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FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
_______________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Fiscal Year Ended September 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _______ to ________
Commission File Number 001-10684
International Game Technology
(Exact name of registrant as specified in its charter)
Nevada 88-0173041
(State of Incorporation) (I.R.S. Employer Identification No.)
9295 Prototype Drive, Reno, Nevada 89521
(Address of principal executive offices)
Registrant's telephone number, including area code: (775) 448-7777
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, Par Value $.000625 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 23, 2002:
$6,673,952,261
The number of shares outstanding of each of the registrant's classes of common
stock, as of November 23, 2002:
86,929,391 shares of Common Stock, $.000625 Par Value
Part III incorporates information by reference from the Registrant's definitive
Proxy Statement to be filed with the Commission within 120 days after the close
of the Registrant's fiscal year.
Table of Contents
Part I
Page
Item 1. Business 2
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 36
Item 8. Consolidated Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 78
Part III
Item 10. Directors and Executive Officers of the Registrant 78
Item 11. Executive Compensation 78
Item 12. Security Ownership of Certain Beneficial Owners
and Management 78
Item 13. Certain Relationships and Related Transactions 78
Item 14. Controls and Procedures 78
Part IV
Item 15. Exhibits, Financial Statement Schedule and Reports
on Form 8-K 79
Signatures 81
Certifications 83
Part I
Item 1. Business
Company Overview
International Game Technology is recognized as one of the world leaders in the
development and production of computerized gaming products. We operate in three
lines of business: product sales, proprietary gaming and lottery systems.
Founded in 1980, IGT principally served the casino gaming industry in the United
States (US). In 1986, we began expanding our business internationally. In
addition to our US production, we currently manufacture our products in the
United Kingdom (UK) and through third party manufacturers in Japan, Canada and
Germany. IGT also maintains sales offices in selected legalized gaming
jurisdictions globally, including Australia, Europe, Japan, Latin America, New
Zealand and South Africa.
Unless the context indicates otherwise, references to "International Game
Technology," "IGT," "we," "our," or "the Company" includes International Game
Technology and our wholly-owned subsidiaries and their subsidiaries. Our
principal executive offices are located at 9295 Prototype Drive, Reno, Nevada
89521; our telephone number is (775) IGT-7777; our internet address is
www.IGT.com. Through our website, we make available free of charge, as soon as
reasonably practical after such information has been filed or furnished to the
SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act.
Forward Looking Statements and Risk Factors
Risk Factors and Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
Throughout this Annual Report on Form 10-K we make some "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.
We urge you to carefully review the following discussion of the specific risks
and uncertainties that affect our business. These include, but are not limited
to, the following:
Our success in the gaming industry depends in large part on our ability to
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develop innovative products and systems and would be adversely affected by:
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o a decline in the popularity of our gaming products with players;
o a lack of success in developing new products;
o an increase in the popularity of competitors' games;
o a negative change in the trend of consumer acceptance of our newest systems
innovations including ticket-in/ticket-out voucher technology.
Demand for our products, placement of our proprietary games and operation of our
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lottery systems would be adversely affected by:
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o a reduction in the growth rate of new and existing markets;
o delays of scheduled openings of newly constructed or planned casinos;
o reduced levels of gaming play on our gaming systems or weakened customer
demand for our gaming machines as a result of declines in travel activity or
customer capital expenditures;
o a decrease in the desire of established gaming properties to upgrade
machines, resulting in a decline in the demand for replacement machines;
o a decline in public acceptance of gaming;
o a reduction in lottery sales in jurisdictions where we hold lottery
contracts;
o a loss of or inability to renew lottery contracts; and
o failure to meet implementation and performance obligations of our online
lottery systems operations could subject us to significant liquidated
damage claims.
We operate in a highly regulated industry and our ability to operate in certain
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jurisdictions could be adversely affected by:
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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:
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o potential inability to obtain and maintain patents, trademarks and
copyrights to protect our newly developed games and technology;
o competitors' infringement upon our existing trademarks, patents and
copyrights; and
o approval of competitors' patent applications that may restrict our ability to
compete effectively.
Our business is vulnerable to changing economic conditions, including:
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o unfavorable changes in economic conditions including those that effect the
relative health of the gaming industry;
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 rate sensitive investments; and
o fluctuations in foreign exchange rates, tariffs and other trade barriers.
Our outstanding Senior Notes and borrowings under credit facilities subject us
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to certain additional risks, including:
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o increasing our vulnerability to general adverse economic and industry
conditions;
o limiting our ability to obtain additional financing to fund future working
capital, capital expenditures, acquisitions and other general corporate
requirements;
o requiring a substantial portion of our cash flow from operations for the
payment of interest on our indebtedness and corporate requirements;
o limiting our flexibility in planning for, or reacting to, changes in our
business and the industry; and
o disadvantaging us compared to competitors with less indebtedness.
Our business operations are subject to other risks, including:
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o the loss or retirement of our key executives or other key employees;
o adverse changes in the creditworthiness of parties with whom we have
receivables or forward currency exchange contracts;
o the loss of tenants on sublet properties no longer used in our operations;
o difficulty integrating parts of the Anchor operations;
o changes to the fair value or lives assigned to assets acquired from Anchor;
o the 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 increased costs due to reliance on third party suppliers and contract
manufacturers;
o agreements with Native American casinos which may subject us to
sovereign immunity risk; and
o we have been working for some time through several phases of our enterprise
resource planning (ERP) solution for our computer system procedures and
controls; any failures, difficulties or significant delays in implementing
our new information systems could result in material adverse consequences to
our business, including disruption of operations, loss of information and
unanticipated increases in costs.
Anchor Acquisition
On December 30, 2001, IGT completed the acquisition of Anchor Gaming (Anchor).
Subsequently, we merged Anchor Gaming into International Game Technology. Since
the acquisition, we have focused our efforts on the successful integration of
the two entities by combining our complementary resources to develop new games
more effectively for the benefit of our customers. We have assimilated the
personnel and physical resources of the two companies to achieve the most
effective mix of game design, productivity and customer service. We believe our
efforts will make IGT a more effective supplier to the casino and lottery
industries. The most notable change to our financial results following the
acquisition is the consolidation of our joint venture with Anchor, The Spin for
Cash Joint Venture (JV), which was previously accounted for under the equity
method. In addition, with Anchor we expanded our business activities into online
lottery systems and augmented our presence in the North American public gaming
sector.
In June 2002, we committed to a plan to sell the Anchor casino operations. This
includes the two casinos in Colorado (Colorado Central Station and Colorado
Grande) and the Nevada slot route operation. We determined that these assets
were not a strategic fit with our core business. In December 2002, we announced
that we entered into a definitive agreement pursuant to which Herbst Gaming will
purchase substantially all of the assets of the Nevada slot route operations of
Anchor Coin, a subsidiary of IGT. The sale is subject to Herbst Gaming obtaining
the required financing and regulatory and third party approvals, including
gaming regulatory approvals and expiration of the waiting period under
Hart-Scott-Rodino Act. The transaction is expected to be completed in quarter
ending March 2003. See Notes 2 and 7 of our Consolidated Financial Statements
for additional information concerning the acquisition of Anchor and planned
divestiture of the casino operations.
Lines of Business
IGT operates principally in three lines of business:
o Product sales encompasses the development, manufacturing, marketing,
distribution and sales of computerized gaming products and systems.
o Our proprietary gaming segment is comprised of our wholly-owned gaming
operations, which includes activities that we perform on behalf of our
strategic marketing alliances, as well as our unconsolidated joint venture
activities reported as earnings of unconsolidated affiliates. Proprietary
gaming includes the development, marketing and operation of wide area
progressive (WAP) systems, stand alone games, and gaming equipment leasing.
Prior to the Anchor acquisition, the JV activities were accounted for under
the equity method and the revenues were reflected net of expenses as
earnings of unconsolidated affiliates on the income statements. Subsequent
to the acquisition, the JV activities have been consolidated.
o Lottery systems consists of the development, manufacturing, operation and
sale of online lottery and pari-mutuel systems and related equipment.
The table below presents our business segment revenues and earnings of
unconsolidated affiliates for the fiscal years ended:
September September September
2002 2001 2000
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(Amounts in thousands)
Product sales $ 846,080 $ 824,267 $ 603,381
Proprietary gaming
Gaming operations 882,432 374,942 295,023
Earnings of unconsolidated affiliates 32,470 142,630 105,991
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Total proprietary gaming 914,902 517,572 401,014
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Lottery systems 119,056 - -
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Total $1,880,038 $1,341,839 $1,004,395
========== ========== ==========
See Note 19 of our Consolidated Financial Statements for additional financial
information related to our principal lines of business.
Product Sales
IGT designs, manufactures and markets computerized casino gaming products and
systems for both domestic and international markets. Domestically, we
manufacture a broad range of gaming machines, consisting of traditional spinning
reel slot machines, video gaming machines, government sponsored terminals and
other video gaming devices. In the international markets, we target the
Amusement With Prize (AWP), casino style, private club, gaming hall and
government sponsored video gaming machine markets. For our domestic and certain
international markets, we offer hundreds of recognized game themes. We typically
sell our machines directly or through distributors to our customers, and in
certain circumstances finance the sale or lease of the equipment.
In the domestic gaming market, IGT holds an estimated 67% share of the installed
base of gaming machines. We believe our market share is the result of our
commitment to innovation in video and spinning reel slot technology, our
extensive theme library, our manufacturing capacity and the combined efforts of
our compliance, sales and customer service teams.
In addition to gaming machines, we offer a variety of gaming systems products to
our customers. These systems products and services enhance the players' gaming
experience and provide operational efficiencies for our customers. Our casino
management system software supports our comprehensive family of IGT Gaming
Systems(TM) (IGS(TM)) products. This system software includes integrated or
stand-alone modules providing casino operators with real-time information in the
areas of slot machine performance, patron management, reporting and analysis for
table games along with credit and banking data. Our EZ-Pay(TM)
ticket-in/ticket-out (TITO) system provides slot machines with the capability of
accepting tickets, enabling players to move from one machine to another without
the inconvenience of handling coins. Casinos have the option to use both hoppers
and tickets-in machines connected to the EZ-Pay(TM) system. This technology
works with both IGT and competitors' slot systems and integrates into casinos'
existing systems and internal controls, while meeting the regulatory
requirements of each gaming jurisdiction.
The following schedule details our percentage of revenues derived from product
sales for the fiscal years listed. Other gaming products include revenues from
pachisuro sales, parts, equipment and service.
September September September
2002 2001 2000
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Gaming products
Video products 50% 53% 44%
Spinning reel slots 23 18 22
Gaming systems 9 8 12
Amusement with prize 5 4 2
Other gaming products (1) 13 17 20
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Total Product Sales 100% 100% 100%
=== === ===
Proprietary Gaming
Our proprietary games are placed in both domestic casinos and government
sponsored gaming markets. In the domestic casino markets, games are placed under
a broad spectrum of recurring revenue pricing arrangements including WAP
systems, stand alone participation and flat fee, and hybrid pricing or premium
products that include a product sale and a recurring fee. In the government
sponsored public gaming markets of Delaware and Rhode Island, we have long-term
lease arrangements to place games at racetracks.
WAP games differ from stand alone and hybrid games in that they are
electronically linked, inter-casino systems that connect gaming machines to a
central computer, allowing the system to build a progressive jackpot with every
wager until a player hits the top award winning combination. The operation of
linked progressive systems varies among jurisdictions as a result of different
gaming regulations. Funding of the jackpots also differs by jurisdiction but is
generally administered by IGT.
We continually provide innovation and enhanced player appeal to our proprietary
games consistent with product lines that are sold directly to the casinos. This
is accomplished through the introduction of feature rich games with second event
bonusing and by incorporating popular themes such as Wheel of Fortune(R),
Megabucks(TM), Regis' Cash Club(TM), The Price is Right(TM) and $1,000,000
Pyramid(TM). New themed product introductions planned for fiscal year 2003
include, but are not limited to, Magic 8 Ball(R), Uno(R), I Love Lucy(R),
American Graffiti(TM), Beetle Bailey(TM), Lifestyles of the Rich and Famous(TM),
Beverly Hillbillies(TM), Sale of the Century(TM) and Family Feud(TM). Extensions
of the current installed base include the Diamond Cinema Series(TM), featuring
James Dean(TM), Marilyn Monroe(TM), Frank Sinatra(TM) and Steve McQueen (TM).
As a developer and market share leader in this segment, we recognize that all
games, including our proprietary games, have a finite lifecycle. Due to the
intense competition and accelerated pace of proprietary games introduced into
the market each year, the lifecycle of these games can vary significantly. As a
result, IGT systematically replaces games experiencing declining play levels
with new games and extensions of existing brands.
At September 28, 2002, we placed proprietary games in 18 domestic jurisdictions
and selected international locations including Italy, Iceland and South Africa.
Included among the domestic jurisdictions is Native America, which encompasses
146 sovereign tribes, located in 15 US states. In the domestic markets we hold
an estimated 77% share of the installed base of the recurring revenue market.
The following schedule provides information regarding our installed base of
proprietary games as of the end of fiscal 2002. Casino owned games are primarily
comprised of machines we sell with royalty agreements, primarily with Action
Gaming, where we receive a daily royalty fee.
IGT owned games
Casino markets 28,600
Public gaming markets 3,500
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32,100
Casino owned games 19,300
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Total 51,400
======
See Note 1 of our Consolidated Financial Statements for additional information
concerning the operation of our proprietary games.
Lottery Systems
Our lottery systems segment consists of online lottery and pari-mutuel wagering
systems, operations and products. This segment was acquired with Anchor. IGT
Online Entertainment Systems (OES), (formerly Automated Wagering International
(AWI)) designs, manufactures, installs and operates or sells online and instant
lottery systems and terminals. Our subsidiary, United Tote, designs,
manufactures, installs and operates or sells computerized pari-mutuel wagering
systems and products.
Online Lottery
Online lotteries are conducted through a computerized system in which lottery
terminals are connected to a central computer. These systems include both the
hardware and software needed to process lottery transactions. The hardware
consists of terminals located in retail outlets, a telecommunications network
and a central computer system. Software components include communication
applications and the software that operates the system, processes sales and
validates the lottery game tickets.
In 1971, AWI, OES's predecessor, designed and installed the country's first
online lottery system for the state of New Jersey, subsequently developing and
installing many system and service features that are now standard in the
industry. In addition to designing new and innovative lottery games, we design,
manufacture and distribute lottery terminals, central computers and software,
and have developed the expertise to interface these products with a wide range
of communication networks including telephone lines and alternate communication
systems.
In the US, state online lottery contracts are typically sole source contracts
with terms between five and nine years that are awarded through a competitive
bid process. We maintain ownership of the lottery system and operate it for the
state in return for a percentage of the lottery ticket sales. By contrast, in
foreign jurisdictions, the lottery authorities purchase the lottery system and
license the related software. Training of lottery personnel in the operation of
the system and add-on services such as system enhancements, equipment
maintenance and ticket stock production may be offered under separate contracts
for a fixed fee or a fixed fee plus a percentage of the handle.
We generally install and commence operations of a lottery network within six to
twelve months from the award of a new lottery contract. Following the start-up,
we are responsible for all aspects of the network's operations. We operate
lottery systems in each jurisdiction with two or more central computer systems,
employing a dedicated workforce consisting of a site manager, computer and
hotline operators, customer service and terminal repair technicians. The
equipment used must comply with the specifications established by the
jurisdiction, and new contracts typically require the installation of new
equipment.
Online lottery revenues fluctuate depending on the relative sizes of jackpots,
the number of terminals online and the volume of tickets sold in the contracted
jurisdictions. The table below illustrates terms of our domestic lottery
contracts and the approximate number of retail terminals installed in each
jurisdiction.
