fund liabilities to jackpot winners 39,684 29,286
Deferred income taxes 25,652 30,053
Assets held for sale 137,485 -
Prepaid expenses and other 48,636 62,739
---------- ----------
Total current assets 1,316,985 967,674
---------- ----------
Long-term notes and contracts receivable, net of
allowances and current maturities 144,719 90,606
---------- ----------
Property, plant and equipment, at cost
Land 21,534 19,597
Buildings 83,499 78,677
Gaming operations equipment 271,310 122,613
Manufacturing machinery and equipment 163,545 139,084
Leasehold improvements 9,786 5,164
---------- ----------
Total 549,674 365,135
Less accumulated depreciation and amortization (267,406) (159,788)
---------- ----------
Property, plant and equipment, net 282,268 205,347
---------- ----------
Investments to fund liabilities to jackpot winners 331,560 233,669
Deferred income taxes 38,405 133,728
Intangible assets, net of amortization 298,126 40,076
Goodwill, net of amortization 951,210 139,558
Investments in unconsolidated affiliates - 74,659
Other assets 37,088 38,122
---------- ----------
Total assets $3,400,361 $1,923,439
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements
Unaudited Condensed Consolidated Balance Sheets
June 29, September 29,
2002 2001
- -----------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except shares and par value)
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes payable and
capital lease obligations $ 2,656 $ 5,023
Accounts payable 81,834 125,164
Jackpot liabilities 147,334 85,109
Accrued employee benefit plan liabilities 32,037 41,452
Accrued interest 14,669 30,884
Other accrued liabilities 133,071 83,267
Liabilities of discontinued operations 17,223 -
---------- -----------
Total current liabilities 428,824 370,899
---------- -----------
Long-term notes payable and capital lease obligations,
net of current maturities 1,216,662 984,742
Long-term jackpot liabilities 380,169 258,457
Other liabilities 13,680 13,228
---------- -----------
Total liabilities 2,039,335 1,627,326
---------- -----------
Commitments and contingencies - -
Stockholders' equity
Common stock, $.000625 par value; 320,000,000 shares
authorized; 173,980,238 and 156,633,430 shares issued 109 98
Additional paid-in capital 1,443,660 365,233
Deferred compensation (11,644) -
Retained earnings 1,465,437 1,257,119
Treasury stock; 87,340,612 and 83,700,984 shares, at cost 1,530,434) (1,316,444)
Accumulated other comprehensive loss (6,102) (9,893)
---------- -----------
Total stockholders' equity 1,361,026 296,113
---------- -----------
Total liabilities and stockholders' equity $3,400,361 $ 1,923,439
========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended
-------------------------------
June 29, June 30,
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $208,318 $ 158,464
-------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary loss on debt retirement 1,459 -
Depreciation and amortization 99,835 44,306
Amortization of discounts and deferred offering costs 654 1,976
Provision for bad debts 15,042 14,926
Provision for inventory obsolescence 11,575 17,967
Gain (loss) on sale of assets 223 (445)
Amortization of stock based compensation 2,421 1,211
(Increase) decrease in operating assets:
Receivables 8,502 (42,309)
Inventories (26,068) (92,607)
Prepaid expenses and other 23,623 (22,982)
Other assets (4,362) (10,584)
Net accrued and deferred income taxes, net of tax
benefit of employee stock plans 55,928 14,081
Decrease in accounts payable and accrued liabilities (50,872) (22,912)
Recoveries of asset impairment and restructuring charges - (1,100)
Acquired in-process research and development 1,000 -
Earnings of unconsolidated affiliates less than (in excess of) distributions 10,578 (6,856)
-------- ---------
Total adjustments 149,538 (105,328)
-------- ---------
Net cash provided by operating activities 357,856 53,136
-------- ---------
Cash Flows from Investing Activities
Investment in property, plant and equipment (23,101) (20,897)
Proceeds from sale of property, plant and equipment 804 982
Investment securities:
Purchases (12,715) -
Proceeds 6,030 12,377
Investments to fund liabilities to jackpot winners:
Purchases (32,523) (23,435)
Proceeds 27,113 20,035
Cash advanced on loans receivable (5,869) (35,179)
Payments received on loans receivable 16,834 12,965
Proceeds from sale of other assets 14,000 -
Investment in unconsolidated affiliates (440) (420)
Acquisition of businesses, net of cash acquired 124,060 (31,177)
-------- ---------
Net cash provided by (used in) investing activities 114,193 (64,749)
-------- ---------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended
-----------------------------
June 29, June 30,
2002 2001
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Financing Activities
Payments, net of borrowings (142,715) (13,027)
Jackpot liabilities:
Payments to winners (154,994) (50,687)
Collections from systems 170,239 69,721
Proceeds from shares issued 67,294 36,749
Purchases of treasury shares (249,270) -
Premium paid for early redemption of debt (3,797) -
--------- --------
Net cash provided by (used in) financing activities (313,243) 42,756
--------- --------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 2,407 408
--------- --------
Net Increase in Cash and Cash Equivalents 161,213 31,551
Cash and Cash Equivalents at:
Beginning of Period 364,234 244,907
--------- --------
End of Period $ 525,447 $276,458
========= ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Supplemental Cash Flow 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, cost of gaming operations
and cost of lottery and pari-mutuel systems.
Nine Months Ended
---------------------------
June 29, June 30,
2002 2001
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Increase in property, plant, and equipment
related to net transfers between inventory
and gaming operations equipment $ 44,014 $43,417
Tax benefit of employee stock plans 31,430 32,524
Payments of interest 94,140 82,122
Payments of income taxes 59,748 86,467
Investing and financing transactions that were initiated and accrued prior to
the period, but cash settled during the current period:
Investment purchases 1,838 -
Principal payments on debt 8,000 -
Purchases of treasury stock 35,280 -
Increase in note receivable from the sale of Pala, classified as
assets held for sale 63,000 -
Acquisitions:
Fair value of assets acquired 1,660,474 53,359
Fair value of liabilities acquired 691,097 22,163
Cash acquired 124,060 2,814
Cash paid - 33,991
Unaudited Notes to Condensed Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The accompanying unaudited condensed consolidated financial statements were
prepared by International Game Technology (referred throughout this document,
together with its consolidated subsidiaries where appropriate, as IGT, Company,
we, our, and us) and include all normal adjustments considered necessary to
present fairly the results of operations, cash flows, and financial position for
the interim periods. These adjustments are of a normal recurring nature. These
financial statements and notes are presented as permitted by the instructions to
Form 10-Q and therefore do not contain certain information included in our
audited consolidated financial statements and notes for the year fiscal ended
September 29, 2001. The operating results and cash flows for the current interim
periods are not necessarily indicative of the results that will be achieved in
future periods.
You should read these financial statements along with the financial statements
and notes included in our Annual Report on Form 10-K for the fiscal year ended
September 29, 2001. We believe that the disclosures in this document are
adequate to make the information presented not misleading.
The accompanying unaudited condensed 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.
Reclassifications
Certain amounts in the unaudited condensed consolidated financial statements
presented for the comparable prior year periods have been reclassified to be
consistent with the presentation used in the current fiscal period.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued two new
standards, Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations and SFAS 142, Goodwill and Other Intangible Assets. Together these
statements changed 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 eliminated the pooling-of-interests method.
IGT adopted SFAS 141 for business combinations completed after June 30, 2001.
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 and indefinite lived assets, including goodwill
recorded in past business combinations, ceases 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. As the result of adopting SFAS 142 as of September 30, 2001, the
beginning of our fiscal year 2002, we have discontinued amortization of
goodwill.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement applies to all entities and to
all legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and the normal operation
of a long-lived asset, except for certain obligations of lessees. This statement
is effective for our 2003 fiscal year and early adoption is permitted. We
believe that the adoption of this statement will not have a material impact on
our financial condition or results of operations.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment and
Disposal of Long-Lived Assets. This statement requires one accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired and broadens the presentation of discontinued
operations to include additional disposal transactions. This statement is
effective for our 2003 fiscal year, but early adoption is permitted. We believe
that the adoption of this statement will not have a material impact on our
financial condition or results of operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44,
and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS 145
rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt. Under
SFAS 4, all gains and losses from extinguishment of debt were required to be
aggregated, if material, and classified as an extraordinary item, net of related
income tax effect, on the statement of income. SFAS 145 requires all gains and
losses from extinguishment of debt to be classified as extraordinary only if
they meet the criteria of Accounting Principles Board (APB) Opinion 30. This
statement is effective for our 2003 fiscal year and early adoption is permitted.
Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria in
APB Opinion 30 shall be reclassified. The adoption of this statement will
require us to reclassify our prior period losses from early retirement of debt
from extraordinary to continuing operations. See Note 13, Subsequent Events.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. A fundamental conclusion reached by the FASB in this
statement is that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability. SFAS 146
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. We have not yet determined the impact of this statement on our
financial position and results of operations, if any.
2. Acquisitions and Discontinued Operations
Acquisitions
On December 30, 2001, IGT completed the previously announced planned acquisition
of Anchor Gaming (Anchor) pursuant to which Anchor became a wholly-owned
subsidiary of IGT in a stock for stock exchange. Anchor shareholders received
one share of IGT common stock for each share of Anchor common stock owned.