Original Current Lottery
Contract Contract Authority Online
Effective Expiration Extension Terminals at
Jurisdiction Date Date Options September 28, 2002
--------------- ----------- ----------- ------------ ------------------
Delaware Jan 1978 Feb 2010 5 one-year 400
Florida Jan 1988 Dec 2004 None 8,800
Indiana Jan 1999 Aug 2006 3 one-year 4,100
Maryland Dec 1995 Jul 2006 None 4,100
Minnesota May 1990 Feb 2003 None 2,000
Pennsylvania Mar 1977 Dec 2005 3 one-year 6,200
South Dakota Jul 1990 Sep 2006 3 one-year 350
West Virginia Feb 2000 Jul 2005 2 one-year 1,400
The Minnesota contract, which represents approximately 7.5% of our fiscal 2002
online lottery revenues, was awarded to a competitor and is our only contract
that is scheduled to expire during fiscal 2003. OES's current Florida contract
expires in December 2004 and a request for proposal will be issued in early
2003.
Internationally, we have sold to and currently support or maintain lottery
systems for customers in Canada, Chile, China, Norway, Switzerland, Vietnam and
the West Indies.
Pari-mutuel Wagering
Pari-mutuel wagering is currently authorized in 40 US states, all provinces in
Canada, and many foreign countries and is conducted at horse and greyhound
racetracks, off-track betting facilities, bicycle velodromes and jai alai
arenas. We provide pari-mutuel wagering services, through our United Tote
subsidiary, to over 110 of the pari-mutuel facilities in North America, as well
as to facilities in South America, Europe and Asia.
Pari-mutuel wagering is pooled wagering in which a central computer system
totals the amounts wagered and adjusts the payouts to reflect the proportionate
amount bet on a racing event's final outcome. The pooled wagers are paid out
proportionately to bettors as winnings, to the applicable regulatory or taxing
authorities and as purses to the owners and trainers of the horses or greyhounds
to encourage them to enter the racetrack's live races. The balance of the pooled
wagers is retained by the wagering facility.
Product Development
IGT's standing as a leader in the global gaming market is built largely on our
ability to develop and design games that people want to play combined with our
innovative systems to improve casino operations and profitability. We
consistently strive to design and deliver the highest quality products, systems
and services in the industry. We accomplish this by anticipating client needs,
responding to feedback and marketing trends, and pioneering innovative gaming
machines and reliable systems solutions. Our emphasis and investment in R&D has
allowed us to maintain our market share leadership position in the industry. We
have seven design centers located worldwide, in addition to our primary
development team located in Nevada. These strategically located centers provide
us with a local presence and access to our customers, allowing us to respond to
market needs and preferences in a timely manner. We also have two development
centers that specifically focus on our lottery business segment. We have over
1,000 employees worldwide, dedicated to product development in various
disciplines from hardware, software and firmware engineering to game design,
video, multimedia, graphics and sound. During fiscal year 2002, we invested
approximately $80.3 million in R&D, as compared to $62.5 million in fiscal 2001
and $55.2 million in fiscal 2000.
The main factor influencing the purchase or placement of a gaming machine is
player appeal, followed by a mix of elements including price, service,
reliability, operational efficiencies, technical capability and the financial
condition and reputation of the manufacturer. Player appeal is the combination
of machine design, hardware, software, game features and ease of play that
ultimately improves the earning power of gaming machines and the operator's
return on investment. To increase the player appeal of our machines, our R&D
efforts are tailored toward the specific demands of our customers as well as the
users of our products. IGT continues to develop creative designs, innovative
mechanical top boxes and multiple interactive bonus features. Combining these
efforts with our entertainment license library and patented intellectual
property provides gaming machines with a high degree of player appeal.
Domestically in fiscal year 2002, we introduced more than 70 new game themes
addressing both the video and spinning reel markets. We expect this level of
performance from our development teams to continue into the future. All new
games are subject to regulatory approval across the jurisdictions we service.
Using MegaTest(TM), our online computerized testing and monitoring system, we
evaluate and forecast acceptance of new products in order to quickly identify
the more popular gaming concepts. The MegaTest(TM) system uses a central
computer to monitor the performance of games placed in a representative sample
of casinos throughout Nevada. The MegaTest(TM) program allows us to test games
in a relatively short time span with a high degree of accuracy, resulting in a
quicker release of higher performing games.
Our product line includes: Game King(R) video platform, which offers a single or
multi-game format with a touch screen monitor utilizing the iGame-Plus(TM)
interactive video games with animated graphics and secondary bonusing features;
the Vision Series(R), a spinning reel slot combined with a full color liquid
crystal display; and the S2000(TM) spinning reel platform which combines one of
the broadest game libraries with upgraded processor boards and an enhanced sound
package. Multi-line, multi-coin video based games are currently among the most
popular games on the casino floor. In response to this trend, our products
employ advanced technology to enhance entertainment and communication features
while retaining many of the familiar and popular features of older games. In
2002, we introduced our latest processor, the Advanced Video Platform (AVP(TM))
which provides improved graphic capabilities such as full screen live streaming
videos and animations with bright vivid colors along with an enhanced stereo
sound system. The AVP(TM) processor greatly expands the storage capacity
allowing space for complex bonusing features.
In the government sponsored public gaming or video lottery markets, the VLC
8800(TM) platform continues to hold a significant market share as governments
replace their older equipment. The 8800's can connect to all the major domestic
video lottery control systems. This platform offers a multi-game format with
Multi-Denomination(TM) and second screen bonus features. We continue to add
enhancements to the platform, including machines with both buttons and touch
screens.
In international markets, our strategy is to respond to developing markets with
local presence, customized games, new product introductions and local production
where feasible or required. For the European casino market, Barcrest has
designed the Enhanced series of reel based, casino style games to complement the
current product offerings in this market. The Enhanced machine incorporates top
box technologies designed in the UK with our casino style machines to add bonus
features. In Australia, two separate design teams create innovative games for
the club and casino markets. In Japan, our engineering department continues to
develop new technologies for the pachisuro market.
We continue to expand upon the functionality of TITO and EZ-Pay(TM) with
additional system updates and enhancements. These system enhancements
incorporate IGT's SAS(TM) 6.0 protocol, recently accepted by the Gaming
Standards Association (GSA). (GSA is a non-profit international association of
leading gaming manufactures, suppliers and operators whose mission is to define,
promote and support standards and specifications for gaming equipment.) Wireless
Validation Terminals expand the level of customer convenience by providing
properly equipped floor attendants with the ability to validate tickets, print
receipts and pay customers right on the casino floor. EZ Pay(TM) Ticket
Redemption Stations(TM) provide another convenient way for players to redeem
cash-out tickets. Using the automated ticket redemption device's high security,
electronically controlled coin and currency hopper, players can redeem cash-out
tickets right on the casino floor. We anticipate that future developments will
include EZ Pay(TM) promotional tickets that can be loaded with credits and sent
out to attract new customers or reward valued players.
The EZ Pay(TM) system is offered in a variety of hardware and software
configurations based on the customer's operational needs or regulatory
requirements. In a two-wire EZ Pay(TM) configuration all TITO transactions are
handled over a secondary casino floor network connected to an EZ Pay(TM) server.
Our one-wire configuration is referred to as the Integrated Voucher System(TM)
(IVS(TM)). This provides our EZ Pay(TM) software application with the ability to
communicate with IGT's own and other vendors' slot systems or the casinos'
current systems, using the existing casino floor network.
We provide central control systems for video lottery gaming to government
entities. Our central control systems incorporate state-of-the-art technology
and are designed with features intended to appeal to the concerns of the
operator, including: security of communications, central control of gaming
machines on the system, the compatibility of our central control system with
gaming machines made by other manufacturers, economy of operation due to the
ability to use a dial-up format (as opposed to requiring dedicated lines),
on-demand generation of reports and audits, the capability of transferring funds
electronically and the flexibility to meet the needs of markets of various
sizes, accommodate regulatory changes and adapt to new game designs and
features. Our Advanced Gaming System(TM) software is modular in design and
allows for the addition of new features including WAPs and downloadable software
to gaming machines.
Our development strategy within the online lottery segment is to consistently
deliver the technology and services necessary for operations worldwide.
Long-term, the online lottery segment is focusing on providing superior game
content to the lotteries and ultimately the players. We also design products
used in pari-mutuel systems. These include the terminals and the high
performance computer hardware and software systems used in them, communications
and video display equipment. Our terminals feature an enhanced display, built-in
magnetic card readers and some are wireless and others permit telephone
wagering. Our next generation terminal product will be PC-based and compatible
with the emerging wireless trends.
The development process in each business segment is not complete until our
compliance teams have ensured that each game, product or system meets all of the
requirements set forth in each jurisdiction, domestic or international. We
conduct business in over 250 jurisdictions worldwide with over 90 people
employed in the areas of regulatory and product compliance.
Product Demand
Demand for IGT's gaming products is a result of the establishment of new gaming
jurisdictions, the expansion of existing casinos, the addition of new casinos
within existing gaming markets and the replacement of older or technologically
obsolete machines. Over the past decade, significant increases in the installed
base of gaming machines was driven by the growth in the number of jurisdictions
with legalized gaming and the increasing popularity of large theme based
casinos. We believe that our manufacturing capabilities along with our
innovative products provide a competitive advantage in providing new casinos
with large numbers of machines.
The replacement cycle in all gaming jurisdictions represents a significant
portion of sales in any given year. The replacement cycle is driven primarily by
competition in each market to provide customers with more entertaining and
sophisticated games. To maximize our opportunities in the replacement market, we
release a number of new games each year and focus our product development
efforts on creating games that provide enhanced entertainment value, as well as
utilizing numerous popular game themes and concepts.
We expect the introduction of new, more sophisticated interactive games and
systems combined with the cost savings, convenience, and other benefits of TITO
technology will continue to stimulate the replacement machine market. The
growing popularity of the low denomination multi-line, multi-coin gaming
machines has been fundamental in the evolution of TITO technology. Because of
the volume of coins handled and paid out by these types of games and the
associated casino costs, these games are excellent candidates for the TITO
technology, such as EZ Pay(TM). All of our new games will be in a
Multi-Denomination(TM) format that can be readily adapted for use with our EZ
Pay(TM) system or other TITO systems. We have tested and installed our EZ
Pay(TM) system in many of the premier casino properties and have received
regulatory approvals in a majority of the jurisdictions.
Demand for replacement products is also dependent, in part, upon the willingness
of operators to incur the costs associated with replacing existing gaming
machines with new machines. The construction of new casino properties also has
an impact on the replacement machine market since, historically, the addition of
new properties has encouraged existing casinos to upgrade to new slot products
and system technologies in order to remain competitive. As new games are
installed, the earnings disparity between the older and newer machines on casino
floors widens and the replacement cycle is further stimulated.
Product Markets
We market our gaming products to legalized gaming jurisdictions around the
world. While our most significant markets are domestic, we continue to pursue
additional market share in international areas. The opportunities, challenges
and ultimately, our successes, vary across these jurisdictions. A review of the
various markets is provided below.
Domestic
In the last decade, the growing popularity of gaming as a leisure activity has
influenced demand in North America, resulting in the expansion of gaming in
existing markets and the legalization of gaming in new markets. The introduction
of riverboat gaming in the Midwest during the early 1990's, the expansion of
Native American casino gaming and the growth in the Canadian and non-casino
government sponsored gaming markets contributed to this market expansion and
provided IGT with significant growth opportunities. As a result, the installed
base of gaming machines has increased from an estimated 184,000 in 1991 machines
to approximately 700,000 machines in 2002.
Based on information provided by various gaming agencies and company documents,
we have compiled the following table of the total estimated gaming machine
installed base by jurisdiction, as of September 28, 2002. Other jurisdictions
primarily includes Colorado and cruise ships.
Jurisdiction Installed base
------------------ ------------------
Nevada 210,000
Atlantic City 38,000
Native American 158,000
Regional 120,000
Public Gaming 62,000
Other 37,000
-------
625,000
Canada
Casinos 27,000
Public Gaming 48,000
-------
75,000
Total North America 700,000
=======
Going forward, there is the potential for further gaming expansion both
domestically and internationally. Domestically, legislation was signed during
2002 and 2001 that would expand Native American gaming in both Arizona and New
York. Other states such as Kansas, Maryland, Massachusetts and Pennsylvania are
evaluating possible legislation associated with gaming devices at racetracks.
North Dakota and Tennessee are considering legislation to create state
lotteries.
Our total machine sales in North America were slightly lower than fiscal 2001
due to the maturation of the California Native American market and lower sales
in Nevada, although our domestic replacement sales increased 8% to 40,700
machines from prior year. This growth resulted from added demand in the public
gaming, Native American and Atlantic City markets.
Casino Markets
Nevada
Nevada is the largest and oldest domestic gaming market with approximately 100
casinos and various smaller gaming venues with an estimated 210,000 gaming
machines. The large mega-resort casinos are concentrated on the Las Vegas strip
and the other primary markets include Laughlin, Reno and Lake Tahoe.
Given the mature nature of this market, Nevada is one of the most competitive
markets in which we conduct business. Nevada, particularly Las Vegas, is a
destination market with approximately 45% of the visitors arriving by air. As a
result, this gaming market was the most significantly impacted by the decline in
airline traffic resulting from the September 11th events, which in turn, lead to
lower demand for our products in the first half of fiscal 2002. Replacement
demand for our products increased in the latter part of fiscal 2002 related to
our strong line up of new product introductions and the acceptance of EZ
Pay(TM). There were several announcements from major multi-property casino
operators, including Coast Resorts and The MGM/Mirage, committing to replace
existing slot machines with our EZ Pay(TM) equipped games.
Atlantic City
The Atlantic City market consists of 12 large casinos that are concentrated in a
mature boardwalk area and marina district. This market includes approximately
38,000 gaming machines. In fiscal 2002, the Claridge, Royal Resorts, Sands and
Harrah's expanded their properties, and we provided a majority of the units
installed. We are currently working with the Park Place properties on converting
their slot floors to the TITO technology. The Borgata Hotel Casino and Spa (a
joint venture between Boyd Gaming and MGM/Mirage Resorts) is expected to open in
summer 2003. This represents the first new casino property to open in this
jurisdiction in the past twelve years and we expect the slot floor will utilize
100% TITO technology.
Native American
Native American gaming differs from the traditional casino market in that it is
regulated under the Indian Gaming Regulatory Act of 1988, which permits specific
types of gaming. Pursuant to these regulations, permissible gaming devices are
denoted as "Class III Gaming" which requires, as a condition to implementation,
that the Native American tribe and the state government in which the Native
American lands are located to enter into a compact governing the terms of the
proposed gaming. We place machines with Native American tribes who have
negotiated compacts with their respective states and have received approval by
the US Department of the Interior.
IGT, through our subsidiary Sodak Gaming Inc. (Sodak), began selling machines to
authorized Native American casinos in 1990 and to date has sold machines or
components to 146 sovereign tribes in 17 US states. Sodak maintained a
distributor relationship with us from 1990 until September 1999, at which time
we acquired the company. Sodak provides financing for product sales and, in some
instances, has participated in the development, equipping, and financing of
gaming ventures.
In fiscal 2002 we shipped over 1,000 machines to the Cypress Bayou Casino in
Louisiana as they converted 100% of their slot floor to our EZ Pay(TM) system.
We also received a multi-quarter order of 2,500 machines from the Mohegan Sun in
Connecticut as a part of their replacement program, with shipments starting in
fiscal 2003. The number of proprietary gaming systems and associated installed
base also expanded in this jurisdictions. New York's governor approved
legislation to expand Native American gaming with the addition of six casinos.
The Seneca tribe is the first to have a compact with the state and has begun
construction of a facility located in Niagara Falls with the first shipments
delivered in December 2002.
Regional
Riverboat style gaming began in Iowa in 1991 and is currently operating in
Illinois, Indiana, Iowa, Louisiana, Mississippi and Missouri. The regional
market also includes the land-based casinos in Detroit, Michigan. After the
events of September 11th, this region showed the fastest signs of recovery but
has since faced controversy with various gaming tax initiatives. In fiscal 2002,
we shipped machines to Delta Downs, a new property in Louisiana and to the
Ameristar property in Missouri as part of their expansion. We also provided
machines to the Horseshoe properties in Louisiana and Mississippi and to the MGM
property in Detroit.
Public Gaming Markets
In the public gaming market, IGT provides both video lottery terminals (VLTs)
and casino style games for sale or on a participation basis and systems to
government controlled jurisdictions. These terminals are similar to slot
machines and provide a form of low stakes gaming entertainment. In all the
domestic public gaming jurisdictions (except for Montana), the VLTs are
connected to a central control system. The public gaming market is more
restrictive than the traditional casino market including limitations on the
number of machines per establishment, win and wagering limitations, state taxes
and game format. Currently there are eight US states that have authorized
various forms of video lottery gaming. These include Delaware, Louisiana,
Montana, New Mexico, Oregon, South Dakota, Rhode Island and West Virginia.
Our growth in the public gaming market in 2002 benefited from the expansion in
West Virginia and strong replacement sales in Oregon. Growth in this public
gaming segment will be driven by the addition of VLTs at racetracks in New York.
The State of New York recently announced that a portion of their 13,800 unit
contract was awarded to IGT for machines under a revenue sharing arrangement.
The implementation is expected to begin during the latter half of fiscal 2003.
Canada
The public gaming market in Canada consists of approximately 47,500 machines
installed within the provinces of Alberta, Manitoba, Quebec, Ontario and
Saskatchewan. The Atlantic Lottery Corporation (ALC) is the exclusive agent in
the provinces of New Brunswick, Newfoundland, Nova Scotia and Prince Edward
Island.
Canada represents another significant replacement market over the next few
years. In fiscal 2002, we shipped more than 2,000 units to the ALC as a part of
their replacement program. New requests for proposals are expected from the
Manitoba and Alberta lotteries, while the provinces of Saskatchewan and Quebec
will both begin replacing their units commencing in fiscal 2003.
The Canadian casino market operates under the auspices of the government
controlled lottery corporations and experienced steady growth during the past
year. There are over 60 casinos in Canada with an approximate installed base of
27,000 gaming machines. The first EZ Pay(TM) system was approved by the Manitoba
Lottery and Manitoba Gaming Control Commission and introduced into two Manitoba
casinos.
Lottery Markets
Revenues from lottery ticket sales in the US have grown and many states have
become increasingly dependent on their lotteries as significant funding sources
for state programs. In 1970, only two states had authorized traditional
lotteries, selling an aggregate of approximately $49.2 million in tickets. As of
September 28, 2002, industry statistics indicate that 39 jurisdictions in the US
were operating lottery systems, with aggregate lottery sales in excess of
approximately $40.0 billion. Internationally, governments in approximately 80
countries have authorized lottery games, primarily as a means of generating
non-tax revenues. Over 200 lotteries are operating worldwide, many of which are
government operated or privately licensed. We currently operate online lottery
systems for eight states domestically and have sold to and currently support or
maintain online lottery systems for customers in Canada, China, Norway,
Switzerland, and the West Indies. We believe that we are well positioned to take
advantage of anticipated future growth in the online lottery market, both
domestically and internationally.
International Gaming Markets
IGT's presence in the international gaming markets began in 1986 and we continue
to pursue growth in this area. Our goal is to leverage off the design and
manufacturing experiences we have in domestic markets, while addressing each
international market's unique customer and regulatory environment. Our
international subsidiaries currently service
markets in Australia, New Zealand, Europe, Japan, Latin America and South
Africa. We maintain local manufacturing in the UK and a third-party manufacturer
in Japan. All other international gaming machines are fabricated, in whole or
kit form, at our Reno facility.
As in North America, our biggest successes come with innovative game design and
our biggest challenges come with the individual gaming jurisdiction's regulatory
environment. Our management team focuses on communication between the domestic
and international personnel to effectively meet the opportunities and challenges
of these markets.
United Kingdom
We established a manufacturing, sales, marketing and distribution operation in
Manchester, England with our acquisition of Barcrest Limited in March 1998.
Barcrest manufactures and sells AWP club machines and top box products. An AWP
machine is a game of chance with minimal stake wagering for amusement with low
value cash prizes, typically under $40. Barcrest is the largest UK manufacturer
of AWP games, selling to both the UK and continental European markets.
Our success in this market is built around access to three separate design
centers that focus on new products in the UK, along with R&D centers in The
Netherlands and Spain that provide game design for other European markets.
Barcrest's markets are primarily replacement driven, dominated by pubs and
licensed betting offices that demand regular releases of new machines. To meet
this demand, new products are launched in the UK every four to six weeks.
Proposed changes to modernize the 1968 Gaming Act in the UK may provide
increased opportunities for IGT and Barcrest. The most significant change will
be to liberalize the UK's casino laws, allowing for an increase in the number of
casinos and the number of machines in casinos. In order to prepare for this
opportunity, we established a division known as IGT-UK Casino, with offices in
the Midlands region. The UK government is presently consulting over the proposed
measures and legislation that could be proposed during 2004.
Australia and New Zealand
Australia is one of the largest and most established markets for video gaming
products outside of North America. Our offices in Australia and New Zealand
provide sales and customer service to all gaming areas in this market. We source
gaming product "kits" from Nevada for final assembly in Sydney, Australia.
The regulatory environment in Australia and New Zealand created uncertainty with
operators and manufacturers during the 2002 fiscal year. A limit on the number
of gaming machines exists in most jurisdictions. The Australian and New Zealand
state and federal governments have pursued a number of policies aimed at a wide
range of "harm minimization" measures, specifically targeting gaming machines.
While not all of the measures have been legislated at this time, the uncertainty
for operators may have an effect on the demand for gaming machines in Australia
and New Zealand that cannot be determined.
Europe, Middle East and Africa
In 1992, we opened our office in The Netherlands to service the European, Middle
Eastern and African markets, excluding South Africa. In these regions, gaming is
prevalent in casinos and non-casino environments such as pubs and arcades.
Within the European markets, casino style gaming machines compete with AWP
machines, which we sell exclusively through our Barcrest office. We currently
anticipate moderate growth in the European installed base, and our sales to this
market will be principally dependent upon replacement sales.
Japan
We established an office in 1990 that serves the Japanese market with
engineering, sales, and administration from our head office in Tokyo and a
development and logistics office in Osaka. The Japanese pachisuro machine is a
three-reel slot machine played with tokens, a small payout, and is considered a
game of skill as the player controls the stopping of the reels. The product is
regulated by the Japanese Security Electronics and Communication Technological
Agency (SECTA), which ensures compliance with regulations mandated by the
National Police Agency. In Japan, we utilize a third-party manufacturer to
produce our machines and distributors or sales agents to sell our products. The
distributors and sales agents sell to hall operators and to second tier
distributors. We also have an in-house sales team to market products directly to
customers in the Nagoya, Sendai and Tokyo areas.
Pachisuro machines are more fashion driven, sell for approximately one-third of
the price of our domestic machines and are licensed for three years. However,
they typically have a replacement cycle of less than twelve months. The
relatively short selling cycle of two to three months for any one new game
release makes success in this market highly dependent upon the ability to
regularly introduce popular new games. We increased our product development
efforts in the past year, shortening the gap between new game introductions.
However, the regulatory environment in Japan has grown more restrictive over the
past year with additional pressure on manufacturers to limit machine sales and
volatile games, which will impact fiscal 2003 results.
Latin America
We sell and lease casino style gaming equipment to many legalized gaming
jurisdictions in Latin America through our established offices in Argentina,
Florida, Peru, and a distributor in Venezuela. The economic instability of this
region during fiscal 2002 and resulting devaluation of the Argentine peso had a
negative impact on operating income compared to previous years.
South Africa
Our office in Midrand, Gauteng, South Africa services the gaming markets located
in South Africa, Sub-Saharan Africa and the Indian Ocean Islands. Casino gaming
in South Africa is governed under their National Gambling Act, which began the
allocation of 40 casino licenses between each of the nine provinces in South
Africa in 1996. We have pursued product sales and licensing in South Africa
since the inception and are currently ranked second in market share. This market
has been slow to develop, but we continue to maintain our presence and pursue
additional customers.
Operational Overview
Manufacturing and Suppliers
We manufacture gaming machines in the US, the UK and through manufacturing
relationships with third parties in Canada, Germany and Japan. The manufacturing
operations primarily involve the assembly of electronic components, cables,
harnesses, video monitors and prefabricated parts purchased from outside
sources. We also operate a cabinet manufacturing and silkscreen facility in the
US. We have a broad base of material suppliers and utilize multi-sourcing
practices to ensure component availability.
Domestic manufacturing has been ISO 9002 certified since 1996. In 2002, our Reno
facility produced over 60% of all machines shipped during the year. The Reno
facility has 736,000 square feet devoted to manufacturing, warehousing, shipping
and receiving.
We generally carry a significant amount of inventory due to the broad range of
products we manufacture and to facilitate our capacity to fill customer orders
on a timely basis. Our product sales backlog orders totaled approximately $150.6
million at the end of October 2002 and $89.0 million at October 2001. For the
same periods, our proprietary gaming backlog orders totaled approximately 4,800
units and 2,000 units. These represent normal backlogs and we reasonably expect
to fill our backlog within fiscal 2003.
Sales and Distribution
Our products and services are sold to gaming operators and governmental entities
that conduct gaming operations. During fiscal 2002, our ten largest customers
accounted for 35% of our total revenue. We market our products and proprietary
systems through our internal sales staff, agents and distributors. We employ
approximately 360 sales personnel in various domestic and international
locations.
IGT uses distributors for sales to specific markets including Canada, the
Caribbean, France, Germany, Japan, South Korea, Louisiana, New Jersey, New
Mexico, New Zealand, Spain, The Netherlands and Venezuela. IGT's agreements with
distributors do not specify minimum purchases but generally provide that IGT may
terminate the distribution agreement if certain performance standards have not
been satisfied.
Customer Service
We consider our customer service department an important aspect of the overall
marketing strategy and a key factor that differentiates us from our competitors.
Customers are provided product delivery and installation services, warranty
services, after-market technical services and new product support services.
Equipment spare parts, product retrofit and game conversion services are also
provided. We typically provide a 90-day service and parts warranty program
domestically and up to a 180-day warranty service internationally for our gaming
machines. We employ more than 1,600 trained service personnel for customer
assistance and maintain over 80 customer service support centers domestically in
all the major gaming jurisdictions and internationally in Argentina, Australia,
Japan, New Zealand, Peru, South Africa, The Netherlands and the UK.
We also provide extensive customer education and service through customer
product and employee training, technical employee certification programs,
videotaped instruction, a 24-hour customer service hotline, newsletters, our
website, (www.IGT.com), and the Technical Assistance Center (TAC). The TAC is a
fully staffed facility providing 24-hour telephone support to all types of
casino system customers. The TAC has access to a range of field support
engineering resources to resolve technical issues. Through these extensive
resources, IGT provides a direct link for two-way communication between the
customer and IGT and access to product information 24 hours a day, seven days a
week.
Regulatory Compliance
Our product and regulatory compliance efforts are designed to ensure that each
gaming product or system we develop meets the requirements set forth in each
jurisdiction, domestic and international. These efforts also ensure that we
obtain the necessary approvals and licenses. Through our efforts we are able to
successfully sell and market our products worldwide, while providing our
customers with the assurance that our products work properly and meet
jurisdictional requirements.
Information Systems
In fiscal 2002, we completed several phases of major technology implementations
with our ERP solution that is designed to support our short and long-term
growth. These implementations included the accounting, finance, human resources
and payroll modules. During the quarter ending March 2003, we plan to implement
additional modules in the areas of operations, customer service, sales and
distribution. We believe these technological upgrades will provide additional
operational efficiencies.
Competition
The market for gaming machines and proprietary systems is intensely competitive.
The principal method of competition is product development. A library of strong
performing games can be a significant competitive advantage. Other methods of
competition include quality and breadth of sales and service organizations,
financial stability of the manufacturer, and pricing.
Product Sales
US and foreign manufacturers which compete with IGT in the domestic casino style
gaming machine market include Ardent Gaming (Ardent); Aristocrat Leisure Limited
(Aristocrat); Bally Gaming Inc., a subsidiary of Alliance Gaming Corp. (Bally);
Atronic Casino Technology, Ltd. (Atronics); Mikohn; Konami Co. Ltd. (Konami);
Shufflemaster; Sigma Game, Inc. (Sigma); Spielo; Universal Distributing, Inc.;
and WMS Industries. All have developed casino products and are either authorized
to sell products or are in the licensing process in many US gaming
jurisdictions. There are several competitors for the international markets
including Aristocrat, Atronics, Aruze, (formerly known as Universal), Bally,
Cirsa Group, Franco Gaming, Ltd., a division of Recreativos Franco, Konami, and
Novomatic Industries. In the accounting and player tracking systems product
market, our casino data management system competes with products offered by
Acres Gaming, Inc.; Bally; Casino Data Systems (CDS), which was acquired by
Aristocrat in 2001; and several other systems manufacturers.
Proprietary Gaming
IGT's competitors in the progressive systems market are Bally, Aristocrat and
most recently Atronics. Our competitors in the stand alone recurring revenue
market are Bally, CDS, Mikohn, and WMS. We provide substantial marketing and
advertising support for our proprietary gaming products and compete on the basis
of our extensive infrastructure, popular brand names, product appeal, jackpot
awards, player loyalty and technical and marketing experience.
Lottery Systems
Relatively few new or rebid online lottery contracts are awarded each year, and
lottery contract awards in the US are often challenged by unsuccessful bidders
through litigation. Our principal competitor in the online lottery business,
GTECH, is significantly larger than we are, currently supplying lottery systems
to 24 of the 39 US online lottery jurisdictions. GTECH also has a substantial
international presence. Other lottery competitors include Scientific Games,
EssNet/Alcatel, International des Jeux (Lotto France), International Lottery and
Totalizer Systems. In jurisdictions with both online and video lottery gaming
products, the products may compete with each other for wagering market share.
Our principal video lottery competitors include Alliance Gaming, GTECH, Spielo
and WMS. Our principal pari-mutuel competitors are AmTote, Autotote, a division
of Scientific Games and, at some facilities, a limited number of other smaller,
local and regional companies. Pari-mutuel competition outside of North America
is more fragmented, with competition provided by several international and
regional companies. No single pari-mutuel company maintains a dominant market
position internationally, although some companies possess regional strengths.
Patents, Trademarks, Copyrights and Trade Secrets
We believe that our patents, trademarks, copyrights and trade secrets
(intellectual property rights) are significant assets. We seek to protect our
investment in R&D and the unique and distinctive features of our products and
services by perfecting and maintaining our intellectual property rights. IGT has
obtained patent rights protection covering many of our products. We have a large
number of US and foreign patent applications pending. In 2002, we were issued 41
patents. The subject matter of these patents and patent applications include
game designs, bonus and secondary game features, gaming device components,
gaming systems, and a variety of other aspects of video and electronic slot
machines and associated equipment. Most of IGT's products are sold under
trademarks and copyrights that provide product recognition and promote
widespread acceptance. IGT creates and licenses trademarks and copyrighted works
that are significant to us. The value of IGT's intellectual property assets is
enhanced and complemented by the highly favorable associated goodwill.
We are the licensing agent on behalf of MGM-Mirage and Alliance Gaming for five
patents related to the TITO technology, which are commonly referred to as the
intellectual property package (IPP). To date, we have licensed this IPP to a
majority of the major gaming suppliers, including Aristocrat Gaming and WMS
Gaming, among others.
Included in this report are the following trademarks, service marks, and/or
federally registered trademarks of IGT: Diamond Cinema, EZ Pay, Game King, IGT
Gaming Systems (IGS), iGame, iGame Plus, MegaJackpots, MegaTest,
Multi-Denomination, S2000, and Vision Series.