The aggregate purchase price paid for Anchor was approximately $988.4 million,
plus the assumption of Anchor's debt of $337.0 million, net of discount. The
purchase price included 14,901,920 outstanding shares of Anchor common stock,
which were exchanged on a one-for-one basis for IGT shares valued at $59.50 per
share, $93.0 million for Anchor stock options assumed by IGT, $3.7 million of
Anchor shares held by IGT prior to the acquisition, and $5.0 million of
transaction costs. For accounting purposes, the $59.50 share price was
determined based on the average closing market prices of IGT's common stock for
the seven trading days ended July 12, 2001, which includes the three trading
days before and after the acquisition announcement on July 9, 2001.
We have applied SFAS 141 in our allocation of the purchase price of the Anchor
acquisition. IGT, with the assistance of valuation consultants, is in the
process of finalizing the fair value and the lives of the assets acquired. The
allocation of the purchase price continues to be subject to refinement. See Note
5 for the allocation of the purchase price to identifiable intangible assets and
goodwill.
IGT and Anchor have been working together since 1996 as joint venture partners.
This acquisition permits the companies to work more closely to develop new games
and use 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. We believe our combined resources make us a more
effective competitor in these businesses. Prior to the Anchor acquisition, the
Spin For Cash Joint Venture (Joint Venture) activities were accounted for under
the equity method and the revenues were reflected net of expenses as earnings of
unconsolidated affiliates on the statements of income. Subsequent to the
acquisition, the Joint Venture activities have been fully consolidated.
The following table presents our preliminary allocation of the purchase price of
the Anchor acquisition, including the full consolidation of the Joint Venture:
Discontinued
Operations
Total Reclass Net
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash acquired $123,104 $ - $ 123,104
Assets held for sale 77,000 126,110 203,110
Accounts and notes receivable 87,534 (2,251) 85,283
Inventory 25,304 (510) 24,794
Property and equipment 145,704 (53,155) 92,549
Investments to fund liabilities to jackpot winners 102,880 - 102,880
Identifiable intangible assets 319,475 (66,100) 253,375
Goodwill 812,298 (1,920) 810,378
Investment in Joint Venture (64,758) - (64,758)
Other current assets 27,448 (829) 26,619
Other long-term assets 4,485 (1,345) 3,140
Accounts payable 13,371 (623) 12,748
Liabilities of discontinued operations - 16,660 16,660
Notes payable 365,939 - 365,939
Jackpot liabilities 168,610 - 168,610
Other liabilities 143,177 (16,037) 127,140
Deferred stock compensation (13,973) - (13,973)
Shares issued 983,350 - 983,350
Effective December 30, 2001, our operating results include the activities of
Anchor and the fully consolidated Joint Venture. The following unaudited
pro-forma financial information is presented as if the Anchor acquisition had
been made at the beginning of fiscal 2001. Excluding impairment, restructuring,
and other one-time charges of $121.5 million ($97.6 net of tax) in the nine
months ended June 30, 2001, pro forma income from continuing operations would
have been $179.9 million or $1.87 per share.
Nine Months Ended
-----------------------------
June 29, June 30,
2002 2001
-----------------------------------------------------------------------
(Dollars in thousands)
Total revenues $1,509,435 $1,434,014
Income from continuing operations 216,484 82,323
Income from discontinued operations 5,932 9,644
Net income 221,507 91,967
Earnings per share
Basic $ 2.64 $ 1.04
Diluted $ 2.59 $ .96
Discontinued Operations
During the current quarter, based on our decision not to operate in competition
with our customers who purchase our games and systems, we committed to a plan to
sell the casino operations acquired in the Anchor acquisition. This segment
included the Colorado Central Station Casino, the Colorado Grande Casino and our
Nevada gaming machine route operations.
Our financial statements have reflected the casino operations as discontinued
operations for all periods presented. Operating results of our discontinued
casino operations are summarized below:
Quarter Ended Nine Months Ended
-------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
----------------------------------------------------------------------------------------
(Amounts in thousands)
Net revenue $29,593 $ - $59,093 $ -
======= ======= ======= ========
Income before tax $ 3,210 $ - $ 5,963 $ -
Provision for income taxes 1,180 - 2,318 -
------- ------- ------- --------
Income from discontinued operations $ 2,030 $ - $ 3,645 $ -
======= ======= ======= ========
Assets and liabilities of our discontinued casino operations were as follows:
June 29,
2002
---------------------------------------------------------------
(Amounts in thousands)
Cash $ 15,116
Accounts receivable, net 1,544
Other current assets 1,977
Property and equipment, net 51,132
Intangible assets 63,762
Goodwill 1,920
Other non-current assets 2,034
--------
Total assets held for sale 137,485
--------
Current liabilities 6,919
Minority interest 10,304
--------
Total liabilities of discontinued operations 17,223
--------
Net assets of discontinued operations $120,262
========
3. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were netted against
current and long-term maturities:
June 29, September 29,
2002 2001
-------------------------------------------------------------------
(Dollars in thousands)
Current $18,245 $15,480
Long-term 18,584 11,461
------- -------
$36,829 $26,941
======= =======
Pala Management Contract
On December 23, 2001, Anchor entered into an agreement with the Pala Band of
Mission Indians (Pala) and Jerome H. Turk to sell their interest in the
management agreement for the Pala Casino in San Diego, California. The
transaction was completed during the quarter ended March 30, 2002. Pala paid
Anchor $77.0 million, consisting of $14.0 million in cash and $63.0 million by
delivery of a subordinated secured promissory note on which interest began to
accrue effective January 1, 2002. The note requires monthly principal payments
of $875,000 plus accrued interest through January 2005, at which time a balloon
payment of $31.5 million is due and payable. The promissory note bears interest
at 6% for the first year, 7% for the subsequent year, and 8% for the final year.
The agreement valued at $77.0 million was classified as an asset held for sale
in the preliminary purchase price allocation of the Anchor acquisition. There
was no gain or loss recorded on the transaction.
4. Concentrations of Credit Risk
The financial instruments that potentially subject IGT to concentrations of
credit risk consist principally of cash and cash equivalents and accounts,
contracts, and notes receivable. IGT maintains cash and cash equivalents with
various financial institutions in amounts which, at times, may be in excess of
the FDIC insurance limits.
IGT's receivables are concentrated in specific legalized gaming regions. We also
distribute a portion of our products through third party distributors resulting
in distributor receivables.
The distribution below presents our accounts, contracts, and notes receivable,
net of allowances, by region as a percentage of total receivables at June 29,
2002.
Domestic Region
---------------
Native American casinos 39%
Nevada 17%
Riverboats (greater Mississippi River area) 7%
Atlantic City (distributor and other) 7%
West Virginia 6%
Canada 3%
Other US regions (individually less than 3%) 8%
----
Total domestic 87%
----
International Region
--------------------
Europe 5%
Latin America 3%
Australia 4%
Other international 1%
----
Total international 13%
----
Total 100%
====
5. Intangible Assets and Goodwill
At the beginning of fiscal 2002, we adopted SFAS 142, Goodwill and Other
Intangible Assets, which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under this pronouncement, goodwill and
intangible assets with indefinite lives are no longer subject to amortization
but are tested for impairment at least annually. Amortization is still required
for identifiable intangible assets with finite lives. In addition, goodwill is
required to be separately disclosed from other intangible assets on the face of
the balance sheet.
The provisions of this accounting standard also require the completion of a
transitional impairment test within six months of the date of adoption. In
conjunction with adopting SFAS 142, we have reassessed our previously recognized
identifiable intangible assets and determined that their useful lives and the
classifications were appropriate. With the assistance of valuation consultants,
we completed our initial assessment of goodwill related to the Sodak and
Barcrest acquisitions and concluded there was no goodwill impairment.
We have applied SFAS 141 and SFAS 142 in our allocation of the purchase price of
the Anchor acquisition to identifiable intangible assets and goodwill as
detailed in the table below. In June 2002, we ceased amortization of the
contract intangibles related to our discontinued casino operations that were
reclassified to assets held for sale, net of accumulated amortization of $2.4
million.
Discontinued
Continuing Casino
Operations Operations Total
----------------------------------------------------------------------------
Finite Lived Intangible Assets
Patents $166,400 $ - $166,400
Contracts 33,658 47,500 81,158
Developed Technology 7,978 - 7,978
Trademarks 6,300 - 6,300
In-Process Research
and Development 1,000 - 1,000
-------- ------- --------
215,336 47,500 262,836
Indefinite Lived Intangible Assets
Trademarks 38,039 18,600 56,639
-------- ------- --------
Total Intangible Assets $253,375 $66,100 $319,475
======== ======= ========
Goodwill $810,378 $ 1,920 $812,298
======== ======= ========
We amortized our acquired identifiable intangible assets with finite lives to
reflect the pattern in which the economic benefits for the intangible assets are
consumed based on projected revenues. Intangible assets with an increasing
revenue stream are amortized using the straight-line method. Intangible assets
with a declining revenue stream are amortized on an accelerated basis. The
following table presents the weighted average amortization period by intangible
asset:
Weighted
Average Life
------------
Patents 14.7
Contracts 7.7
Developed technology 12.7
Trademarks 13.4
The tables below present information regarding our intangible assets, excluding
discontinued operations, as of the periods ended:
June 29, 2002 September 29, 2001
------------------------------ ----------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
- ------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Amortized Intangible Assets
Patents $232,504 $14,099 $218,405 $ 42,636 $2,560 $40,076
Contracts 33,664 5,256 28,408 - - -
Developed technology 7,978 512 7,466 - - -
Trademarks 6,343 535 5,808 - - -
In-process research and development 1,000 1,000 - - - -
-------- ------- -------- -------- ------ -------
Total 281,489 21,402 260,087 42,636 2,560 40,076
Unamortized Intangible Assets
Trademarks 38,039 - 38,039 - - -
-------- ------- -------- -------- ------ -------
Net carrying amount of all intangibles $319,528 $21,402 $298,126 $ 42,636 $2,560 $40,076
======== ======= ======== ======== ====== =======
Goodwill
Aggregate amount acquired $960,261 $148,609
Less accumulated amortization
recognized prior to adoption
of SFAS 142 (9,051) (9,051)
-------- --------
Net carrying amount $951,210 $139,558
======== ========
Aggregate amortization expense totaled $7.1 million and $586,000 for the current
and prior year quarters and $17.8 million and $744,000 for the current and prior
nine month periods. Estimated amortization expense for fiscal 2002 and for each
of the four succeeding fiscal years is as follows:
Fiscal Year Amount
---------------------- --------
(Amounts in thousands)
2002 $25,856
2003 28,379
2004 27,913
2005 26,694
2006 24,025
Changes in the carrying amount of goodwill for the nine months ended June 29,
2002, by operating segment, are presented below. The allocation of goodwill by
segment is subject to refinement from the final Anchor purchase price
allocation.
Product Proprietary
Sales Gaming Lottery Total
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance as of September 29, 2001 $124,442 $ 15,116 $ - $139,558
Goodwill acquired during the period 6,652 803,726 - 810,378
Foreign currency translation adjustment 1,274 - - 1,274
-------- -------- ------- --------
Balance as of June 29, 2002 $132,368 $818,842 $ - $951,210
======== ======== ======= ========
In accordance with SFAS 142, the current year results reflect no amortization of
goodwill. A reconciliation of previously reported net income and earnings per
share for the comparative prior periods adjusted for the exclusion of goodwill
amortization (net of related tax effects) is as follows:
Quarter Ended Nine Months Ended
-------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Reported net income $82,628 $56,718 $208,318 $158,464
Goodwill amortization, net of tax - 580 - 1,747
------- ------- -------- --------
Adjusted net income $82,628 $57,298 $208,318 $160,211
======= ======= ======== ========
Reported basic earnings per share $ 0.92 $ 0.76 $ 2.48 $ 2.16
Goodwill amortization, net of tax - 0.01 - .02
------- ------- -------- --------
Adjusted basic earnings per share $ 0.92 $ 0.77 $ 2.48 $ 2.18
======= ======= ======== ========
Reported diluted earnings per share $ 0.91 $ 0.73 $ 2.44 $ 2.07
Goodwill amortization, net of tax - 0.01 - .03
------- ------- -------- --------
Adjusted diluted earnings per share $ 0.91 $ 0.74 $ 2.44 $ 2.10
======= ======= ======== ========
6. Impairment of Assets and Restructuring
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
subsequent payments totaling $3.0 million for receivables previously considered
fully impaired, of which $1.1 million was received in fiscal 2001. We do not
expect any further recoveries of Brazil's impairment charges.
7. Earnings Per Share
The following table shows the reconciliation of basic earnings per share (EPS)
for income from continuing operations to diluted EPS:
Quarter Ended Nine Months Ended
--------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Income from continuing operations $81,507 $56,718 $205,582 $158,464
======= ======= ======== ========
Weighted average common shares outstanding 89,490 74,297 83,889 73,523
Dilutive effect of stock options outstanding 1,342 2,935 1,513 2,867
------- ------- ------- ---------
Weighted average common and potential
shares outstanding 90,832 77,232 85,402 76,390
======= ======= ======== ========
Basic earnings per share $ 0.91 $ 0.76 $ 2.45 $ 2.16
Diluted earnings per share $ 0.90 $ 0.73 $ 2.41 $ 2.07
Number of common shares excluded from
diluted EPS because option exercise price
was greater than average market price 1,927 7 1,363 60
8. Income Taxes
Our provision for income taxes is based on estimated effective annual income tax
rates. The provision differs from income taxes currently payable because certain
items of income and expense are recognized in different periods for financial
statement and tax return purposes.
9. Comprehensive Income
Items of other comprehensive income include cumulative foreign currency
translation adjustments and net unrealized gains and losses on investment
securities. Our total comprehensive income is presented below:
Quarter Ended Nine Months Ended
--------------------- ----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net income $82,628 $56,718 $208,318 $158,464
Net change in other comprehensive income 3,765 (2,494) 3,791 (1,138)
------- ------- -------- --------
Comprehensive income $86,393 $54,224 $212,109 $157,326
======= ======= ======== ========
10. 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 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, 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, the Court heard oral arguments regarding the issue of
certification of the plaintiff class. On March 27, 2002, the Court directed that
certain merits discovery could proceed. On June 21, 2002, the Court denied the
plaintiffs' motion for class certification.
Acres
In February 1999, the Anchor 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). The complaint alleges, among other things,
infringement of certain secondary event patents owned by Anchor and licensed to
the Anchor Joint Venture. In April 1999, Acres responded by filing an answer and
counterclaim against the Anchor Joint Venture and Anchor. In addition, in April
1999, Acres filed an action in Oregon state circuit court against the Anchor
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 for post-trial relief that were
denied by the trial court. IGT timely filed its Notice of Appeal anticipating
the appellate court will order a new trial. The opening brief from IGT was
timely filed on April 19, 2002. On May 20, 2002, Collins filed a Motion to
Dismiss the IGT appeal. Oral argument on the motion was held on August 7, 2002
and no decision has been rendered.
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, IGT filed a motion to intervene as a party defendant, which
was granted on October 26, 2001. The plaintiff claimed 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 alleged 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 alleged violations of the
Michigan Consumer Protection Act, common law fraud and unjust enrichment and
asked for unspecified compensatory and punitive damages, disgorgement of
profits, injunctive and other equitable relief, and costs and attorney's fees.
The Michigan Gaming Control Board, the administrative agency responsible for
regulating the Detroit casinos, approved the machines and their programs for
use. On December 10, 2001, IGT and Anchor filed their Motion for Summary
Disposition. On April 26, 2002, the Court granted Summary Disposition and
dismissed Plaintiff's complaint. On May 15, 2002, Plaintiff filed an appeal with
the Michigan Court of Appeals.
Aristocrat
In December 2001, IGT filed a complaint for patent infringement for six US
patents, misappropriation of trade secrets and breach of contract against
Aristocrat Leisure Limited (ALL), an Australian corporation, and two
wholly-owned US subsidiaries, Aristocrat Technologies, Inc. (ATI) and Casino
Data Systems (CDS) in the United States District Court for the District of
Nevada (Aristocrat Lawsuit I). In January 2002, ALL, ATI, CDS and Aristocrat
Technologies Australia Pty Ltd., a wholly-owned Australian subsidiary of ALL,
filed a complaint for patent infringement of four US patents against IGT and for
a declaratory judgment that the subject matter of Aristocrat Lawsuit I be
decided in their favor in the United States District Court for the District of
Nevada (Aristocrat Lawsuit II). In February 2002, IGT filed an amended complaint
in Aristocrat Lawsuit I naming all the Aristocrat parties from Aristocrat
Lawsuit II as defendants, incorporating all the subject matter previously
involved in Aristocrat Lawsuit I and Aristocrat Lawsuit II, and including
additional claims for trademark infringement and trademark counterfeiting
against all the Aristocrat parties. The court has granted IGT's motion to
consolidate the Aristocrat Lawsuit I and the Aristocrat Lawsuit II, so that all
the pending issues between IGT and the Aristocrat parties may be resolved in a
single lawsuit.
GTECH
In February 1999, GTECH Holdings Corporation filed a complaint for declaratory
judgment, injunction, and violation of the Public Records Law against the State
of Florida, Department of Lottery (Florida Lottery) and Automated Wagering
International (AWI), an on-line lottery subsidiary of Anchor, in the Circuit
Court, Second Judicial Circuit, in Leon County, Florida. The complaint requests
the Circuit Court to declare the contract between AWI and the Florida Lottery
void in the event the First District Court of Appeals of Florida upholds the
Florida Lottery's decision to award the on-line lottery services contract to
AWI. On July 22, 1999, the First District Court of Appeals affirmed the Florida
Lottery's award of the contract to AWI. In March 1999, AWI and the Florida
Lottery executed an amended contract.
On January 28, 2000, the Florida Circuit Court determined that the amended
contract materially differed from the Request for Proposal and declared the
amended contract null and void. The Florida Lottery appealed on February 2,
2000, affecting an automatic stay of the Circuit Court's order. AWI appealed on
February 10, 2000. On February 28, 2001, the Florida First District Court of
Appeals affirmed the order of the Circuit Court. Both AWI and the Florida
Lottery petitioned the Court of Appeals for a rehearing or certification of
questions to the Florida Supreme Court. On July 17, 2001, the Court of Appeals
granted these motions. Both AWI and the Florida Lottery have petitioned the
Florida Supreme Court to consider the questions certified by the Court of
Appeals and also to stay enforcement of the Order of the Circuit Court.
On June 6, 2002, the Florida Supreme Court issued an order dismissing the
appeals of AWI and the Florida Lottery. Both parties immediately began operating
under an Emergency Agreement executed between AWI and the Florida Lottery
effective February 2000.
AWI, the Florida Lottery and GTECH began settlement discussions and in July
2002, the parties entered into a settlement agreement, which provides for
dismissal of the lawsuit. It further provides that AWI and the Florida Lottery
will continue to operate the lottery under the Emergency Agreement through
December 31, 2004, which is the term of the original agreement executed by AWI
and the Florida Lottery in 1999. The Florida Lottery agreed to commence the
procurement process for a new on-line system not later than the first quarter of
2003 with the new system to be implemented by January 1, 2005.