We design, manufacture, produce, operate, use, and/or otherwise have permission
to exploit certain gaming machines utilizing materials under license from
third-party licensors. More specifically, the games which have been mentioned in
this report and their related trademark and copyright ownership information are:
The Addams Family developed under agreement with Monaco Entertainment
Corporation; Jeopardy! is a registered trademark of Jeopardy Productions, Inc.;
Wheel of Fortune is a registered trademark of Califon Productions, Inc.; Regis'
Cash Club is a game developed in conjunction with Philbin Enterprises;
$1,000,000 Pyramid is a trademark of CPT Holdings, Inc.; I Dream of Jeannie is a
trademark of CPT Holdings, Inc.; American Bandstand is a trademark of dick clark
productions, inc.; Austin Powers is a trademark of New Line Productions, Inc.;
The Price Is Right is a trademark of FremantleMedia Operations B V based on the
FremantleMedia television programme "The Price Is Right." Licensed by Fremantle
Brand Licensing; Harley-Davidson(R) is among the registered trademarks of H-D
Michigan Inc.; "Beetle Bailey" (C)2002 King Features Syndicate, Inc. TM Hearst
Holdings, Inc.; SALE OF THE CENTURY is a trademark of FremantleMedia Operations
B V Based on the FremantleMedia television program SALE OF THE CENTURY. Licensed
by Fremantle Brand Licensing; FAMILY FEUD and related marks are trademarks of
FremantleMedia Operations B V Based on the FremantleMedia television program
FAMILY FEUD. Licensed by Fremantle Brand Licensing; "James Dean" (TM) (C) 2002
James Dean, Inc. licensed by CMG Worldwide James Dean.com; "Marilyn Monroe" (TM)
(C) Marilyn Monroe, LLC, licensed by CMG Worldwide Marilyn Monroe.com; "Sinatra"
(TM) game is an IGT product manufactured in association with Sheffield
Enterprises, Inc. and Bristol Productions Limited Partnership"; "Magic 8 Ball"
(C) 2002 Mattel, Inc. All Rights Reserved. Magic 8 Ball is a registered
trademark owned by Mattel, Inc.; "I LOVE LUCY" and related marks are trademarks
of CBS Broadcasting Inc. Images of Lucille Ball & Desi Arnaz are licensed by
Desilu, too, LLC. Licensing by Unforgettable
Licensing; "UNO"(C)2002 Mattel, Inc. All Rights Reserved. UNO is a registered
trademark owned by Mattel, Inc.; and Steve McQueen(TM) Licensed by Chadwick
McQueen and The Terry McQueen Testamentary Trust, Represented by The Roger
Richman Agency, Inc., www.stevemcqueen.com.
We cannot ensure that our intellectual property rights will not be infringed
upon or that others will not develop products in violation of our intellectual
property rights. Additionally, we cannot guarantee that our pending applications
for additional intellectual property rights will be granted.
Employees
As of September 28, 2002, IGT employed approximately 6,200 total employees,
including 4,500 in continuing domestic operations, 800 in discontinued
operations and 900 internationally. We believe that we have a satisfactory
relationship with our employees.
Government Regulation
General
We operate in most legal casino gaming jurisdictions worldwide, as well as in a
significant number of legalized lottery jurisdictions. The manufacture and
distribution of gaming equipment and related software and the operation of
casinos is subject to regulation in these jurisdictions by various regulators at
all levels from city and tribal officials along with federal regulatory
agencies, with the majority of oversight being provided by each individual
state's gaming regulators. While the regulatory requirements vary from
jurisdiction to jurisdiction, the majority of these jurisdictions require
licenses, permits, findings of suitability, documentation of qualification
including evidence of financial stability and/or other required approvals for
companies who manufacture and distribute gaming equipment, as well as the
individual suitability of officers, directors, major stockholders and key
employees.
Various gaming regulatory agencies have issued licenses allowing us to
manufacture and/or distribute our products and operate WAP systems, and we hold
licenses to operate casinos in Colorado and a slot route in Nevada. IGT and our
key personnel have obtained or applied for all government licenses, permits,
registrations, findings of suitability and approvals necessary to maintain
compliance with all regulatory agency requirements. Many of the regulations at
each level are similar or overlapping; however, we are required to satisfy all
conditions individually for each jurisdiction. Laws of the various gaming
regulatory agencies serve to protect the public and ensure that gaming related
activity is conducted honestly, competitively, and free of corruption. In the
jurisdictions where we operate casinos or gaming machines, the oversight
additionally ensures that the local authorities receive the appropriate amount
of tax revenues. As such, our operations' financial systems and reporting
functions must demonstrate high levels of detail and integrity.
In some jurisdictions, regulators not only govern the activities that take place
in their particular jurisdiction, but they also oversee activities that occur in
other jurisdictions to ensure that the company is in compliance with local
standards on a worldwide basis. As a Nevada corporation we are held responsible
by our state regulatory authorities to maintain Nevada standards for all of our
operations worldwide. For this reason, in a number of jurisdictions we employ
localized staff members and legal resources with local knowledge to assist in
keeping us in compliance with local regulatory laws. The local staff
communicates regularly with our corporate headquarters compliance department to
ensure that none of our licenses in any jurisdiction are put in jeopardy.
The nature of the industry and our worldwide operations make this process very
time consuming and requires extensive resources, the process helps assure both
regulators and investors that all of our operations maintain the highest levels
of integrity and avoid any appearances of improprieties. We have never been
denied a gaming related license, nor have our licenses ever been suspended or
revoked.
Responsible Gaming
We continue to be an industry leader in addressing and attempting to minimize
problem gambling. We partnered with other companies in the gaming industry to
raise awareness of problem gaming, and we work to educate the public and our
employees about its symptoms and consequences. To stress our commitment to
raising an awareness of this problem, we have dedicated internal resources to
coordinate with the industry and its trade groups to organize awareness events,
distribute educational materials and organize contributions for the research of
problem gaming. In virtually every casino in the US and Canada, there are posted
advisories and telephone numbers for patrons to call if they or someone they
know needs help, as well as literature for patrons to read about problem gaming.
Nevada Regulation
The manufacture, sale and distribution of gaming devices in Nevada or for use
outside Nevada are subject to extensive state and local laws, regulations and
ordinances of the Nevada Gaming Commission (Commission), the State Gaming
Control Board (GCB), and various county and municipal regulatory authorities
(collectively referred to as the Nevada gaming authorities). These laws,
regulations and ordinances primarily cover the responsibility, financial
stability and character of gaming equipment manufacturers, distributors and
operators, as well as persons financially interested or involved in gaming
operations. The manufacture, distribution and operation of gaming devices
require separate licenses. The laws, regulations and supervisory procedures of
the Nevada gaming authorities seek to (i) prevent unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity, (ii) establish and maintain responsible accounting practices and
procedures, (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada gaming authorities,
(iv) prevent cheating and fraudulent practices, and (v) provide a source of
state and local revenues through taxation and licensing fees. Changes in these
laws, regulations, procedures, and judicial or regulatory interpretations could
have an adverse effect on our gaming operations.
Our subsidiaries that conduct the manufacture, sale, and distribution of gaming
devices in Nevada or for use outside Nevada, as well as the operation of slot
machine routes and other gaming activities in Nevada, are each required to be
licensed by the Nevada gaming authorities. Our licenses must be renewed
periodically and the Nevada gaming authorities have broad discretion with regard
to such renewals. Licenses are not transferable. Each type of machine we sell in
Nevada must first be approved by the Commission and may require subsequent
machine modification. Our gaming subsidiaries licensed in Nevada must also
report substantially all loans, leases, sales of securities and similar
financing transactions of a material nature to the GCB and/or have them approved
by the Commission. We believe we have obtained all required licenses and/or
approvals necessary to carry on our business in Nevada.
The Company is registered with the Commission as a publicly traded corporation
and is required periodically to submit detailed financial and operating reports
to the Commission and to furnish any other information that the Commission may
require. No person may become a stockholder of or receive any percentage of
profits from our licensed gaming subsidiaries, without first obtaining licenses
and approvals from the Nevada gaming authorities.
Our officers, directors and key employees who are actively engaged in the
administration or supervision of gaming and/or directly involved in gaming
activities of our licensed gaming subsidiaries may be required to file
applications with the Nevada gaming authorities and may be required to be
licensed or found suitable by them. Officers, directors, and certain key
employees of our licensed gaming subsidiaries must file applications with the
Nevada gaming authorities and may be required by them to be licensed or found
suitable.
In addition, anyone having a material relationship or involvement with us or any
of our licensed gaming subsidiaries may be required to be found suitable or
licensed and to pay to the GCB all of its investigation costs and fees. The
Commission may deny an application for licensure or finding of suitability for
any cause deemed reasonable. A finding of suitability is comparable to licensing
and both require submission of detailed personal and financial information
followed by a thorough background investigation. We must report changes in
licensed positions to the Commission. The Commission may disapprove any change
in position by one of our officers, directors, or key employees, or require us
to suspend or dismiss officers, directors or other key employees and sever
relationships with other persons who refuse to file appropriate applications or
whom the Nevada gaming authorities find unsuitable to act in such capacities.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
We are required to submit detailed financial and operating reports to the
Commission. If the Commission determines that we are in violation of any gaming
laws, our gaming licenses can be limited, conditioned, suspended or revoked. In
addition, the Company, our licensed gaming subsidiaries and any persons involved
may be subject to substantial fines for each separate violation of the gaming
laws at the discretion of the Commission. The Commission also has the power to
appoint a supervisor to operate our gaming properties and, under certain
circumstances, earnings generated during the supervisor's
appointment could be forfeited to the State of Nevada. The limitation,
conditioning or suspension of our gaming licenses or the appointment of a
supervisor could (and revocation of our gaming licenses would) materially and
adversely affect our gaming operations.
The Commission may require any beneficial holder of our voting securities,
regardless of the number of shares owned, to file an application, be
investigated, and be found suitable, in which case the applicant would be
required to pay the costs and fees of the GCB investigation. If the beneficial
holder of voting securities who must be found suitable is a corporation,
partnership, or trust, it must submit detailed business and financial
information including a list of beneficial owners. Any person who acquires more
than 5% of the Company's voting securities must report this to the Commission.
Any person who becomes a beneficial owner of more than 10% of our voting
securities must apply for a finding of suitability within 30 days after the
Chairman of the GCB mails the written notice requiring this finding of
suitability.
Under certain circumstances, an Institutional Investor, as this term is defined
in the Nevada gaming regulations, which acquires more than 10%, but not more
than 15%, of our voting securities may apply to the Commission for a waiver of
these finding of suitability requirements, provided the institutional investor
holds the voting securities for investment purposes only. An institutional
investor will not be deemed to hold voting securities for investment purposes
unless the voting securities were acquired and are held in the ordinary course
of its business. Our voting securities must not be acquired for the purpose of
causing, directly or indirectly (i) the election of a majority of our board of
directors, (ii) any change in our corporate charter, bylaws, management,
policies or operations, or (iii) any other action which the Commission finds to
be inconsistent with holding our voting securities for investment purposes only.
The Commission considers voting on all matters voted on by stockholders and the
making of financial and other informational inquiries of the type normally made
by securities analysts, to be consistent with investment intent.
The Commission has the power to investigate any person who holds our debt or
equity securities. The Clark County Liquor and Gaming Licensing Board, which has
jurisdiction over gaming in the Las Vegas area, may similarly require a finding
of suitability of a security holder. The applicant stockholder is required to
pay all costs of such investigation. Our bylaws provide for us to pay these
costs that are related to our officers, directors or employees.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Commission or the
Chairman of the GCB may be found unsuitable. The same restrictions apply to a
record owner who fails to identify the beneficial owner, if requested to do so.
Any stockholder found unsuitable and who holds, directly or indirectly, any
beneficial ownership of our common stock beyond such period of time as may be
prescribed by the Commission may be guilty of a criminal offense. We are subject
to disciplinary action, and possible loss of our approvals, if, after we receive
notice that a person is unsuitable to be a stockholder or to have any other
relationship with us or any of our licensed gaming subsidiaries, we (i) pay that
person any dividend or interest upon our voting securities, (ii) allow that
person to exercise, directly or indirectly, any voting right conferred through
securities held by that person, (iii) give remuneration in any form to that
person, for services rendered or otherwise, or (iv) fail to pursue all lawful
efforts to require such unsuitable person to relinquish his voting securities
for cash at fair market value. Additionally, the Clark County authorities have
taken the position that they have the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming licensee.
The Commission may, in its discretion, require the holder of our debt securities
to file an application, be investigated and be found suitable to own any of our
debt securities. If the Commission determines that a person is unsuitable to own
any of these securities, then pursuant to the Nevada gaming laws, we can be
sanctioned, including the loss of our approvals, if without prior Commission
approval, we: (i) pay to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognize any voting right by such unsuitable
person in connection with such securities; (iii) pay the unsuitable person
remuneration in any form; or (iv) make any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
We are required to maintain a current stock ledger in Nevada, which may be
examined by the Commission at any time. If any of our securities are held in
trust by an agent or by a nominee, the record holder may be required to disclose
the identity of the beneficial owner to the Commission. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. We are also
required to render maximum assistance in determining the identity of the
beneficial owner.
The Commission has the power at any time to require our stock certificates to
bear a legend indicating that the securities are subject to the Nevada gaming
laws and the regulations of the Commission. To date, the Commission has not
imposed this requirement on us.
We may not make a public offering of our securities without the prior approval
of the Commission if the securities or their proceeds are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or retire or extend
obligations incurred for such purposes. Such approval, if given, does not
constitute a finding, recommendation, or approval by the Commission or the GCB
as to the accuracy or adequacy of the prospectus or the investment merits of the
securities. Any representation to the contrary is unlawful.
In July 2001, the Commission granted us prior approval to make public offerings
for a period of two years, subject to certain conditions (referred to as a shelf
approval). The chairman of the GCB may rescind the shelf approval for good cause
without prior notice upon the issuance of an interlocutory stop order. The shelf
approval does not constitute a finding, recommendation, or approval by the
Commission or the GCB as to the accuracy or adequacy of the prospectus or the
investment merits of the securities offered. Any representation to the contrary
is unlawful.
Changes in control of the Company through merger, consolidation, acquisition of
assets or stock, management or consulting agreements or any form of takeover
cannot occur without the prior investigation of the GCB and approval of the
Commission. Entities seeking to acquire control of us must satisfy the GCB and
the Commission in a variety of stringent standards prior to assuming control.
The Commission may also require controlling stockholders, officers, directors
and other persons having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as part of the
approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and other corporate defense tactics
that affect Nevada gaming licensees, and publicly traded corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Commission has established a regulatory scheme to guard
against the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Commission
before we can make exceptional repurchases of voting securities above their
current market price and before a corporate acquisition opposed by management
can be consummated. Nevada's gaming laws and regulations also require prior
approval by the Commission if we were to adopt a plan of recapitalization
proposed by our board of directors in opposition to a tender offer made directly
to our stockholders for the purpose of acquiring control of us.
License fees and taxes are imposed by the Nevada gaming authorities and are
either payable quarterly or annually. The fees and taxes are computed in various
ways depending on the type of activity involved by our subsidiaries and the
cities and counties where our subsidiaries conduct operations. Annual fees are
payable to the GCB to renew our licenses as a manufacturer, distributor, and
operator of a slot machine route. Nevada law also requires persons providing
gaming machines in Nevada to casino customers on a revenue participation basis
to pay their proportionate share of the taxes imposed on gaming revenues
generated by the participation gaming machines.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively referred
to as licensees), and who proposes to participate in the conduct of gaming
operations outside of Nevada is required to deposit with the GCB, and thereafter
maintain, a revolving fund in the amount of $10,000 to pay the expenses of
investigation by the GCB of the licensee's participation in foreign gaming. This
revolving fund is subject to increase or decrease at the discretion of the
Commission. As a licensee, we are required to comply with certain reporting
requirements imposed by the Nevada laws. We are also subject to disciplinary
action by the Commission if we knowingly violate any laws of the foreign
jurisdiction pertaining to our foreign gaming operation, fail to conduct our
foreign gaming operations in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees,
or employ a person in the foreign operation who has been denied a license or
finding of suitability in Nevada on the grounds of personal unsuitability.
Federal Registration
The Federal Gambling Devices Act of 1962 (the Act) makes it unlawful for a
person to manufacture, transport, or receive gaming machines, gaming devices or
components across interstate lines unless that person has first registered with
the Attorney General of the US Department of Justice. In addition, gambling
device identification and record keeping requirements are imposed by the Act.
Violation of the Act may result in seizure and forfeiture of the equipment, as
well as other penalties. Subsidiaries of International Game Technology involved
in the manufacture and transportation of gaming devices are required to register
annually. We have complied with the registration requirements of the Act.