11. Derivatives and Hedging Activities
IGT adopted SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, on October 1, 2000. 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 the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. The adoption of SFAS 133 did not have a material impact on our
financial condition or results of operations.
During the current period, IGT 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.
Prior to the Anchor acquisition, Anchor entered into an interest rate swap
agreement designated as a fair value hedge of a portion of the $250.0 million
principal amount of Anchor's debt due in 2008. Under the terms of this
agreement, we made payments based on a specific spread over six-month LIBOR and
received payments equal to the interest rate on the fixed rate debt. The
notional value of the swap was $70.0 million. The interest rate swap agreement
qualifies for the "shortcut" method allowed under SFAS 133, which allows an
assumption of no ineffectiveness in the hedging relationship. The accounting for
changes in the fair value of the swap instrument was recorded as an asset or
liability on the balance sheet and there was no income statement impact.
Accordingly, we recorded the $643,000 fair value of the swap instrument in other
long-term liabilities, with an offsetting adjustment to the carrying value of
the related debt. During July 2002, we completed a cash tender offer to
repurchase Anchor's outstanding 9-7/8% fixed rate debt. In conjunction with this
debt repurchase, the interest rate swap agreement was terminated.
During the second quarter of the current fiscal year we entered into a $61.1
million forward exchange contract to hedge a firm commitment in the amount of
$61.2 million denominated in foreign currency for a Canadian lottery contract.
The hedge has been designated as a fair value hedge.
12. Business Segments
As a result of the Anchor acquisition on December 30, 2001, we have restructured
and renamed our business segments. We now operate in three business segments:
Product Sales, Proprietary Gaming and Lottery. The Casino Operations segment
acquired from Anchor has been reclassified to discontinued operations. See Note
2.
Product Sales
The development, manufacturing, marketing and distribution of gaming products is
referred to as "Product Sales". Subsequent to the Anchor acquisition, Anchor's
video lottery terminal sales are included in product sales.
Proprietary Gaming
Our Proprietary Gaming segment reflects the development, manufacturing,
marketing, and operation of wide-area progressive systems, stand-alone games and
gaming equipment leasing. This segment includes both wholly-owned gaming
operations and unconsolidated joint venture activities reported as earnings of
unconsolidated affiliates. Our joint ventures are an integral part of our
Proprietary Gaming segment. The nature of the products are the same and the same
management group monitors all activities. Subsequent to the Anchor acquisition,
the activities of our largest joint venture with Anchor, have been fully
consolidated. Anchor's leased video lottery terminals are included in
proprietary gaming.
Lottery
Anchor's Automated Wagering International and United Tote business units form
"Lottery". This segment consists of the development and distribution of on-line
lottery systems and pari-mutuel wagering systems to government controlled
jurisdictions.
The following tables present information on our business segments as of and for
the current and prior comparable periods. The prior period amounts have been
restated to conform to the current period presentation.
Product Proprietary
Sales Gaming Lottery Corporate Consolidated
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Quarter ended June 29, 2002
Total Revenues $ 222,429 $ 261,190 $ 38,748 $ - $ 522,367
Losses of unconsolidated affiliates - (345) - - (345)
----------- ----------- ----------- ----------- -----------
Total Revenues & Losses of
Unconsolidated Affiliates $ 222,429 $ 260,845 $ 38,748 $ - $ 522,022
=========== =========== =========== =========== ===========
Income from continuing operations,
before tax $ 50,333 $ 101,019 $ 589 $ (20,950) $ 130,991
=========== =========== =========== =========== ===========
-----------------------------------------------------------------------------------------------------------
Nine months ended June 29, 2002
Total Revenues $ 628,359 $ 618,039 $ 78,341 $ - $ 1,324,739
Earnings of unconsolidated affiliates - 32,772 - - 32,772
----------- ----------- ----------- ----------- -----------
Total Revenues & Earnings of
Unconsolidated Affiliates $ 628,359 $ 650,811 $ 78,341 $ - $ 1,357,511
=========== =========== =========== =========== ===========
Income from continuing operations,
before tax $ 123,179 $ 264,456 $ 1,032 $ (58,680) $ 329,987
=========== =========== =========== =========== ===========
-----------------------------------------------------------------------------------------------------------
Quarter ended June 30, 2001
Total Revenues $ 222,715 $ 97,419 $ - $ - $ 320,134
Earnings of unconsolidated affiliates - 38,584 - - 38,584
----------- ----------- ----------- ----------- -----------
Total Revenues & Earnings of
Unconsolidated Affiliates $ 222,715 $ 136,003 $ - $ - $ 358,718
=========== =========== =========== =========== ===========
Income from continuing operations,
before tax $ 39,170 $ 69,551 $ - $ (18,692) $ 90,029
=========== =========== =========== =========== ===========
Product Proprietary
Sales Gaming Lottery Corporate Consolidated
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Nine months ended June 30, 2001
Total Revenues $ 636,222 $ 267,086 $ - $ - $ 903,308
Earnings of unconsolidated affiliates - 104,049 - - 104,049
----------- ----------- ----------- ----------- -----------
Total Revenues & Earnings of
Unconsolidated Affiliates $ 636,222 $ 371,135 $ - $ - $ 1,007,357
=========== =========== =========== =========== ===========
Income from continuing operations,
before tax $ 119,036 $ 190,177 $ - $ (57,683) $ 251,530
=========== =========== =========== =========== ===========
-----------------------------------------------------------------------------------------------------------
June 29, 2002
Identifiable operating assets $ 767,979 $ 1,028,693 $ 96,582 $ 555,897 $ 2,449,151
Goodwill 132,368 818,842 - - 951,210
Investments in unconsolidated
affiliates - - - - -
----------- ----------- ----------- ----------- -----------
Total consolidated assets $ 900,347 $ 1,847,535 $ 96,582 $ 555,897 $ 3,400,361
=========== =========== =========== =========== ===========
September 29, 2001
Identifiable operating assets $ 647,764 $ 605,122 $ - $ 456,336 $ 1,709,222
Goodwill 124,443 15,115 - - 139,558
Investments in unconsolidated
affiliates - 74,659 - - 74,659
----------- ----------- ----------- ----------- -----------
Total consolidated assets $ 772,207 $ 694,896 $ - $ 456,336 $ 1,923,439
=========== =========== =========== =========== ===========
13. Subsequent Events
During July 2002, we completed a cash tender offer to repurchase Anchor's
outstanding 9-7/8% Senior Subordinated Notes due 2008. We have now extinguished
substantially all of the debt outstanding that was assumed in the Anchor
acquisition. The loss attributed to the tender of the notes of approximately
$12.0 million, net of tax, or $0.14 per diluted share, will be reflected in our
fourth quarter earnings.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America. Accordingly, we
are required to make certain estimates, judgments, and assumptions that we
believe are reasonable based on the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the periods presented. Actual results may differ from these estimates. We
believe the significant accounting policies described below are the most
critical to fully understand and evaluate our reported financial results.
Revenue Recognition
Product Sales
IGT generally recognizes revenue from the sale of gaming machines, systems,
equipment and related parts when the products are shipped and title passes to
the customer. Our sales credit terms are normally 90 days or less. We also grant
extended payment terms under contracts of sale secured by the related equipment
sold, generally for terms of one to five years with interest recognized at
prevailing rates.
Proprietary Gaming
Proprietary gaming is comprised of our wholly-owned gaming operations, which
includes our proportionate share of joint marketing alliances for which no
separate legal entities exists. Because our joint venture operations are an
integral part of our business, the earnings from unconsolidated affiliates are
included as a component of our income from operations. Subsequent to the Anchor
acquisition on December 30, 2001, the activities of our largest joint venture
with Anchor (Joint Venture) have been fully consolidated.
Proprietary games include linked wide-area-progressive (WAP) systems, as well as
certain stand-alone machines that generate recurring revenues whereby IGT
participates in the revenue from the machine on a percentage or flat fee basis.
WAP game revenues are recognized based on a percentage of the revenue, or "coin
in". Revenues from stand-alone games are recognized based on a percentage of the
net win that the game generates or on a flat fee basis with the passage of time.
Additionally, our proprietary gaming revenues include recurring royalty revenue
from our games, where we sell the machine to the customer, but also receive a
recurring royalty for the right to use the intellectual property in the game.
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. Participating 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. 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.
Lottery and Pari-mutuel Systems
Revenue from the sale of lottery and pari-mutuel gaming systems equipment and
related parts is recognized upon delivery to the customer. Revenues from sales
of lottery, pari-mutuel and video gaming central site systems (including
customized software and equipment) is recognized using the percentage of
completion method of accounting for long-term construction type contracts where
costs to complete the contract can reasonably be estimated. Prior to revenue
recognition on central site systems, costs incurred are applied against progress
billings and recorded as a net accrued liability or other current asset as
appropriate. Systems contract services revenue is recognized as the services are
performed and primarily relate to revenue from long-term contracts which require
installation and operation of lottery and pari-mutuel wagering networks. Revenue
under these contracts is generally based on a percentage of sales volume, which
may fluctuate over the lives of the contracts.
Casino Operations
In accordance with industry practice, we recognize casino gaming revenue as the
net win from casino operations, which is the difference between amounts wagered
and payments made to casino players. Slot route revenue is recognized based on
our share of coins wagered or on our share of net winnings. Revenue excludes the
retail value of complimentary food and beverage furnished gratuitously to
customers. Revenue is also reported net of cash rebates accrued to customers as
part of the casino loyalty programs. In June 2002, we committed to a plan to
sell our casino operations, and we have reclassified casino revenue to
discontinued operations.