Native American Gaming Regulation
Federal law, tribal-state compacts, and tribal gaming regulations govern gaming
on Native American lands. The Indian Gaming Regulatory Act of 1988 (IGRA)
provides the framework for federal and state control over all gaming on Native
American lands and is administered by the National Indian Gaming Commission (the
NIGC) and the Secretary of the US Department of the Interior. The NIGC has
authority to issue regulations governing tribal gaming activities, approve
tribal ordinances for regulating gaming, approve management agreements for
gaming facilities, conduct investigations and monitor tribal gaming generally.
IGRA is subject to interpretation by the NIGC and may be subject to judicial and
legislative clarification or amendment. IGRA requires that the tribe and the
state enter into a written agreement, a tribal-state compact, which governs the
terms of the gaming activities. Tribal-state compacts vary from state-to-state
and in many cases require equipment manufacturers and/or distributors to meet
ongoing registration and licensing requirements. In addition, tribal gaming
commissions have been established by many Native American tribes to regulate
gaming related activity on Indian lands. Indian tribes are sovereign in their
own government systems, which have primary regulatory authority over gaming on
land within the tribes' jurisdiction. IGT manufactures and supplies gaming
equipment to Native American tribes who have negotiated compacts with their
state and have received federal approval. As of September 28, 2002, we were
authorized to sell gaming machines and components to Native American casinos in
17 states.
International Regulation
Certain foreign countries permit the importation, sale and operation of gaming
equipment in casino and non-casino environments. Some countries prohibit or
restrict the payout feature of the traditional slot machine or limit the
operation and the number of slot machines to a controlled number of casinos or
casino-like locations. Each gaming machine must comply with the individual
country's regulations. Certain jurisdictions require the licensing of gaming
machine operators and manufacturers.
We manufacture and supply gaming equipment to various international markets
including Australia, Europe, Japan, Latin America, the Middle East, New Zealand,
South Africa, and the UK. We have obtained the required licenses to manufacture
and distribute our products in the various foreign jurisdictions where we do
business.
Casino Operations
We operate two casinos acquired from Anchor, Colorado Grande Casino in Cripple
Creek and the Colorado Central Station Casino in Black Hawk. The Colorado
Limited Gaming Control Commission and the Colorado Division of Gaming
(collectively referred to as the Colorado Authorities) administer the licensing
and regulatory control of our Colorado operations. Each casino in Colorado
requires a retailer gaming license, which must be renewed annually. The sale of
alcoholic beverages at our casinos is subject to licensing, control, and
regulation by the applicable state and local authorities. All alcoholic beverage
licenses are revocable and are not transferable.
Additionally, our casino operations are subject to extensive scrutiny and
regulation in certain areas of the operations for which procedures and plans
must be developed and approved by the Colorado Authorities. These include, but
are not limited to: administrative, accounting, security, prize payouts, age
requirements for patrons, game placement, purchase of approved gaming machines
and associated equipment, business operations, licensing of all casino employees
and internal controls.
Lottery Systems
There are currently 39 lotteries operating in the US and District of Columbia.
All of the lotteries operate under legislative authorization of each respective
state and offer various forms of lotto and instant scratch games. Domestically,
we provide online systems, terminals, technical operations and marketing
services to the following state lotteries: Delaware, Florida, Indiana, Maryland,
Minnesota, Pennsylvania, South Dakota and West Virginia. Internationally, we
also provide online
systems and services to lotteries in Canada, China, Norway,
Switzerland, and the West Indies. Policy and management decisions of lottery
operations in the US are generally governed by a commission appointed by the
governor or other official of each state with the day-to-day operations of the
lottery administered by a director appointed either by the governor or lottery
commission.
The award of lottery contracts and ongoing operations of lotteries in
international jurisdictions are also often highly regulated, although the
operations typically vary from lotteries in the US. In addition, foreign
jurisdictions may impose restrictions on US corporations seeking to do business
in those jurisdictions.
To ensure the integrity of their lottery operations, most US jurisdictions
require detailed background disclosure and investigations of vendors providing
goods and services under a contract award for a major procurement, which
typically include: online systems, terminals, and services; instant ticket
printing; ticket validation systems; drawing equipment; and advertising
services. Background investigations typically are conducted on Company
subsidiaries, affiliates, officers, directors, and stockholders who own a 5% or
greater interest in the Company's outstanding stock for purposes of meeting
suitability standards defined under statutes and regulations of each
jurisdiction. Additionally, jurisdictions require vendors to meet comprehensive
standards as described in a lottery's request for proposals or invitation for
bid for the goods and services contracted. Failure on the part of a vendor to
meet the described suitability standards or requirements could jeopardize the
award of a lottery contract to the Company or provide grounds for the
termination of an existing lottery contract. Additionally, we are subject to the
imposition of liquidated damages by the lottery regulators for central system
and terminal downtime.
We regularly engage public affairs advisors and lobbyists in various US
jurisdictions to advise legislators and the public in connection with lottery
legislation, and to advise us in connection with contract proposals. In recent
years, it has become increasingly common for US procurement procedures to allow
an unsuccessful lottery provider to appeal a decision to award the lottery to
another party. Appeals typically take the form of an administrative hearing, or
a judicial hearing or both. Once an appeal is filed, it may be several years
before the outcome of the appeal is finally known assuming the appellant
exercises all available avenues of appeal. This introduces an element of
unpredictability into the online lottery market that may continue long after
procurements have been awarded.
Pari-mutuel Racing Regulation
Our operations in the manufacturing, sale, and operation of live and simulcast
wagering systems for pari-mutuel wagering facilities in certain jurisdictions
are also subject to extensive state regulatory and licensing requirements
similar to those that are applicable to our online lottery businesses. In the
greyhound and horse racing industry, simulcasting involves sending and receiving
audio and video signals of live races to and from off-track facilities,
including other racetracks, for the purpose of wagering. We are licensed to
engage in pari-mutuel wagering operations in various US states and Canadian
jurisdictions.
Item 2. Properties
We believe that the following properties are suitable to our business and
adequate for our current and near-term needs.
Corporate Headquarters
Our largest manufacturing facility and corporate headquarters is located in
Reno, Nevada, where we built a facility of over 1.0 million square feet to house
our manufacturing, cabinet production, engineering, and administrative
personnel. We recently added 44,000 square feet in a mezzanine area to
accommodate growth in our engineering workforce. This facility supports
production for all domestic markets as well as Australia, Europe and other
international areas. We also maintain leased warehousing facilities in Reno
totaling 143,000 square feet.
Domestic Sales and Service
Our largest sales and service office is located in Las Vegas, Nevada where we
lease approximately 450,000 square feet in warehousing, sales and administration
facilities. Additionally we lease approximately 258,000 square feet of
warehousing and sales and service properties throughout the US and Canada to
support each significant gaming market. Our Sodak subsidiary, which supports our
Native American gaming markets, owns a 94,000 square foot building in Rapid
City, South Dakota.
Lottery Operations
We conduct our lottery operations through properties in New Jersey, Pennsylvania
and Montana. OES operates in 74,000 square feet of leased property in Clifton,
New Jersey. United Tote owns 12,000 square feet in Glen Rock, Pennsylvania and
VLC owns an 80,000 square foot manufacturing, design and administrative property
in Bozeman, Montana. Other leased facilities servicing the individual lottery or
pari-mutuel markets total 236,000 square feet.
International
Our most significant international properties include facilities in the UK and
Australia. Barcrest owns 122,000 square feet and leases 82,000 square feet to
support manufacturing and administrative functions in the UK. We lease 117,000
square feet in New South Wales, Australia for subassembly, sales and
administration. All other leased properties used in international operations
total 165,000 square feet.
Sublease Properties
As market needs fluctuate, we occasionally sublet properties no longer used in
operations. Currently we are subleasing 111,000 square feet.
Discontinued Operations
Our casino properties in Colorado include 161,000 square feet of casino space
and 149,000 square feet of parking lot space in Black Hawk and 16,000 square
feet in Cripple Creek.
Item 3. Legal Proceedings
IGT has been named in and has brought lawsuits in the normal course of business.
Management does not expect the outcome of these suits to have a material adverse
effect on our financial position or results of future operations. For a
description of certain of these matters, see Note 14 of our Consolidated
Financial Statements, which is incorporated by reference in response to this
item.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
Our common stock is listed on the New York Stock Exchange (NYSE) under the
symbol "IGT." The following table sets forth for the periods presented the high
and low sales prices of the common stock as traded on the NYSE:
Fiscal 2002 High Low
-----------------------------------------------
First Quarter $ 71.03 $ 41.10
Second Quarter 70.09 60.80
Third Quarter 64.42 53.75
Fourth Quarter 70.09 49.55
Fiscal 2001 High Low
-----------------------------------------------
First Quarter $48.50 $32.81
Second Quarter 56.75 43.87
Third Quarter 65.31 47.35
Fourth Quarter 64.11 38.90
As of November 23, 2002, there were approximately 2,881 record holders of IGT's
common stock. The closing price of the common stock was $79.20 on that date.
We declared no dividends in fiscal 2002, 2001 or 2000.
IGT's transfer agent and registrar is The Bank of New York, 63 Madison Avenue,
8th Floor, New York, NY 10016, (212) 503-4279.
For the equity compensation plan information table, see Note 17 of our
Consolidated Financial Statements.
Item 6. Selected Financial Data
The following information has been derived from our consolidated financial
statements. On December 30, 2001, we completed our acquisition of Anchor. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 2 of our Consolidated Financial Statements for additional
information.
Sept. 28, Sept. 29, Sept. 30, Oct. 2, Sept. 30,
2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
Selected Income Statement Data
Total revenues $1,847,568 $1,199,209 $ 898,404 $ 854,106 $ 758,942
Earnings of unconsolidated affiliates $ 32,470 $ 142,630 $ 105,991 $ 75,556 $ 65,181
Income from operations $ 532,432 $ 395,279 $ 267,528 $ 116,318 $ 218,877
Income from continuing operations,
net of tax $ 276,718 $ 213,935 $ 156,792 $ 65,312 $ 152,446
Income from discontinued operations,
net of tax $ 7,639 $ - $ - $ - $ -
Extraordinary item, net of tax $ (13,192) $ - $ - $ (3,254) $ -
Net income $ 271,165 $ 213,935 $ 156,792 $ 62,058 $ 152,446
Basic earnings per share
Continuing operations $ 3.28 $ 2.90 $ 2.05 $ 0.65 $ 1.35
Discontinued operations $ .09 $ - $ - $ - $ -
Extraordinary item $ (.16) $ - $ - $ (.03) $ -
Net income $ 3.21 $ 2.90 $ 2.05 $ 0.62 $ 1.35
Diluted earnings per share
Continuing operations $ 3.21 $ 2.80 $ 2.00 $ 0.65 $ 1.33
Discontinued operations $ .09 $ - $ - $ - $ -
Extraordinary item $ (.15) $ - $ - $ (.03) $ -
Net income $ 3.15 $ 2.80 $ 2.00 $ 0.62 $ 1.33
Cash dividends declared per common
share $ - $ - $ - $ 0.03 $ 0.12
Weighted average common shares
outstanding 84,593 73,851 76,586 99,461 113,064
Weighted average common and potential
shares outstanding 86,049 76,525 78,229 100,238 114,703
Selected Balance Sheet Data
Working capital $ 683,963 $ 596,775 $ 555,233 $ 739,753 $ 470,003
Total assets $3,315,818 $1,923,439 $1,623,716 $1,765,060 $1,543,628
Long-term notes payable and capital
lease obligations $ 971,375 $ 984,742 $ 991,507 $ 990,436 $ 322,510
Stockholders' equity $1,433,144 $ 296,113 $ 96,585 $ 242,218 $ 541,276
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States (US). Accordingly,
we are required to make estimates, judgments and assumptions that we believe are
reasonable based on our historical experience, contract terms, observance of
known trends in our company and the industry as a whole, and information
available from other outside sources. Our estimates affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On a regular basis, we evaluate our
estimates, including those related to customer programs and incentives, product
returns, bad debts, inventory obsolescence, investments, intangible assets,
income taxes, warranty obligations, long-term contracts, contingencies and
litigation. Actual results may differ from initial estimates.
We have identified the following policies as critical to our business operations
and the understanding of our results of operations: use of estimates, revenue
recognition, jackpot liabilities and expenses, receivables and allowance for
doubtful accounts, inventories and obsolescence, and long-lived assets. For a
discussion on the application of these and other significant accounting
policies, see Note 1 of our Consolidated Financial Statements.
Anchor Acquisition
On December 30, 2001, we completed our acquisition of Anchor Gaming (Anchor)
whereby Anchor became a wholly-owned subsidiary of IGT. The acquisition resulted
in the addition of two new lines of business, lottery and pari-mutuel systems
and casino operations. The lottery and pari-mutuel operations provide equipment
and related services to online lotteries and pari-mutuel organizations. In June
2002, we committed to a plan to sell the casino operations acquired with Anchor.
Casino operations included the Colorado Central Station Casino, the Colorado
Grande Casino and the Nevada gaming machine route operations. We determined that
these assets were not a strategic fit with our core business. As a result, our
casino operations are classified as discontinued operations for all periods
presented.
The allocation of the Anchor acquisition purchase price continues to be subject
to refinement as we continue to finalize the integration of Anchor's businesses
and the fair value and estimated useful lives of the intangible assets acquired.
IGT and Anchor have worked together since 1996 as JV partners. The most notable
change to our financial results following the acquisition was the consolidation
of our joint venture with Anchor, The Spin For Cash Joint Venture (JV), which
was previously accounted for under the equity method, whereby revenues were
reflected, net of expenses, in earnings of unconsolidated affiliates on our
statements of income.
Results of Operations
We operate principally in three lines of business: Product sales encompasses the
development, manufacturing, marketing, distribution and sales of computerized
gaming products and systems; Proprietary gaming includes the development,
marketing and operations of wide area progressive (WAP) systems, stand alone
games, and gaming equipment leasing; and Lottery systems consists of the
development, manufacturing, operation and sale of online lottery and pari-mutuel
systems and related equipment.
Fiscal 2002 Compared to Fiscal 2001
Net income for fiscal 2002 increased to $271.2 million or $3.15 per diluted
share compared to $213.9 million or $2.80 per diluted share for fiscal 2001.
Adjusted net income for fiscal 2002 increased to $289.3 million or $3.36 per
diluted share compared to $216.2 million or $2.83 per diluted share in fiscal
2001. The acquisition of Anchor and the consolidation of the JV contributed
significantly to this improvement. In June 2002, we committed to a plan to sell
our casino operations acquired with Anchor and as a result the casino operations
have been classified as discontinued operations. We recognized an extraordinary
loss on early redemption of debt primarily related to our cash tender offer to
repurchase Anchor's outstanding Senior Subordinated Notes. One-time items also
included litigation accruals primarily related to a dispute with a former gaming
machine distributor. At the beginning of fiscal 2002 we ceased amortization of
goodwill related to the adoption of Statement of Financial Accounting Standards
(SFAS 142). For comparability, fiscal 2001 adjusted net income included the
elimination of goodwill amortization.
Fiscal Years Ended
--------------------------------------
September September
Reconciliation of Net Income to Adjusted Net Income 2002 2001
- --------------------------------------------------------------------------------------------------
(Amounts in millions, except per share amounts)
Per Share Per Share
--------- ---------
Net Income $271.2 $ 3.15 $213.9 $2.80
One-time items, net of tax:
Income from discontinued operations (7.6) (0.09) - -
Extraordinary loss on early redemption of debt 13.2 0.15 - -
Litigation accruals 12.5 0.15 - -
Goodwill amortization (ceased in 2002) - - 2.3 0.03
------ ------ ------ -----
Adjusted Net Income $289.3 $ 3.36 $216.2 $2.83
====== ====== ====== =====
Operating Income
Operating income for fiscal 2002 grew 35% to $532.4 million from $395.3 million
in fiscal 2001. Post acquisition contributions from Anchor and the consolidation
of the JV drove this increase. Additionally, product sales gross margins
strengthened and we experienced enhanced yield per proprietary game compared to
the prior year.
Prior to the Anchor acquisition on December 30, 2001, our revenue from the JV
was presented, net of expenses, in earnings of unconsolidated affiliates. Given
that current revenues include the JV, but our prior year revenues do not,
operating income as a percentage of revenue is not comparable to prior years
except on a pro forma basis. If the Anchor acquisition and the consolidation of
the JV had been effective at the beginning of fiscal 2001, pro forma revenue
would have totaled $2.0 billion in fiscal 2002 compared to $1.9 billion in
fiscal 2001. Pro forma operating income before Anchor one-time impairment and
restructuring charges would have totaled $555.6 million in fiscal 2002 compared
to $483.2 million in fiscal 2001. Pro forma operating income before one-time
impairment and restructuring charges as a percentage of revenue improved to 27%
in fiscal 2002 versus 25% in fiscal 2001.
Revenues and Gross Profit
Total revenues and earnings of unconsolidated affiliates for fiscal 2002 climbed
40% to $1.9 billion compared to $1.3 billion in the prior fiscal year. Anchor's
operations and the consolidated results of the JV activities for the nine months
since acquisition contributed $608.3 million in total revenues and $315.8
million in total gross profit in the current fiscal year.
Product Sales
Revenue from product sales reached $846.1 million on shipments of 124,000 units
worldwide in fiscal 2002. Sales in the prior year totaled $824.3 million on
shipments of 120,000 units worldwide. Replacement needs drove demand for our
products across most domestic and international markets in the current fiscal
year. Total replacement sales increased to 97,400 units for fiscal 2002 compared
to 88,800 units in fiscal 2001. Gross profit margins on product sales improved
to 43% in the current year versus 40% in the prior year, primarily due to
ongoing operational efficiencies and lower component costs.
Fiscal 2002 domestic shipments of 63,500 units were slightly behind the prior
fiscal year of 64,600 machines. The decrease in domestic unit sales resulted
from fewer shipments to new or expanded properties in the Nevada and California
markets, offset by greater volume across all of our other North American
markets. Domestic replacement sales for the current fiscal year increased 8% to
40,700 units compared to 37,600 units in the prior fiscal year. IGT innovations
in slot technology, such as Multi-Denomination(TM) games, customer acceptance of
new games, as well as growing demand for ticket-in/ticket-out (TITO) technology
and our related EZ Pay(TM) systems, contributed significantly to the increase in
replacement sales. Several multi-property casino operators have committed to
replace existing slot machines with our EZ Pay(TM) systems and TITO equipped
machines throughout their major casino resorts.
The declines in domestic shipments were offset by increased international
product shipments. International units increased to 60,400 in fiscal 2002
compared to 55,300 in the prior year reflecting improvements across all
international markets except Latin America and South Africa.
Proprietary Gaming
Gaming operations revenues and earnings of unconsolidated affiliates increased
77% to $914.9 million in the current fiscal year compared to $517.6 million in
fiscal 2001. Gross profit from proprietary gaming operations climbed 48% to
$511.8 million compared to $346.5 million in the prior year. These improvements
resulted primarily from the inclusion of Anchor and the consolidation of the JV
subsequent to the acquisition, along with a favorable jurisdictional mix and
enhanced yield per game.
The total installed base of our proprietary games, including joint venture and
alliance units ended the current fiscal year at 28,600 units. During fiscal
2002, proprietary game placements declined in Nevada and Atlantic City by 1,600
units, offset by 2,000 additional placements in US regional and Native American
jurisdictions. During the current year our win-per-unit improved due to the
continued popularity and player preference for our proprietary games. The
newest, highest revenue producing themes in fiscal 2002 included
Harley-Davidson(R), Diamond Cinema(R), Regis' Cash Club, The Price is Right(TM)
and American Bandstand(R). During fiscal 2002 we were also able to improve our
yield per game by diversifying the geographical placement of games focusing on
higher win-per-unit jurisdictions.
We recognize that all games, including our proprietary games, have a finite
life- cycle. Due to the intense competition and accelerated pace of proprietary
games introduced into the market each year the lifecycle of these games can vary
significantly. As a result, we systematically replace games experiencing
declining play levels with new game introductions, as well as extensions of
existing brands, that incorporate enhanced entertainment value and improved
player appeal. Our strategy is to grow the installed base of proprietary games
while preserving the margins by cost effectively deploying games in
jurisdictions that provide the best yield per game.
Lottery and pari-mutuel systems
Revenue from lottery and pari-mutuel systems, acquired as part of the Anchor
acquisition, totaled $119.1 million for fiscal 2002, producing gross profits of
$39.2 million or 33% of related revenues. Current year revenues were favorably
impacted by increased Florida incentive and terminal fees, as well as the sale
of terminals in Maryland. Florida revenues increased due to increased play
resulting from a large 2002 Lotto jackpot, partially offset by reduced Powerball
revenues resulting from reduced play subsequent to a large jackpot in 2001.
Operating Expenses
Operating expenses for the current fiscal year totaled $382.1 million compared
to $282.3 million in fiscal 2001. The inclusion of Anchor's operations during
the fiscal year accounted for increases in all operating expense categories
except bad debt expense. Operating expenses included $7.9 million in fiscal 2002
and $5.2 million in fiscal 2001 to update our internal software systems with an
enterprise resource planning (ERP) solution. Expenses also increased due to
legal costs related to protection of our intellectual property along with our
ongoing investment in research and development (R&D). Bad debt expense for the
current fiscal year includes additional provisions recorded for Argentina
receivables due to the economic instability and currency devaluation in that
country. 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 $3.7 million for the current fiscal year. Intangible assets with
finite lives resulting from the Anchor acquisition increased amortization
expense by $21.7 million for the current fiscal year.
Other Income and Expense
Other expense, net, totaled $88.3 million for the current fiscal year compared
to $55.8 million in 2001. Higher net expenses for the current fiscal year
resulted from interest expense on the debt acquired with Anchor and one-time
litigation accruals of $20.2 million. Anchor's debt was substantially paid off
in July 2002.
Our worldwide tax rate increased to 37.7% in fiscal 2002 from 37% in fiscal 2001
related primarily to the Anchor acquisition. We expect our tax rate for fiscal
2003 to fluctuate between 37.5% and 38%.
Discontinued Operations
In June 2002, we committed to a plan to sell our casino operations acquired in
connection with the Anchor acquisition. This includes the two casinos in
Colorado (the Colorado Central Station and the Colorado Grande Casino) and the
Nevada slot route operation. In December 2002, we announced that we entered into
a definitive agreement pursuant to which Herbst Gaming will purchase
substantially all of the assets of the Nevada slot route operations of Anchor
Coin, a subsidiary of IGT. The sale is subject to Herbst Gaming obtaining the
required financing and regulatory and third party approvals, including gaming
regulatory approvals and expiration of the waiting period under
Hart-Scott-Rodino Act. The transaction is expected to be complete in our quarter
ending March 2003. As a result of the decision to reclassify our casino
operations to discontinued operations, we ceased depreciation and amortization
of the related assets. Our statements of income reflected the casino operations
as discontinued operations for all periods presented. Current year income from
discontinued operations, net of tax, totaled $7.6 million.
Business Segments Operating Profit (See Note 19 of our Consolidated Financial
Statements)
IGT's operating profit by segment reflects income from continuing operations
before tax, including an appropriate allocation of operating expenses, as well
as interest income, interest expense and other expenses, net. Our proprietary
gaming segment includes both our wholly-owned gaming operations and our
unconsolidated joint venture activities reported as earnings of unconsolidated
affiliates. Our current year operating results included nine months of Anchor's
financial results and the consolidation of the JV subsequent to acquisition.
Product sales operating profit for fiscal 2002 increased 10% to $179.8 million
or 21% of related revenues up from $163.2 million or 20% of related revenue in
fiscal 2001. This improvement related primarily to volume growth and increased
gross profit margins, partially offset by increased operating expenses.
Operating profits from proprietary gaming improved 39% to $363.3 million in
fiscal 2002 compared to $262.2 million in fiscal 2001. These improvements
resulted primarily from the consolidation of the JV activities and the inclusion
of Anchor's results for nine months subsequent to the acquisition, growth in our
installed base, and enhanced yield per game. As a percentage of revenue and
earnings of unconsolidated affiliates, proprietary gaming segment profit totaled
40% in the current year compared to 51% in fiscal 2001. This fluctuation is
primarily due to a greater portion of earnings of unconsolidated affiliates,
recorded net of expenses, included in the prior year.
Current year operating profit from our lottery systems segment totaled $5.5
million or 5% of related revenues. The lottery segment benefited from increased
revenues in Florida and Maryland.
Foreign Operations
Approximately 14% of our total revenues and earnings from unconsolidated
affiliates in fiscal 2002 were derived outside of North America, compared to 16%
in fiscal 2001, and 24% in fiscal 2000. To date, we have not experienced
material translation or transaction losses related to foreign exchange
fluctuations.
Fiscal 2001 Compared to Fiscal 2000
Net income for fiscal 2001 increased to $213.9 million or $2.80 per diluted
share compared to $156.8 million or $2.00 per diluted share in fiscal 2000.
Adjusted net income for fiscal 2000 totaled $138.4 million or $1.77 per diluted
share. One-time items in fiscal 2000 included a legal settlement gain from the
resolution of legal actions between IGT and WMS related to patent infringement
claims. We also recognized a loss on the sale of the Olympic gaming system in
Australia and a gain on the sale of Barcrest's Japanese subsidiary.
Fiscal Years Ended
------------------------------------
September September
Reconciliation of Net Income to Adjusted Net Income 2001 2000
- --------------------------------------------------------------------------------------------
(Amounts in millions, except per share amounts)
Per Share Per Share
--------- ---------
Net Income $213.9 $2.80 $156.8 $ 2.00
One-time items, net of tax:
Legal settlement gain - - (17.3) (0.22)
Loss on sale of Olympic gaming system - - 0.9 0.01
Gain on sale of Barcrest's Japanese subsidiary - - (2.0) (0.02)
------ ----- ------ ------
Adjusted Net Income $213.9 $2.80 $138.4 $ 1.77
====== ===== ====== ======
Operating Income
Operating income for fiscal 2001 totaled $395.3 million, a 48% increase over
fiscal 2000 operating income of $267.5 million. Operating margins were 33% and
30% for fiscal 2001 and 2000. This substantial growth was driven by improved
margins in both the product sales and proprietary gaming segments.
Revenues and Gross Profit
Total revenues and earnings of unconsolidated affiliates for fiscal 2001 grew to
$1.3 billion compared to $1.0 billion for fiscal 2000. Product sales and gaming
operations posted substantial gains, increasing 37% and 27% over fiscal 2000.
Both areas also contributed to the overall gross profit of $677.6 million for
fiscal year 2001 versus $503.8 million in fiscal 2000.
Product Sales
Product sales reached $824.3 million on shipments of 120,000 units worldwide for
fiscal 2001. Comparatively, fiscal 2000 sales totaled $603.4 million on
shipments of 107,000 units. A 44% increase in domestic shipments drove this
improvement, with 64,500 units in fiscal 2001 compared to 44,700 in fiscal 2000.
In fiscal 2001 replacement sales of 38,000 machines domestically represented a
100% increase over fiscal 2000. Replacement sales were especially strong in the
Nevada, Midwestern and Native American markets. IGT innovations in slot
technology such as Multi-Denomination(TM) games and EZ Pay(TM) games and systems
along with strong player acceptance of new games helped stimulate these
replacement sales. Fiscal 2001 sales of 11,900 machines into the new California
Native American market contributed significantly to the increase. IGT also
provided gaming machines to several new casinos during fiscal 2001 including the
Texas Casino, Palms Casino and Green Valley Ranch in Las Vegas, and the San
Manuel in California.
International shipments declined 11% to 55,300 units in fiscal 2001 versus
62,300 units during fiscal 2000. Japanese shipments slowed to 7,400 in fiscal
2001 compared to 14,600 in fiscal 2000 due to difficulties experienced in
bringing popular new games to the market. Australia realized improvements from
the standardization of its product line resulting in unit sales of 9,800, a 47%
increase over fiscal 2000. Slight declines were experienced by the United
Kingdom (UK), Europe and Africa, with offsetting improvements in Latin America.
Product sales margins rose to 40% during fiscal 2001 compared to 38% in fiscal
2000 as a result of volume efficiencies and a higher percentage of domestic
sales.
Proprietary Gaming
Gaming operations revenues and earnings of unconsolidated affiliates totaled
$517.6 million during fiscal 2001 compared to $401.0 million in fiscal 2000. The
combination of the ongoing popularity of our established proprietary games, such
as Wheel of Fortune(R), and the successful introduction of new games drove
positive financial results. The newest games in our proprietary games family,
Jeopardy!(R) Video Slots, The Addams Family (TM), Austin Powers(TM), The Price
is Right(TM) and the $1,000,000 Pyramid(TM) along with the joint venture game I
Dream of Jeannie(TM), contributed significantly to the overall improvement. The
total installed base of our proprietary games, including joint venture and
strategic alliance games, increased to 26,200 units, a growth rate of 36% over
the installed base of 19,200 games in fiscal 2000. In recognition that all games
have a finite lifecycle, IGT systematically replaces legacy proprietary games
experiencing declining play levels with new games incorporating enhanced
entertainment value and improved player appeal.
Gross margin contributions from proprietary gaming totaled $346.5 million in
2001, 25% higher than the $276.2 million recorded in fiscal 2000. The resulting
gross profit percentage declined two percentage points in fiscal 2001 to 67%.
Significant interest rate cuts during fiscal 2001 adversely impacted our cost of
funding jackpot payments. The fiscal 2001 installed base also had a larger
percentage of "theme" games, which carry additional royalty costs.
Operating Expenses
Operating expenses totaled $282.3 million in fiscal 2001 versus $236.3 million
for fiscal 2000. Selling, general, and administrative expenses increased $30.4
million as a result of higher variable commission and incentive costs, along
with additional legal and compliance costs in support of stronger sales volumes.
Depreciation and amortization expense, not included in cost of sales, declined
slightly to $20.3 million. R&D expenses for fiscal 2001 were $62.5 million as
compared to $55.2 million in fiscal 2000. Additional personnel and related costs
to support our commitment to innovative game development resulted in this
increase. Bad debt expense increased $8.9 million related to increased sales
volume and specific reserves related to international receivables.
Other Income and Expense
Other expense, net, totaled $55.8 million for fiscal 2001 compared to $22.5
million for fiscal 2000. The primary difference in the two periods relates to
the legal settlement received in fiscal 2000. Additionally, gains on investments
declined $4.1 million based on corporate cash investment timing and market
conditions.
Our worldwide tax rate increased to 37% in fiscal 2001 from 36% in fiscal 2000.
Business Segments Operating Profit (See Note 19 of our 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.
Product sales operating profit grew to $163.2 million or 20% of related revenues
for fiscal 2001 compared to $91.4 million or 15% for fiscal 2000. This
significant improvement reflects the growth in domestic sales partially offset
by increased R&D costs.
In fiscal 2001, operating profit for the proprietary gaming segment reached
$262.2 million, an increase of $60.0 million or 30% over fiscal 2000. This
improvement resulted from the growth of the installed base of our proprietary
machines and the popularity of both the established games such as Wheel of
Fortune(R) and our newer proprietary games themes. This improvement was slightly
offset by the increased cost of funding jackpot payments and higher royalty
costs.
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 2003 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 the Anchor acquisition, 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 expenditures 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 fiscal 2002 totaled $504.5 million, an increase
of $306.4 million from fiscal 2001. The most significant fluctuation was due to
the inclusion of Anchor's operating results and the consolidation of the JV for
the nine months subsequent to acquisition. Additional improvements to cash flow
generated from operations were derived predominantly from improvements in
inventories and receivables, as well as timing of payments for prepaid expenses,
distributions from unconsolidated affiliates, and accrued and deferred taxes.
Fiscal 2001 cash provided by operations totaled $198.2 million, an increase of
$69.3 million from fiscal 2000, primarily as the result of favorable operating
performance.