Jackpot Liabilities and Expenses
IGT, the administrator or the trust recognizes a liability for jackpots not yet
won and jackpot expense for the cost to fund these jackpots in the future.
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 (lump-sum) in
lieu of annual installments. Since October 1998, when federal legislation was
passed to allow winners to receive the discounted lump-sum amount of progressive
jackpots in lieu of annual installments, approximately 80% of winners have
elected the lump-sum option. To calculate the present value of our outstanding
progressive jackpot meter liabilities to be paid to future winners, we use the
current month quoted market rates for prime rates and treasury securities,
weighted based on the 80% historical lump-sum election rate. We believe this
calculation provides the best estimate of the cost to fund future winner
liabilities.
Additionally, we estimate the current portion of our liabilities for jackpots
not yet won based on our historical experience with winners' lump-sum elections,
as well as the theoretical projected number of jackpots for the current and non-
current periods. Based on this, we classified 80% of our jackpot liabilities as
current and 20% as non-current. Changes in future winners' elections of
installment or lump-sum payments would impact the allocation of our jackpot
liabilities between current and non-current liabilities.
Fluctuations in interest rates directly impact our cost to fund jackpots, and
therefore the gross profit on our proprietary progressive jackpot systems. If
interest rates decline, our cost to fund jackpots increases, and correspondingly
our gross profit declines. Over the past two fiscal years, interest rates have
declined.
Receivables and Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts on our accounts and notes
receivable that we have deemed to have a high risk of collectibility. We analyze
historical collection trends, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of our allowance for doubtful accounts.
Inventories and Obsolescence
Inventories are stated at the lower of actual cost (first-in, first-out method)
or market value. We regularly review inventory quantities on hand and record
provisions for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements.
Long-lived Assets
We assigned estimated useful lives to our long-lived assets, including
intangible assets and royalties, based on the period of time the asset is
expected to contribute directly or indirectly to future cash flows. We consider
certain factors when assigning useful lives such as legal, regulatory and
contractual provisions, as well as the effects of obsolescence, demand,
competition, and other economic factors. We are required to use judgments and
estimates to determine the useful lives of long-lived assets. We have
classified prepaid and deferred royalty costs as current and non-current assets
based on the period of expected consumption related to projected revenues. We
depreciate or amortize our long-lived assets with finite lives to reflect the
pattern in which the economic benefits for the assets will be consumed based on
projected usage and revenues. While we believe that our estimates of future
revenues and cash flows are reasonable, different assumptions could materially
effect our evaluations and the method of depreciation or amortization. Any
changes to the estimated useful lives of our depreciable or amortizable assets
will impact the results of operations.
We periodically evaluate the carrying value of long-lived and intangible assets,
including goodwill, for impairment, whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable from
related future undiscounted cash flows. Indicators which could trigger an
impairment review include legal and regulatory factors, market conditions, and
operational performance. Any resulting impairment loss, measured as the
difference between the carrying amount and the fair value of the assets, could
have a material adverse impact on our financial condition and results of
operations.
Overview of Anchor Acquisition
On December 30, 2001 we completed our acquisition of Anchor whereby Anchor
became a wholly-owned subsidiary of International Game Technology. The
acquisition resulted in acquiring two new lines of businesses, lottery and
pari-mutuel systems and casino operations. The lottery and pari-mutuel
operations provide equipment and related services to on-line lotteries and
pari-mutuel organizations. The casino operations acquired consist of the
activities of two casinos in Colorado and gaming machine route operations in
Nevada and have been classified as discontinued operations for all periods
presented.
With the assistance of valuation consultants, we are in the process of
finalizing our valuation of Anchor's net assets acquired on December 30, 2001
and the useful lives assigned to those depreciable and amortizable assets. The
current purchase price allocation is subject to refinement. Any changes in the
fair value or lives assigned to depreciable or amortizable assets will impact
the results of operations.
IGT and Anchor have been working together since 1996 as joint venture partners.
Prior to the acquisition, the Anchor Joint Venture activities were accounted for
under the equity method and revenues were reflected, net of expenses, in
earnings of unconsolidated affiliates on our statements of income. Subsequent to
the acquisition, the Joint Venture is fully consolidated.
Results of Operations
Quarter Ended June 29, 2002 Compared to the Quarter Ended June 30, 2001
Net income for the third quarter of fiscal 2002 totaled $82.6 million or $0.91
per diluted share compared to $56.7 million or $0.73 per diluted share in the
same quarter last year. The current quarter results included income from
discontinued casino operations, net of tax, totaling $2.0 million or $0.02 per
diluted share and an extraordinary loss on early redemption of debt, net of tax,
totaling $909,000 or $0.01 per diluted share. Income from continuing operations
for the current quarter grew to $81.5 million or $0.90 per diluted share.
Operating Income
Current quarter operating income grew 42% to $146.7 million from $103.4 million
in the third quarter of fiscal 2001. This growth was predominately due to the
inclusion of Anchor's operating results and the full consolidation of the Joint
Venture, as well as improved margins in product sales, and increased yields and
growth in the installed base of recurring revenue games.
Revenues and Gross Profit Margins
Total revenues for the third quarter of fiscal 2002 grew to $522.4 million
compared to $320.1 million for the prior year quarter, primarily due to the
acquisition of Anchor. Anchor's operations and the fully consolidated results of
the Joint Venture activities contributed $206.1 million to total revenues and
$105.3 million in total gross profit in the current quarter. Prior to the
acquisition, our share of the Joint Venture revenues, net of expenses, were
reflected as earnings of unconsolidated affiliates.
Product sales totaled $222.4 million on shipments of 31,300 units worldwide for
the third quarter of fiscal 2002. Comparatively, the prior year quarter sales
totaled $222.7 million on shipments of 32,600 units. Although product revenues
and units were down slightly over the third quarter of last year, the gross
profit on product sales improved 8% to $94.3 million in the current quarter from
$87.3 million in the prior year quarter. Product sales gross profit margins
improved to 42% from 39% in the prior year quarter predominately due to lower
component costs, as well as ongoing production efficiencies.
Domestic shipments totaled 17,600 in the current third quarter versus 18,100 in
the prior year quarter. Current quarter domestic replacement units totaled
10,300 compared to 10,500 in the same quarter last year. The current quarter
benefited from sales, both new and replacement, in the government-operated
public gaming sector. We shipped 5,200 units into this market in the current
quarter compared to 250 units in the comparable prior year quarter. Expansion of
gaming at several West Virginia racetrack and video lottery venues, accompanied
by replacement demand from the Atlantic Lottery Commission in Canada and the
Oregon Lottery, resulted in increased growth in this market. This increase
offset lower volumes in the Nevada and California Native American markets.
International shipments totaled 13,700 units in the third quarter of fiscal 2002
compared to 14,400 in the corresponding period last year. Stronger volumes in
Australia, Europe and Barcrest over the prior year quarter were offset by lower
volumes in Japan.
Revenues from gaming operations for the third quarter improved to $261.2 million
from $97.4 million in the same quarter last year. Third quarter gross profit
from gaming operations totaled $141.7 million compared to $50.2 million in the
third quarter of last year. These improvements resulted from a mix of elements,
including the acquisition of Anchor and the full consolidation of the Joint
Venture results subsequent to acquisition, additional installations, enhanced
yield per game and a greater variety of recurring revenue games, including WAP,
instant winner systems, flat fee, participation, and games introduced in
alliance with A.C. Coin and Shuffle Master. Historically, our 50% net earnings
in our Joint Venture with Anchor were reflected as earnings of unconsolidated
affiliates. As a result of the Anchor acquisition, our current quarter includes
the fully consolidated Joint Venture activities and Anchor's proprietary games,
which together contributed $152.7 million in revenues and $36.3 million in gross
profit to our gaming operations.
The total installed base of our proprietary games, including joint venture and
alliances units, ended the current quarter at 28,300 machines, an increase from
27,250 one year earlier. Placements of American Bandstand(R), Diamond
Cinema(TM), and Harley-Davidson(R) games, and the new Elvira(R) edition of the
Spooky(TM) slot series were offset by removals of lower performing proprietary
games. On a year-over-year basis, we experienced coin-in per game improvements
due to the continued popularity and player preference for our proprietary games.
During the quarter we were able to improve our yield per game due to a shift of
games out of Nevada and Atlantic City into our other domestic markets. We
believe this movement in our installed base over the past few quarters is a
reflection of current industry conditions. We operate recurring revenue games
across all legal US domestic markets, and the installed patterns vary between
jurisdictions.
Revenue from lottery and pari-mutuel systems, acquired with Anchor, totaled
$38.7 million for the quarter ended June 29, 2002. Gross profit on our lottery
and pari-mutuel systems totaled $12.2 million or 32% of the related revenues.
Higher handle revenues from our multi-state lotteries in West Virginia,
Delaware, and Minnesota, prompted by large Powerball jackpots during the quarter
positively impacted the current quarter results. Our lottery segment experienced
improved gross margins in the current quarter from reduced telecommunications
and system consultant costs.