Cash Flow From Investing Activities
Net cash flow from investing activities provided $111.9 million in the current
fiscal year compared to $70.7 million used in fiscal 2001. This increase is
primarily related to the Anchor acquisition and consolidation of the JV. Other
significant increases in the current year cash flows from investing activities
related to proceeds from the sale of Anchor's Pala management contract and a
decrease in cash advanced on loans receivable. In 2001, investing activities
used an additional $89.1 million in cash compared to fiscal 2000. This increase
was the result of business acquisitions during 2001 and a decrease in proceeds
from disposals of investments and other assets. Fiscal 2000 included $43.2
million in proceeds from sale of the Miss Marquette riverboat, a held-for-sale
asset acquired in the purchase of Sodak Gaming in fiscal 1999.
Total capital expenditures for property, plant and equipment and the percentage
distribution by geographic operating segment for fiscal 2002, 2001, and 2000 are
as follows:
Fiscal Years
--------------------------------
2002 2001 2000
------------------------------------------------------------------
(Amounts in millions)
Capital Expenditures $ 33.8 $ 34.7 $ 18.5
Domestic 93% 88% 77%
International 7% 12% 23%
The increase in fiscal 2001 over fiscal 2000 spending is primarily due to
investments to improve the productivity of operations. We invested $6.0 million
in fiscal 2002, $8.6 million in fiscal 2001, and $4.5 million in fiscal 2000 to
update our internal software systems with an ERP solution.
Cash Flow From Financing Activities
Net cash used for financing activities in fiscal 2002 was $558.4 million
compared to $9.1 million used in fiscal 2001. The increase in fiscal 2002 is
primarily due to the use of $249.3 million for purchases of treasury stock and
$373.0 million for principal payments on long-term debt, primarily related to
the early redemption of Anchor's debt. The change between 2001 and 2000 was
primarily due to decreased purchases of treasury stock in fiscal 2001.
Other Cash Flow Information
Inventory Transfers to Gaming Operations Equipment
The $59.6 million of net cash used for inventory in fiscal 2002 is comprised of
the $11.7 million net decrease in our inventory balances, $20.1 million of
inventory added through acquisition and $2.0 million in currency translation
adjustment, and offset by $16.8 million of obsolescence and $76.6 million of
non-cash transfers to gaming operations equipment. Property, plant, and
equipment increased during fiscal year 2002 as the result of capital
expenditures and non-cash transfers of machines from inventory to gaming
operations equipment, as well as assets acquired from the Anchor acquisition.
Net Cash Flow from Proprietary Progressive Jackpot Systems
WAP games differ from stand alone and hybrid games in that they are
electronically linked, inter-casino systems that connect gaming machines to a
central computer, allowing the system to build a progressive jackpot with every
wager until a player hits the top award winning combination. Only WAP systems
have related jackpot liabilities and investments to fund future jackpot
payments.
Our proprietary WAP 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 $31.5 million in fiscal 2002, $18.2
million in 2001 and used cash of $23.2 million in fiscal 2000.
Stock Repurchase Plan
Our Board of Directors authorized IGT's stock repurchase plan in 1990. As of
November 23, 2002, the remaining share repurchase authorization, as amended,
totaled 4.7 million shares. During fiscal 2002, we repurchased 3.6 million
shares for an aggregate price of $214.0 million. During fiscal 2001, we
repurchased 2.5 million shares for an aggregate price of $100.7 million. During
fiscal 2000, we repurchased 15.7 million shares for an aggregate price of $318.5
million, including 11.0 million shares repurchased pursuant to an issuer-tender
offer at $21 per share.
Credit Facilities and Indebtedness
Our domestic and foreign borrowing facilities totaled $275.3 million at
September 28, 2002. Of this amount, $2.9 million was drawn with an average
interest rate of 2.38%, $8.2 million was reserved for letters of credit and the
remaining $264.2 million was available for future borrowings. We are required to
comply with certain covenants contained in these agreements, which, among other
things, limit our ability to incur indebtedness, grant liens, make investments,
acquisitions, dispositions, or to pay dividends or make certain other restricted
payments without the written consent of the lenders and require the maintenance
of certain financial ratios. At September 28, 2002, we were in compliance with
all applicable covenants.
IGT assumed approximately $337.0 million, net of discount, of Anchor's long-term
debt upon the completion of the acquisition. Immediately following the
acquisition, we fully repaid and terminated Anchor's senior credit facility of
$89.5 million using available cash. During the current fiscal year we
repurchased $249.9 million face value of Anchor's outstanding 9.875% fixed rate
Senior Subordinated Notes due 2008, primarily in a cash tender offer in July
2002, using available cash. This transaction extinguished substantially all of
the debt outstanding that was assumed in the Anchor acquisition. We recognized
an extraordinary loss of approximately $12.5 million, net of tax, or $0.14 per
diluted share related to the early extinguishment of this debt.
In fiscal 1999, we issued $1.0 billion of Senior Notes in two tranches, $400
million at 7.875% due May 15, 2004 and $600 million at 8.375% due May 15, 2009,
in a private placement subsequently exchanged for registered notes. During the
current fiscal year, we repurchased $17.2 million of these Senior Notes using
available cash recognizing an extraordinary loss of approximately $700,000, net
of tax, or $0.01 per diluted share. The issuance of these Senior Notes could
have important consequences, including (1) increasing our vulnerability to
general adverse economic and industry conditions; (2) limiting our ability to
obtain additional financing to fund future working capital, capital
expenditures, acquisitions and other general corporate requirements; (3)
requiring a substantial portion of our cash flow from operations for the payment
of interest on our indebtedness and reducing our ability to use our cash flow to
fund working capital, capital expenditures, acquisitions and general corporate
requirements; (4) limiting our flexibility in planning for, or reacting to,
changes in our business and the industry; and (5) disadvantaging us compared to
competitors with less indebtedness. The indenture contains a number of
covenants, including restrictions on our ability to incur indebtedness, grant
liens on our assets, or enter into sale/leaseback transactions. At September 28,
2002, we were in compliance with all applicable covenants.
Our ability to meet our debt service obligations on the remaining Senior Notes
outstanding and our other indebtedness will depend on our future performance. In
addition, our bank revolving line of credit requires us to maintain specified
financial ratio tests. Our ability to maintain such ratio tests will also depend
on our future performance which is subject to general economic conditions and to
financial, business, regulatory and other factors affecting our operations, many
of which are beyond our control. If we were unable to maintain the financial
ratio tests under the bank revolving line of credit, the lenders could terminate
their commitments and declare all amounts borrowed, together with accrued
interest and fees, to be immediately due and payable. If this happened, other
indebtedness that contains cross-default or cross-acceleration provisions,
including the Senior Notes, may also be accelerated and become due and payable.
If any of these events should occur, we may not be able to pay such amounts. At
September 28, 2002, we had $971.4 million outstanding in long-term debt, net of
unamortized discount, compared to $984.7 million at September 29, 2001.
Liquidated Damages Under Online 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 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 significant additional
expense. Our lottery contracts generally require us to post a performance bond,
which may be substantial, securing our performance under such contracts. At
September 28, 2002, we had $2.7 million accrued for liquidated damages.
Financial Condition
September September
2002 2001
---------------------------------------------------------------------
(Amounts in millions)
Total assets $3,316 $1,923
Total liabilities and minority interest 1,883 1,627
Total stockholders' equity 1,433 296
Total assets increased $1.4 billion during fiscal year 2002 primarily due to the
acquisition of Anchor, and the associated consolidation of the JV. This
acquisition significantly impacted the increase in property, plant and
equipment, intangible assets, goodwill and investments to fund jackpot
liabilities. See Note 2 of our Consolidated Financial Statements. Inventories
decreased over the prior year reflecting better management of inventory
quantities.
Total liabilities and minority interest at September 28, 2002 increased $255.3
million, related to the Anchor acquisition and consolidation of the JV, offset
by subsequent debt repayments. The consolidation of the JV was the most
significant component of the increase in our jackpot liabilities and accrued
income taxes. Additionally, other accrued liabilities were also affected by
additional litigation accruals. The reduction in accounts payable was due
primarily to the timing of payments on stock repurchases initiated in fiscal
2001 and settled in fiscal 2002.
Total stockholders' equity increased $1.1 billion, predominantly due to the fair
value of shares issued for the acquisition of Anchor. Net income generated
during the current year also increased stockholders' equity, offset by treasury
stock repurchases. Additional paid-in capital also increased as the result of
employee stock plans.
Off-Balance Sheet Activities
In the normal course of business, we are a party to financial instruments with
off-balance sheet risk such as performance bonds and other guarantees, which are
not reflected in our balance sheet. We do not expect any material losses to
result from these off-balance sheet instruments and we are not dependent on
off-balance sheet financing arrangements to fund our operations.
We had performance bonds outstanding, related to our operation of several
lottery systems and a gaming machine route, totaling $77.1 million at September
28, 2002 and $2.1 million at September 29, 2001. The amount outstanding at
September 28, 2002 included $75.0 million related to lottery systems acquired
with Anchor. We are liable to reimburse the bond issuer in the event the bond is
exercised as a result of our nonperformance. See Note 12 of our Consolidated
Financial Statements for additional information regarding off-balance sheet
information.
Our linked progressive systems in Iowa and New Jersey are administered by trusts
consisting of participating casino members. We have agreed to loan to these
trusts, upon request, and subject to certain limitations, amounts necessary to
meet substantially all obligations of the trusts. Trust assets and liabilities
are primarily related to jackpot liabilities and the cash and investments used
to fund those jackpot liabilities. At September 28, 2002, trust assets were
greater than liabilities to third parties and we had no trust loans outstanding.
Impact of Inflation
In the last three years, the general level of inflation affecting us has not had
a significant effect on our operations. Inflation affects the way we operate in
many markets worldwide. In general, we are able to increase prices to counteract
the majority of inflationary effects of increasing costs and to generate
sufficient cash flows to maintain our productive capability. Our ability to pass
on future cost increases in the form of higher sales prices will continue to be
dependent on the prevailing competitive environment and the acceptance of our
products in the marketplace.
Recently Issued Accounting Standards
IGT keeps abreast of new accounting standards issued by the Financial Accounting
Standards Board (FASB), Securities and Exchange Commission (SEC) and other
standard setting agencies. Recently issued accounting standards affecting our
financial results are described in Note 1 of our Consolidated Financial
Statements.
Reclassifications
Certain amounts in the prior years' comparative consolidated financial
statements have been reclassified to be consistent with the presentation used in
the current fiscal year.
Euro Currency Conversions
On January 1, 1999, 11 of 15 member countries of the European Union fixed
conversion rates between their existing currencies and one common currency, the
euro. Conversion to the euro eliminated currency exchange rate risk between the
member countries. The euro trades on currency exchanges and may be used in
business transactions. Beginning in January 2002, new euro denominated bills and
coins 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 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.
Item 7a. Quantitative and Qualitative Disclosures 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 Management
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. 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. The primary business
objective of our hedging program is to minimize the impact to our earnings
resulting from exchange rate changes.
At September 28, 2002, we had net foreign currency exposure of $28.9 million
related to our monetary assets and liabilities denominated in non-functional
foreign currency and $54.9 million for a firm sales commitment denominated in
Canadian dollars. These exposures were hedged with $86.5 million in forward
currency contracts. At September 29, 2001, we had net foreign currency exposure
of $44.6 million related to our monetary assets and liabilities denominated in
non-functional foreign currency, hedged with $40.5 million in forward contracts.
Given our foreign exchange position, a 10% percent adverse change in foreign
exchange rates upon which these foreign exchange contracts are based would
result in exchange gains and losses. In all material aspects, these exchange
gains and losses would be fully offset by exchange gains and losses on the
underlying net monetary exposures for which the contracts are designated as
hedges. We do not expect material exchange rate gains and losses from unhedged
foreign currency exposures.
As currency exchange rates change, translation of the income statements of our
international businesses into US dollars affects year-over-year comparability of
operating results. IGT does not generally hedge translation risks because cash
flows from international operations are generally reinvested locally.
Changes in the currency exchange rates that would have the largest impact on
translating our international operating results include the Australian dollar,
the British pound, the Japanese yen and the Euro. We estimate that a 10% change
in foreign exchange rates would impact reported operating results by
approximately $3.0 million in the current fiscal year compared to $1.5 million
in the prior year. This sensitivity analysis disregards the possibility that
rates can move in opposite directions and that gains from one area may or may
not be offset by losses from another area.
Interest Rate Risk
Fluctuations in prime, treasury and agency rates due to changes in market and
other economic conditions directly impact our cost to fund jackpots, and
therefore the gross profit in our proprietary gaming operations. If interest
rates decline, our cost to fund jackpots increases, and correspondingly our
gross profit declines. Since fiscal 2000, we have experienced declining interest
rates which have lowered our proprietary gaming gross profits. We estimated that
a 10% decline in interest rates would have reduced our proprietary gaming gross
profit by $11.3 million in fiscal 2002 and $8.5 million in 2001. IGT currently
does not manage this exposure with derivative financial instruments.
Our outstanding Senior Notes carry interest at fixed rates. If interest rates
increased by 10%, the fair market value of these notes would have decreased
approximately $24.2 million at September 28, 2002 and $33.2 million at September
29, 2001.