Operating Expenses
Operating expenses increased to $101.2 million in the current quarter versus
$72.7 million in the comparable prior year quarter. The increase is due
primarily to the inclusion of Anchor in the current quarter, which accounted for
increases in all operating expense categories except bad debt expense. Expenses
also increased due to added litigation expenditures, health and business
insurance costs, and our ongoing investment in research and development. As a
result of the decision to reclassify our casino operations to discontinued
operations during the current quarter, we ceased depreciation and amortization
of the related assets. A portion of our current and prior period operating
expenses included spending to update our internal software systems with an
enterprise resource planning (ERP) solution. Operating expenses as a percentage
of revenues improved to 19% in the current quarter from 23% in the prior year
quarter.
At the beginning of the current fiscal year, we elected to adopt the provisions
of SFAS 142, Goodwill and Other Intangible Assets, which allowed us to cease
amortization of goodwill and intangible assets with indefinite lives. Adoption
of this pronouncement provided us with a pre-tax benefit of approximately
$925,000 for the current quarter. Intangible assets with finite lives recorded
with the Anchor acquisition resulted in increased amortization expense of $6.0
million for the current fiscal quarter. We are continuing to work with valuation
consultants to finalize the fair value and lives of Anchor's assets acquired,
and preliminary numbers are subject to refinement.
Other Income and Expense
Other expense, net, totaled $15.7 million for the current quarter compared to
$13.3 million in the year earlier quarter, due primarily to increased interest
expense related to Anchor's debt.
Our worldwide tax rate increased to 37.7% during the third quarter compared to
37% for the prior year quarter. With the consolidation of Anchor, we expect our
tax rate for fiscal 2002 to be slightly less than 38%.
Discontinued Operations
During the current quarter, we committed to a plan to sell our casino operations
acquired in connection with the Anchor acquisition, which includes the Colorado
Central Station, the Colorado Grande Casino and our gaming machine route
operations in Nevada. Our statements of income reflect the casino operations as
discontinued operations for all periods presented. Income from discontinued
casino operations, net of tax, totaled $2.0 million for the current third
quarter.
Business Segments Operating Profit (See Note 12 of Notes to Condensed
Consolidated Financial Statements)
IGT's segment profit reflects income from continuing operations before tax,
including an appropriate allocation of operating expenses, as well as interest
income, interest expense and other expenses. Our proprietary gaming segment
includes both our wholly-owned gaming operations and our unconsolidated joint
venture activities reported as earnings of unconsolidated affiliates. Subsequent
to December 30, 2001, our operating results included activities of Anchor and
the fully consolidated Joint Venture. Our current period results also
incorporated the additional lottery segment as the result of the Anchor
acquisition.
Product sales segment profit for the current quarter improved 29% to $50.3
million or 23% of related revenues compared to $39.2 million or 18% in the
comparable quarter last year. This improvement primarily related to increased
gross profit margins, and decreased operating expenses.
Segment profit from proprietary gaming improved 45% to $101.0 million in the
third quarter of fiscal 2002 compared to $69.6 million in the third quarter of
fiscal 2001. These improvements resulted primarily from the consolidation of the
Joint Venture activities and the inclusion of Anchor's results subsequent to the
acquisition on December 30, 2001, growth in the installed base and enhanced
yield per game. As a percentage of revenue and earnings of unconsolidated
affiliates, proprietary gaming segment profit totaled 39% in the current quarter
versus 51% in the prior year quarter. This fluctuation is primarily due to a
greater portion of earnings of unconsolidated affiliates, recorded net of
expenses, included in the prior year period.
Third quarter segment profit from our newly acquired lottery segment totaled
$589,000 or 2% of the related revenues. Increased handle revenues and cost
reductions related to restructuring efforts commenced in March 2001 positively
impacting these results.
Nine Months Ended June 29, 2002 Compared to the Nine Months Ended June 30, 2001
Net income for the first nine months of fiscal 2002 totaled $208.3 million or
$2.44 per diluted share compared to $158.5 million or $2.07 per diluted share in
the prior year period. The current fiscal year period includes income from
discontinued casino operations, net of tax, totaling $3.6 million or $0.04 per
diluted share and an extraordinary loss on early redemption of debt, net of tax,
totaling $909,000 or $0.01 per diluted share. Income from continuing operations
for the first nine months of fiscal 2002 grew to $205.6 million or $2.41 per
diluted share.
Operating Income
For the nine months just ended, operating income grew 31% to $380.7 million from
$291.6 million in the first nine months of fiscal 2001. This growth was
attributable primarily to the inclusion of Anchor's operating results and the
full consolidation of the Joint Venture subsequent to the Anchor acquisition, as
well as improved product sales margins, and increased yields and growth in the
installed base of recurring revenue games.
Revenues and Gross Profit Margins
Total revenues for the first nine months of fiscal 2002 grew to $1.3 billion
compared to $903.3 million for the first nine months of fiscal 2001. Anchor's
operations and the fully consolidated results of the Joint Venture activities
contributed $416.6 million to total revenues and $209.6 million in total gross
profit in the current nine month period. Prior to the acquisition, our share of
the Joint Venture revenues, net of expenses, were reflected in earnings of
unconsolidated affiliates.
Product sales totaled $628.4 million on shipments of 93,200 units worldwide for
the first nine months of fiscal 2002. Comparatively, the prior year period sales
totaled $636.2 million on shipments of 93,000 units. While product revenues were
down slightly, the gross profit on total product sales improved 6%
year-over-year. Product sales gross profit margins improved to 42% versus 39% in
the prior year period predominately due to lower component costs, as well as
ongoing production efficiencies.
Domestic shipments totaled 46,400 in the first nine months of fiscal 2002 versus
49,700 in the first nine months of fiscal 2001. Increased shipments, both new
and replacement, into the government-operated public gaming markets in the
current nine months contributed an additional 8,600 units, offsetting the
decrease in Nevada shipments, down 6,500 units, and the decline in the
California Native American market, down by 7,900 units compared to the same
period last year. Replacement units drove growth for our products across most
domestic markets in the first nine months just ended. Domestic replacement sales
increased to 29,500 units for the first nine months of fiscal 2002 compared to
16,900 in the comparable prior year period. Customer appeal of
ticket-in/ticket-out technology continued to stimulate replacement unit demand,
as did replacements in Canadian and Oregon lottery markets.
Further demonstrating the diversity in IGT's markets, declines in domestic
product shipments in the nine months ended June 29, 2002 were offset by
increased international product shipments. International shipments increased to
46,700 units in the first nine months of fiscal 2002 compared to 43,300 in the
comparable prior year period. The successful introduction of new games in Japan
improved units to 10,300 in the current nine month period compared to 5,300 in
the prior year period.
In April 2002, Anchor's subsidiary, VLC, announced the signing of a contract to
deliver 8,400 video lottery replacement units to a wholly-owned subsidiary of
Loto-Quebec. The estimated revenue over the duration of the contract is
approximately $60.0 million and we anticipate the delivery of these machines to
begin during fiscal 2003.
Revenues from our gaming operations for the first nine months improved to $618.0
million compared to $267.1 million in the comparable prior year period. Gross
profit from gaming operations totaled $334.8 million compared to $144.5 million
in the first nine months of last year. These improvements resulted from a mix of
elements, including the acquisition of Anchor and the full consolidation of the
Joint Venture results subsequent to acquisition, growth in the installed base,
enhanced yield per game and a greater variety of recurring revenue games,
including WAP, instant winner systems, flat fee, participation and games
introduced in alliance with A. C. Coin and Shuffle Master. Prior to the Anchor
acquisition on December 30, 2001, the results of our half of the Joint Venture
were reflected as earnings of unconsolidated affiliates. Subsequent to the
acquisition, the results of Anchor and the fully consolidated Joint Venture
contributed $304.9 million in revenues and $73.5 million in gross profit to our
gaming operations.
The total installed base of our proprietary games, including joint venture and
alliance units, ended the current period at 28,300 units, an increase from
27,250 one year earlier. Placements of American Bandstand(R), Diamond
Cinema(TM), and Harley-Davidson(R) games, and the new Elvira(R) edition of the
Spooky(TM) slot series, were offset by removals of lower performing proprietary
games. On a year-over-year basis, we experienced coin-in per game improvements
due to the continued popularity and player preference for our proprietary games.
During the period we were able to improve our yield per game due to a shift of
games out of Nevada and Atlantic City into our other domestic markets. We
believe this movement in our installed base over the past few quarters is a
reflection of current industry conditions. We operate recurring revenue games
across all legal US domestic markets, and the installed patterns vary between
jurisdictions. Additionally, growth in our installed base of proprietary games
is a result of timing of product introductions, timing of regulatory approvals
in the various markets, competition within the market, and normal product life
cycles. In recognition that all games have a finite lifecycle, we systematically
replace legacy proprietary games experiencing declining play levels with new
games incorporating enhanced entertainment value and improved player appeal.
During the first nine months of fiscal 2002, we removed seven proprietary
systems in five jurisdictions.
Revenue from lottery and pari-mutuel systems, acquired as part of the Anchor
acquisition, totaled $78.3 million for the fiscal year-to-date period ended June
29, 2002. Gross profit for the year-to-date period since acquisition on our
lottery and pari-mutuel systems totaled $23.8 million or 30% of the related
revenues. Higher lottery systems revenues in Pennsylvania, Florida, Minnesota,
and Maryland, as well as reduced costs from restructuring efforts commenced in
March 2001, positively impacted these results.
Operating Expenses
Operating expenses increased to $276.2 million in the first nine months of
fiscal 2002 compared to $207.9 million in the comparable prior year period. The
increase is due primarily to the inclusion of Anchor results subsequent to
acquisition in the current fiscal period, which accounted for increases in all
operating expense categories except bad debt expense. Expenses also increased
due to added litigation expenditures, health and business insurance costs, and
our ongoing investment in research and development. As a result of the decision
to reclassify our casino operations to discontinued operations in June 2002, we
ceased depreciation and amortization of the related assets. The bad debt expense
for the current nine month period includes additional provisions recorded for
Argentina receivables due to the economic instability and currency devaluation
in that country. Our Argentina receivables, denominated in US dollars, totaled
approximately $15.3 million at June 29, 2002 and were approximately 66%
reserved. A portion of our current and prior period operating expenses included
spending to update our internal software systems with an enterprise resource
planning (ERP) solution. Operating expenses as a percentage of revenues improved
to 21% in the current nine months from 23% in the comparable prior year period.
At the beginning of the current fiscal year, we elected to adopt the provisions
of SFAS 142, Goodwill and Other Intangible Assets, which allowed us to cease
amortization of goodwill and intangible assets with indefinite lives. Adoption
of this pronouncement provided us with a pre-tax benefit of approximately $2.8
million for the current nine month period. Intangible assets with finite lives
recorded with the Anchor acquisition resulted in increased amortization expense
of $13.9 million for the current fiscal period. We are continuing to work with
valuation consultants to finalize the fair value and lives of assets acquired,
and preliminary numbers may change.
Other Income and Expense
Other expense, net, grew to $50.7 million for the first nine months of fiscal
2002 compared to $40.1 million in the prior year period, due to increased
interest expense related to Anchor's debt and increased foreign currency losses
related to the devaluation of the Argentine peso.
Our worldwide tax rate increased to 37.7% for the current nine month period
compared to 37% in the prior year period. With the consolidation of Anchor, we
expect our tax rate for fiscal 2002 to be just below 38%.
Discontinued Operations
In June 2002, we committed to a plan to sell our casino operations acquired in
connection with the Anchor acquisition, which include the Colorado Central
Station, the Colorado Grande Casino and our Nevada gaming machine route
operations. Our statements of income reflect the casino operations as
discontinued operations for all periods presented. Income from discontinued
casino operations, net of tax, was $3.6 million for the current nine month
period.
Business Segments Operating Profit (See Note 12 of Notes to Condensed
Consolidated Financial Statements)
IGT's segment profit reflects income from continuing operations before tax,
including an appropriate allocation of operating expenses, as well as interest
income, interest expense and other expenses. Our proprietary gaming segment
includes both our wholly-ownedgaming operations and our unconsolidated joint
venture activities reported as earnings of unconsolidated affiliates. Effective
December 30, 2001, our operating results included activities of Anchor and the
fully consolidated Joint Venture. Our current period results also incorporated
our new lottery segment acquired with Anchor.
Product sales segment profit for the first nine months of fiscal 2002 increased
4% to $123.2 million or 20% of related revenues from $119.0 million or 19% in
the same period last year, primarily related to improved gross profit margins as
discussed above.
Segment profit from proprietary gaming improved 39% to $264.5 million in the
first nine months of fiscal 2002 compared to $190.2 in the first nine months of
fiscal 2001, primarily due to the inclusion of Anchor's results and the full
consolidation of the Joint Venture subsequent to the acquisition. As a
percentage of revenue and earnings of unconsolidated affiliates, proprietary
gaming segment profit totaled 41% in the current nine-month period versus 51% in
the prior year period. This fluctuation is primarily due to a greater portion of
earnings of unconsolidated affiliates, recorded net of expenses, included in the
prior year period. Current period segment profit from our lottery segment
totaled $1.0 million or 1% of the related revenues. Increased lottery system
revenues in several jurisdictions and cost reductions related to restructuring
efforts commenced in March 2001 positively impacted these results.
Financial Condition, 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. With the
completion of our acquisition of Anchor on December 30, 2001, we have additional
sources of capital from its operations.
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.
Cash Flow From Operating Activities
Cash provided by operations in the first nine months of fiscal 2002 totaled
$357.9 million compared to $53.1 million in the prior year period. The increase
in operating cash flow in the current period is largely due to improvements in
inventories and receivables, as well as payment timing in prepaid expenses,
accounts payable, distributions from unconsolidated affiliates, and accrued and
deferred income taxes. Other significant fluctuations year-over-year were due
primarily to the inclusion of Anchor's operating results and the full
consolidation of the Joint Venture subsequent to the acquisition on December 31,
2001.
Cash Flow From Investing Activities
Net cash flow from investing activities provided $114.2 million in the current
nine months compared to $64.7 million used in the prior year period. This
fluctuation is primarily related to cash balances of Anchor and the Joint
Venture acquired on December 30, 2001. Other significant increases in the
current period investing cash flow related to proceeds from the sale of Anchor's
Pala management contract and a decrease in cash advanced on loans receivable.
Use of cash from investing activities included purchases of property, plant and
equipment totaling $23.1 million in the current nine month period compared to
$20.9 million in the prior year period. A portion of this capital spending was
used to update our internal software systems with an enterprise resource
planning (ERP) solution in both fiscal periods.
Cash Flow From Financing Activities
Net cash flow from financing activities used $313.2 million in the nine months
ended June 29, 2002 compared to $42.8 million provided in the prior year period.
This fluctuation is primarily due to the use of $249.3 million for purchases of
treasury stock and $140.0 million for the early repayments of our Senior Notes
and Anchor's credit facilities during the current period.
Other Cash Flow Information
Inventory Transfers to Gaming Operations Equipment
The $26.1 million of net cash used for inventory in the nine months just ended
is comprised of the $2.0 million net decrease in our inventory balances, reduced
by $25.0 inventory added through acquisition and $2.5 million in currency
translation adjustment, and increased by $11.6 million of obsolescence and $44.0
million of non-cash transfers to gaming operations equipment. Property, plant,
and equipment increased during the nine months ended June 29, 2002 as the result
of capital expenditures and non-cash transfers of machines from inventory to
gaming systems equipment, as well as the Anchor acquisition.
Net Cash Flow from Proprietary Progressive Jackpot Systems
Our proprietary gaming segment incorporates our installed base of recurring
revenue games whereby IGT participates in the machine revenue on a percentage or
flat fee basis. Our proprietary gaming machines include both wide-area
progressive jackpot linked systems and stand-alone format machines that are not
linked. Only progressive jackpot systems have related jackpot liabilities and
investments to fund future jackpot payments.
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 investments to fund jackpot liabilities are classified as
investing activities. Collections from systems to fund jackpot liabilities and
payments to winners 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 games. Net cash flow from these
activities collectively provided cash of $9.8 million in the first nine months
of fiscal 2002 and $15.6 million in the comparable prior year period.
Stock Repurchase Plan
Our Board of Directors originally authorized IGT's stock repurchase plan in
October 1990. As of July 27, 2002, the remaining shares repurchase
authorization, as amended, was 4.7 million additional shares. During the first
nine months of fiscal 2002, we repurchased 3.6 million shares for an aggregate
price of $214.0 million. Cash flows for the first nine months of fiscal 2002
also included $35.3 million for purchases of treasury stock that were initiated
and accrued in September 2001. No additional shares have been repurchased since
July 27, 2002.
Credit Facilities and Indebtedness
Our domestic and foreign borrowing facilities totaled $275.7 million at June 29,
2002. Of this amount, $2.1 million was drawn, $7.8 million was reserved for
letters of credit and the remaining $265.8 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 June 29, 2002, we were in compliance with all
applicable covenants.
IGT assumed approximately $337.0 million, net of discount, in long-term debt
upon completion of the Anchor acquisition. Immediately subsequent to the
acquisition, we repaid in full and terminated Anchor's senior credit facility of
$89.5 million using available cash. During April 2002, we repurchased $42.2
million face value of our outstanding Senior Notes. The loss attributed to the
tender at approximately $12.0 million, net of tax, or $0.14 per diluted share,
will be reflected in our fourth quarter earnings.
During July 2002, we completed a cash tender offer to repurchase Anchor's
outstanding 9.875% fixed rate Senior Subordinated Notes due 2008. This
transaction substantially extinguished all of the debt outstanding that was
assumed in the Anchor acquisition. The loss attributed to the tender at
approximately $12.0 million, net of tax, or $0.14 per diluted share, will be
reflected in our fourth quarter earnings.
Liquidated Damages Under On-line Lottery Contracts
Our lottery contracts typically permit termination of the contract by the
lottery authority at any time for our failure to perform or for other specified
reasons and generally contain demanding implementation schedules and performance
schedules. Failure to perform under such contracts may result in substantial
monetary liquidated damages, as well as contract termination. Many of our
lottery contracts also permit the lottery authority to terminate the contract at
will and do not specify the compensation, if any, to which we would be entitled
should such termination occur. Some of our US lottery contracts have contained
provisions for up to $1.0 million a day in liquidated damages for late system
start-up and have provided for up to $15,000 per minute or more in penalties for
system downtime in excess of a stipulated grace period. Some of our
international customers similarly reserve the right to assess monetary damages
in the event of contract termination or breach. Although such liquidated damages
provisions are customary in the lottery industry and the actual liquidated
damages imposed are generally subject to negotiation, such provisions in our
lottery contracts present an ongoing potential for substantial expense. Our
lottery contracts generally require us to post a performance bond, which may be
substantial, securing our performance under such contracts. At the end of June
2002, we had $1.7 million accrued for liquidated damages.
Financial Condition
June 29, 2002 September 29, 2001
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(Amounts in millions)
Total assets $ 3,400 $1,923
Total liabilities 2,039 1,627
Total stockholders' equity 1,361 296
Total assets increased $1.5 billion during the first nine months of fiscal 2002
primarily due to the acquisition of Anchor completed on December 30, 2001 and
the associated full consolidation of the Joint Venture. Total liabilities at
June 29, 2002 increased $412.0 million, also mainly due to the acquisition of
Anchor and the full consolidation of the Joint Venture.
Total stockholders' equity increased $1.1 billion predominantly related to the
fair value of shares issued for the Anchor acquisition. Additional paid in
capital also increased as the result of employee stock plans.
Recently Issued Accounting Standards
In June 2001, the FASB issued two new standards, SFAS 141, Business Combinations
and SFAS 142, Goodwill and Other Intangible Assets. Together these statements
changed 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 eliminated the pooling-of-interests method. IGT adopted SFAS
141 for business combinations completed after June 30, 2001. 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 and indefinite lived assets, including goodwill recorded in past
business combinations, ceases 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. As the result of adopting SFAS 142
as of September 30, 2001, the beginning of our fiscal year 2002, we have
discontinued amortization of goodwill. See Note 5 of Notes to Condensed
Consolidated Financial Statements.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement applies to all entities and
applies to all legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and the
normal operation of a long-lived asset, except for certain obligations of
lessees. This statement is effective for our 2003 fiscal year and early adoption
is permitted. We believe that the adoption of this statement will not have a
material impact on our financial condition or results of operations.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment and
Disposal of Long-Lived Assets. The changes in this statement require one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal transactions.
This statement is effective for our 2003 fiscal year, but early adoption is
permitted. We believe that the adoption of this statement will not have a
material impact on our financial condition or results of operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44,
and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS 145
rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt. Under
SFAS 4, all gains and losses from extinguishment of debt were required to be
aggregated, if material, and classified as an extraordinary item, net of related
income tax effect, on the statement of income. SFAS 145 requires all gain and
losses from extinguishment of debt to be classified as extraordinary only if
they meet the criteria of Accounting Principles Board (APB) Opinion 30. This
statement is effective for our 2003 fiscal year and early adoption is permitted.
Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria in
APB Opinion 30 shall be reclassified. The adoption of this statement will
require us to reclassify our prior period losses from early retirement of debt
from extraordinary to continuing operations. See Note 13 of Notes to Condensed
Consolidated Financial Statements.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force(EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. A fundamental conclusion reached by the FASB in this
statement is that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability. SFAS 146
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. We have not yet determined the impact of this statement on our
financial position and results of operations, if any.
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 were issued and the former currencies were withdrawn from circulation.
Our operating subsidiaries affected by the euro conversion established and
implemented the euro currency conversion at the beginning of fiscal 2002. The
conversion to the euro included adapting financial systems and business
processes, changing the 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 have not incurred 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.
Risk Factors and Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
This report contains "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
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by adverse changes in the gaming industry including:
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o a decline in demand for our 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 a decline in public acceptance of gaming; and
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 these events 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.
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 and other gaming properties to
upgrade machines;
o a change in the trend of consumer acceptance of new ticket-in/ticket-out
voucher technology; and
o a decline in the popularity of our 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 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.
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 our 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 reduced lottery sales in lottery jurisdictions where we have lottery
contracts;
o we may not be able to keep or renew existing lottery contracts;
o competition in Colorado could adversely affect our Colorado casino operations.
o the loss or retirement of our key executives or other key employees;
o adverse changes in the credit worthiness of parties with whom we have
receivable and foreign 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 us or determinations by judges, juries or other finders of
fact which do not accord with our evaluation of the possible liability or
outcome of existing litigation;
o an inability to generate sufficient cash flow to reinvest in our business and
service debt obligations;
o an inability to comply with debt covenant restrictions, which may trigger
payment acceleration provisions;
o increased costs due to reliance on third-party suppliers and contract
manufactures;
o agreements with Native American casinos may subject us to sovereign immunity
risk; and
o difficulties in successfully upgrading our internal software system
with an enterprise resource planning (ERP) solution within a predetermined
timeframe.
Our acquisition of Anchor exposed us to additional risks that may affect our
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combined operations, including the following:
o any unfavorable change in IGT's or Anchor's relationship with third parties
resulting from the acquisition may reduce our post-acquisition profits;
o we may have difficulty integrating parts of the Anchor operations;
o inability to retain key personnel after the acquisition;
o changes to the preliminary fair values and lives assigned to amortizable or
depreciable assets that impact the results of operations; and
o Anchor's lottery business could subject us to significant liquidated damage
claims, which could adversely effect our operating results.
Trademarks and Copyright Information
Italicized text indicates trademarks of IGT or its licensors. Included in this
filing are the following trademarks, service marks, and/or federally registered
trademarks of International Game Technology or its wholly-owned subsidiaries:
Diamond Cinema, MegaJackpots and Spooky.
IGT also 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 that have been
mentioned in this filing and their related trademark and copyright ownership
information are as follows: HARLEY-DAVIDSON(R) is among the registered
trademarks of H-D Michigan, Inc.; Elvira(R) is a trademark of Queen "B"
Productions; American Bandstand is a registered trademark of dick clark
productions, inc.; Wheel of Fortune is a registered trademark of Califon
Productions, Inc.; I Dream of Jeannie is a trademark of CPT Holdings, Inc.
Item 3. 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. At
June 29, 2002, we had net foreign currency exposure of $43.7 million hedged with
$43.2 million in forward contracts. At September 29, 2001, we had net foreign
currency exposure of $44.6 million hedged with $40.5 million in forward
contracts. In addition, from time to time, we may enter into forward exchange
contracts to establish with certainty the US dollar amount of future firm
commitments denominated in a foreign currency. During the previous quarter we
entered into a forward exchange contract to hedge a firm commitment in the
amount of $61.2 million denominated in foreign currency for a Canadian lottery
contract. The hedge has been designated as a fair value hedge. There were no
firm commitment hedges during the prior year period.
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. We do not 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, the European euro and the Japanese yen. We estimated that a
10% change in foreign exchange rates would have impacted operating results by
approximately $2.3 million in the current period and $1.5 million in the prior
year-to-date period. 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 and earnings of unconsolidated affiliates by $9.1 million in
the first nine months of fiscal 2002 and $7.1 million in the comparable prior
year period. IGT currently does not manage this exposure with derivative
financial instruments.
During October 2001, Anchor entered into an interest rate swap agreement
designated as a fair value hedge of a portion of our $250.0 million principal
amount of fixed rate debt due in 2008. Under the terms of this agreement, we
make payments based on a specific spread over six-month LIBOR and receive
payments equal to the interest rate on the fixed rate debt. The notional value
of the swap is $70.0 million as of June 29, 2002. During July 2002, we completed
a cash tender offer to repurchase Anchor's outstanding 9-7/8% fixed rate Senior
Subordinated Notes. The interest rate swap agreement was terminated in
conjunction with this debt repurchase.
During July 2002, we completed a cash tender offer to repurchase Anchor's
outstanding 9-7/8% fixed rate Senior Subordinated Notes due 2008 for $267.0
million. This transaction substantially extinguishes all of the debt outstanding
that was assumed in the Anchor acquisition. If interest rates increased by 10%,
the fair market value of our remaining outstanding Senior Notes would have
decreased approximately $27.8 million at June 29, 2002 and $33.2 million at
September 29, 2001.
Part II - Other Information
Item 1. Legal Proceedings
For a description of our legal proceedings, see Note 10 of Notes to
Condensed Consolidated Financial Statements, which is incorporated by
reference in response to this item.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
We want to remind stockholders that a stockholder proposal submitted
pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 for
inclusion in our proxy statement and form of proxy for the 2003 Annual
Meeting of Stockholder must be received by us by September 27, 2002. Such
a proposal must also comply with the requirements as to form and substance
established by the Securities and Exchange Commission for such proposals.
In addition, a stockholder desiring to present a proposal at the 2003
Annual Meeting must deliver written notice of the proposal to us prior to
December 11, 2002, or the persons appointed as proxies in connection with
the meeting will have discretionary authority to vote on the proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Anchor filed a Current Report on Form 8-K on July 25, 2002
regarding the tender offer to repurchase 9.875% Senior
Subordinated Notes.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 12, 2002
INTERNATIONAL GAME TECHNOLOGY
By: /s/ Maureen Mullarkey
---------------------------
Maureen Mullarkey
Senior Vice President and
Chief Financial Officer
WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350
The undersigned, G. Thomas Baker, the Chief Executive Officer of
International Game Technology (the "Company"), pursuant to 18 U.S.C. Section
1350, hereby certifies that:
(i) the Quarterly Report of the Company, on Form 10-Q for the
period ending June 29, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report") fully complies with the
requirements of section 13(a) and 15(d) of the Securities Exchange Act
of 1934; and
(ii) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: August 12, 2002
/s/ G. Thomas Baker
-----------------------------
G. Thomas Baker
Chief Executive Officer
International Game Technology
This certification accompanies this Report on Form 10-Q pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required
by such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350
The undersigned, Maureen T. Mullarkey, the Chief Financial Officer of
International Game Technology (the "Company"), pursuant to 18 U.S.C. Section
1350, hereby certifies that:
(i) the Quarterly Report of the Company, on Form 10-Q for the
period ending June 29, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report") fully complies with the
requirements of section 13(a) and 15(d) of the Securities Exchange Act
of 1934; and
(ii) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: August 12, 2002
/s/ Maureen T. Mullarkey
-----------------------------
Maureen T. Mullarkey
Chief Financial Officer
International Game Technology
This certification accompanies this Report on Form 10-Q pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required
by such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.