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Financial Statements Page
Independent Auditors' Report 38
Consolidated Statements of Income
for the years ended September 28, 2002, September 29, 2001,
and September 30, 2000 39
Consolidated Balance Sheets
at September 28, 2002 and September 29, 2001 41
Consolidated Statements of Cash Flows
for the years ended September 28, 2002, September 29, 2001
and September 30, 2000 43
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 28, 2002, September 29, 2001
and September 30, 2000 46
Notes to Consolidated Financial Statements 47
Independent Auditors' Report
To the Stockholders and Board of Directors of International Game Technology:
We have audited the accompanying consolidated balance sheets of International
Game Technology and Subsidiaries (the "Company") as of September 28, 2002 and
September 29, 2001, and the related consolidated statements of income, cash
flows and changes in stockholders' equity for each of the three years in the
period ended September 28, 2002. Our audits also included the consolidated
financial statement schedule listed in the Index at Item 15(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 28,
2002 and September 29, 2001, and the results of its operations and its cash
flows for each of the three years in the period ended September 28, 2002, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Reno, Nevada
November 5, 2002
Consolidated Statements of Income
Years ended
------------------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
(Amounts in thousands except per share amounts)
Revenues
Product sales $ 846,080 $ 824,267 $ 603,381
Gaming operations 882,432 374,942 295,023
Lottery and pari-mutuel systems 119,056 - -
---------- ---------- ----------
Total revenues 1,847,568 1,199,209 898,404
---------- ---------- ----------
Costs and expenses
Cost of product sales 482,490 493,201 375,750
Cost of gaming operations 403,129 171,087 124,806
Cost of lottery and pari-mutuel systems 79,901 - -
Selling, general and administrative 236,405 180,421 150,057
Depreciation and amortization 46,953 20,252 20,897
Research and development 80,265 62,526 55,204
Provision for bad debts 18,463 19,073 10,153
---------- ---------- ----------
Total costs and expenses 1,347,606 946,560 736,867
---------- ---------- ----------
Earnings of unconsolidated affiliates 32,470 142,630 105,991
---------- ---------- ----------
Income from operations 532,432 395,279 267,528
---------- ---------- ----------
Other income (expense)
Interest income 50,665 49,819 50,977
Interest expense (116,879) (102,039) (102,170)
Gain (loss) on investments (15) 438 4,553
Loss on the sale of assets (326) (26) (917)
Minority interest (695) - -
Other (21,011) (3,999) 25,016
---------- ---------- ---------
Other expense, net (88,261) (55,807) (22,541)
---------- ---------- ----------
Income from continuing operations
before tax 444,171 339,472 244,987
Provision for income taxes (167,453) (125,537) (88,195)
---------- ---------- ----------
Income from continuing operations 276,718 213,935 156,792
Income from discontinued operations,
net of tax 7,639 - -
---------- ---------- ----------
Income before extraordinary item 284,357 213,935 156,792
Extraordinary loss on early redemption of
debt, net of income tax benefit of $7,984 (13,192) - -
---------- ---------- ----------
Net income $ 271,165 $ 213,935 $ 156,792
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statements of Income
Years ended
----------------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(Amounts in thousands except per share amounts)
Basic earnings per share
Continuing operations $ 3.28 $ 2.90 $ 2.05
Discontinued operations 0.09 - -
Extraordinary item (0.16) - -
---------- ---------- ----------
Net income $ 3.21 $ 2.90 $ 2.05
========== ========== ==========
Diluted earnings per share
Continuing operations $ 3.21 $ 2.80 $ 2.00
Discontinued operations 0.09 - -
Extraordinary item (0.15) - -
---------- ---------- ----------
Net income $ 3.15 $ 2.80 $ 2.00
========== ========== ==========
Weighted average common shares outstanding 84,593 73,851 76,586
Weighted average common and potential
shares outstanding 86,049 76,525 78,229
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Balance Sheets
September 28, September 29,
2002 2001
- -------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except shares and par value)
Assets
Current assets
Cash and cash equivalents $ 423,694 $ 364,234
Investment securities, at market value 13,493 13,085
Accounts receivable, net of allowances for doubtful
accounts of $18,578 and $15,944 314,620 249,410
Current maturities of long-term notes and contracts
receivable, net of allowances 61,357 62,977
Inventories, net of allowances for obsolescence
of $24,677 and $28,887
Raw materials 66,536 71,835
Work-in-process 5,412 3,093
Finished goods 72,212 80,962
---------- ----------
Total inventories 144,160 155,890
---------- ----------
Investments to fund liabilities to jackpot winners 39,932 29,286
Deferred income taxes 3,511 30,053
Prepaid expenses and other 47,111 62,739
Assets held for sale 147,144 -
---------- ----------
Total current assets 1,195,022 967,674
---------- ----------
Long-term notes and contracts receivable,
net of allowances and current maturities 138,279 90,606
---------- ----------
Property, plant and equipment, at cost
Land 21,750 19,597
Buildings 85,975 78,677
Gaming operations equipment 294,096 122,613
Manufacturing machinery and equipment 169,143 139,084
Leasehold improvements 9,364 5,164
---------- ----------
Total 580,328 365,135
Less accumulated depreciation and amortization (284,193) (159,788)
---------- ----------
Property, plant and equipment, net 296,135 205,347
---------- ----------
Investments to fund liabilities to jackpot winners 329,802 233,669
Deferred income taxes 82,916 133,728
Intangible assets, net 276,485 40,076
Goodwill, net 967,424 139,558
Investments in unconsolidated affiliates 66 74,659
Other assets 29,689 38,122
---------- ----------
$3,315,818 $1,923,439
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Balance Sheets
September 28, 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 $ 8,519 $ 5,023
Accounts payable 77,669 125,164
Jackpot liabilities 167,097 85,109
Accrued employee benefit plan liabilities 47,156 41,452
Accrued interest 29,998 30,884
Accrued income taxes 45,762 7,246
Other accrued liabilities 123,672 76,021
Liabilities of discontinued operations 11,186 -
---------- -----------
Total current liabilities 511,059 370,899
Long-term notes payable and capital lease obligations,
net of current maturities 971,375 984,742
Long-term jackpot liabilities 380,567 258,457
Other liabilities 11,010 13,228
---------- -----------
1,874,011 1,627,326
---------- -----------
Minority Interest 8,663 -
---------- -----------
Commitments and contingencies - -
Stockholders' Equity
Common stock: $.000625 par value; 320,000,000
shares authorized; 174,166,938 and 156,633,430
shares issued 109 98
Additional paid-in capital 1,451,385 365,233
Deferred compensation (10,748) -
Retained earnings 1,528,284 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 (5,452) (9,893)
---------- ----------
1,433,144 296,113
---------- -----------
$3,315,818 $ 1,923,439
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statements of Cash Flows
Years ended
--------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Cash flows from operating activities
Net income $271,165 $213,935 $156,792
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 146,101 63,348 54,387
Discounts, premiums and deferred offering costs 1,197 2,939 2,457
Stock based compensation 3,348 1,269 1,216
Provision for bad debts 18,463 19,073 10,153
Provision for inventory obsolescence 16,853 21,088 16,001
Gain (loss) on sale of assets 341 (412) (3,636)
(Increase) decrease in operating assets:
Receivables 6,311 (22,430) (34,755)
Inventories (59,583) (94,687) (67,490)
Prepaid expenses and other 32,927 (19,139) (5,993)
Other assets (5,612) (19,553) (8,458)
Net accrued and deferred income taxes, net of
tax benefit of employee stock plans 44,763 19,931 (17,394)
Increase (decrease) in accounts payable and
accrued liabilities (3,812) 16,425 46,553
Earnings of unconsolidated affiliates
less than (in excess of) distributions 10,881 (3,637) (20,993)
Extraordinary loss on early redemption of debt 21,176 - -
-------- -------- --------
Total adjustments 233,354 (15,785) (27,952)
-------- -------- --------
Net cash provided by operating activities 504,519 198,150 128,840
-------- -------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statements of Cash Flows
Years ended
--------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Cash flows from investing activities
Investment in property, plant and equipment (33,793) (34,651) (18,460)
Proceeds from sale of property, plant and equipment 1,394 1,402 11,503
Investment securities:
Purchases (12,715) (3,891) (14,034)
Proceeds 8,030 13,891 12,758
Investments to fund liabilities to jackpot winners:
Purchases (40,091) (33,098) (25,202)
Proceeds 36,192 27,814 30,469
Loans receivable:
Cash advanced (5,869) (40,179) (25,327)
Payments received 21,766 29,652 3,519
Proceeds from sale of other assets 14,000 - 43,249
Investment in unconsolidated affiliates (1,040) (420) (55)
Acquisition of businesses 124,060 (31,177) -
-------- --------- ---------
Net cash provided by (used in) investing activities 111,934 (70,657) 18,420
-------- --------- ---------
Cash flows from financing activities
Long-term debt:
Proceeds 1,974 5,093 12,008
Principal payments (372,988) (18,604) (10,408)
Jackpot liabilities:
Collections from systems 223,037 91,596 82,769
Payments to winners (187,631) (68,106) (111,251)
Proceeds from shares issued 72,762 43,726 13,287
Share repurchases (249,270) (62,807) (318,473)
Premium paid on early redemption of debt (46,279) - -
-------- --------- ---------
Net cash used in financing activities (558,395) (9,102) (332,068)
-------- --------- ---------
Effect of exchange rate changes on cash
and cash equivalents 1,402 936 3,372
-------- --------- ----------
Net increase (decrease) in cash
and cash equivalents 59,460 119,327 (181,436)
Cash and cash equivalents at:
Beginning of year 364,234 244,907 426,343
-------- --------- ---------
End of year $423,694 $ 364,234 $ 244,907
======== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
Supplemental Cash Flows Information
Certain non-cash investing and financing activities described below are not
reflected in the consolidated statements of cash flows. Depreciation and
amortization reflected in the statements of cash flows includes the amounts
presented separately on the statements of income, plus depreciation that is
classified as a component of cost of product sales, cost of gaming operations
and cost of lottery and pari-mutuel systems.
Years ended
-------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Increase in property, plant, and equipment
related to net transfers between inventory
and gaming operations equipment $ 76,590 $ 63,106 $ 20,683
Treasury stock acquired for options exercised - 2,650 -
Tax benefit of employee stock plans 33,735 38,765 2,381
Payments of interest 97,306 88,339 86,944
Payments of income taxes 113,833 115,472 107,216
Investing and financing transactions accrued in 2001,
but cash paid in 2002:
Investment purchases - 1,838 -
Principal payments on debt - 8,000 -
Purchases of treasury stock - 35,280 -
Increase in notes receivable from the sale of the Pala
management contract 63,000 - -
Acquisitions:
Cash acquired 124,060 2,814 -
Cash paid - 33,991 -
Fair value of assets acquired 1,559,597 53,218 -
Fair value of liabilities assumed 714,280 22,041 -
Fair value of equity issued, net 969,377 - -
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
Years ended
----------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Common stock
Balance at beginning of year
156,633; 153,740; and 152,871 shares $ 98 $ 96 $ 96
Employee stock plans
2,632; 2,893; and 869 shares 2 2 -
Anchor acquisition; 14,902 shares 9 - -
----------- ----------- -----------
Balance at end of year
174,167 shares at 2002 $ 109 $ 98 $ 96
=========== =========== ===========
Additional paid-in capital
Balance at beginning of year $ 365,233 $ 278,825 $ 261,941
Employee stock plans 72,760 46,374 13,287
Stock based compensation 123 1,269 1,216
Tax benefit of employee stock plans 33,735 38,765 2,381
Anchor acquisition 979,534 - -
----------- ----------- -----------
Balance at end of year $ 1,451,385 $ 365,233 $ 278,825
=========== =========== ===========
Deferred compensation
Balance at beginning of the year $ - $ - $ -
Stock based compensation expense 3,225 - -
Anchor acquisition (13,973) - -
----------- ----------- -----------
Balance at end of year $ (10,748) $ - $ -
=========== =========== ===========
Retained earnings
Balance at beginning of year $ 1,257,119 $ 1,043,184 $ 886,392
Net income 271,165 213,935 156,792
---------- ----------- -----------
Balance at end of year $ 1,528,284 $ 1,257,119 $ 1,043,184
=========== =========== ===========
Treasury stock
Balance at beginning of year $(1,316,444) $(1,215,707) $ (897,234)
Share repurchases (213,990) (100,737) (318,473)
----------- ----------- -----------
Balance at end of year $(1,530,434) $(1,316,444) $(1,215,707)
=========== =========== ===========
Accumulated comprehensive loss
Balance at beginning of year $ (9,893) $ (9,813) $ (8,977)
Other comprehensive income (loss) 4,441 (80) (836)
----------- ----------- -----------
Balance at end of year $ (5,452) $ (9,893) $ (9,813)
========== =========== ===========
Summary of total comprehensive income
Net income $ 271,165 $ 213,935 $ 156,792
Other comprehensive income (loss) 4,441 (80) (836)
----------- ----------- -----------
Comprehensive income $ 275,606 $ 213,855 $ 155,956
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
Notes to Consolidated Financial Statements
1. Organization, Basis of Presentation and Summary of Significant Accounting
Policies
Organization
International Game Technology is recognized as one of the world leaders in the
development and production of computerized gaming products. We operate in three
lines of business: product sales, proprietary gaming and lottery systems.
Founded in 1980, IGT principally served the casino gaming industry in the United
States (US). In 1986, we began expanding our business internationally. In
addition to our US production, we currently manufacture our products in the
United Kingdom (UK) and through third party manufacturers in Japan, Canada, and
Germany. We also maintain sales offices in selected legalized gaming
jurisdictions globally, including Australia, Europe, Japan, Latin America, New
Zealand and South Africa.
Unless the context indicates otherwise, references to "International Game
Technology," "IGT," "we," "our," or "the Company" includes International Game
Technology and our wholly-owned subsidiaries and their subsidiaries. Our
principal executive offices are located at 9295 Prototype Drive, Reno, Nevada
89521; our telephone number is (775) IGT-7777; our Internet address is
www.IGT.com. Through our Internet website, we make available free of charge, as
soon as reasonably practical after such information has been filed or furnished
to the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act.
Basis of Presentation
Certain amounts in the comparative prior years' consolidated financial
statements have been reclassified to be consistent with the presentation used in
the current fiscal year. Our fiscal years end on the Saturday closest to
September 30. Similarly, our quarters end on the Saturday closest to the last
day of the quarter end month.
Principles of Consolidation
Our consolidated financial statements include the accounts of International Game
Technology and all of its majority owned or controlled subsidiaries. The
minority interests for Colorado Grande Casino have been presented within
discontinued operations and liabilities of discontinued operations. We account
for investments in 50% or less owned joint ventures using the equity method. For
strategic marketing alliances for which no separate legal entity exists, we
recognize 100% of the assets, liabilities, revenues and expenses that we own,
owe, earn and incur based on the activities that we perform on behalf of the
alliance. All appropriate inter-company accounts and transactions have been
eliminated.
Critical Accounting Policies
Use of Estimates
Our consolidated financial statements have been prepared in conformity with US
generally accepted accounting principles. Accordingly, we are required to make
estimates, judgments and assumptions that we believe are reasonable based on our
historical experience, contract terms, observance of known trends in our company
and the industry as a whole, and information available from other outside
sources. Our estimates affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On a regular basis, we evaluate our estimates, including those
related to customer programs and incentives, product returns, bad debts,
inventory obsolescence, investments, intangible assets, income taxes, warranty
obligations, long-term contracts, contingencies and litigation. Actual results
may differ from initial estimates.
Revenue Recognition
We generally recognize revenue when persuasive evidence of an arrangement
exists, the seller's price to the buyer is fixed or determinable, collectibility
is reasonably assured and delivery has occurred.
Product Sales
We generally recognize 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
Our proprietary gaming segment is comprised of our wholly-owned gaming
operations, which includes activities that we perform on behalf of our strategic
marketing alliances for which no separate legal entities exist, as well as our
unconsolidated joint venture activities reported as earnings of unconsolidated
affiliates. Because our joint venture operations are an integral part of our
business and the nature of the products and management are the same, our
earnings of unconsolidated affiliates are included as a component of income from
operations. IGT and Anchor Gaming (Anchor) were 50% partners in our largest
joint venture, The Spin For Cash Wide Area Progressive Joint Venture (JV).
Subsequent to the acquisition of Anchor on December 30, 2001, the activities of
the JV have been consolidated.
We place games in both casinos and government sponsored gaming markets under a
broad spectrum of recurring revenue pricing arrangements, including wide area
progressive (WAP) systems, stand alone participation and flat fee, equipment
leasing and rental, as well as hybrid pricing or premium products that include a
product sale and a recurring fee. WAP games differ from stand alone and hybrid
games in that they are electronically linked, inter-casino systems that connect
gaming machines to a central computer, allowing the system to build a
progressive jackpot with every wager until a player hits the top award winning
combination. WAP game revenues are recognized based on a percentage of coin in
generated by the game. 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. The operation of linked progressive systems varies among
jurisdictions as a result of different gaming regulations. Participating casinos
pay a percentage of the coin-in either directly to IGT, an administrator, or a
trust to oversee and fund the progressive jackpot. Funding of the jackpots also
differs by jurisdiction but is generally administered by IGT.
Our linked progressive systems in Iowa are operated under a trust consisting of
one member from each Iowa casino operating multi-linked games related to the
trust. As administrator, IGT provides all of the services associated with the
operation of the trust. Fees paid to IGT consist of funds generated by the trust
in excess of the amount necessary to fund the jackpot liabilities. IGT
recognizes revenue based on the trust profits. In Atlantic City, New Jersey, our
linked progressive slot system operations are administered by several trusts
managed by representatives of the participating casinos. Separate trusts exist
for each system linked by a progressive meter. Fees paid to IGT are a function
of the trusts' adequate cash flow. We recognize revenues from these trusts based
on estimated collectibility.
Lottery and Pari-mutuel Systems
Revenue from the sale of lottery and pari-mutuel gaming systems equipment and
related parts is generally recognized upon delivery to the customer. Revenues
from sales of lottery 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. These long-term contracts require installation and operation of
lottery and pari-mutuel wagering networks and the related revenue 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 have reclassified all related financial results
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 generally payable in equal installments over a 20 to 26 year period
or immediately in the case of our instant win progressive jackpots. Winners may
elect to receive the present value of jackpots discounted at applicable interest
rates (lump-sum) in lieu of annual installments. Interest rates eligible for use
in the lump sum payment calculation vary by jurisdiction and are impacted by
market forces and other economic conditions. Historically, approximately 80% of
winners elect the lump sum payment option. Winners that do not elect the lump
sum payment generally receive equal annuity payments over the 20 to 26 year time
horizon. We fund jackpot annuity payments through qualifying US government or
agency securities. To calculate the present value of our outstanding progressive
jackpot liabilities to be paid to future winners, we use current market prime,
treasury, and agency rates weighted based on the 80% historical lump-sum
election ratio. We believe this calculation provides the best estimate of our
cost to fund jackpots.
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 have 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 applicable interest rates due to changes in market and other
economic conditions directly impact our cost to fund jackpots, and therefore the
gross profit on our gaming operations. If interest rates decline, our cost to
fund jackpots increases, and correspondingly our gross profit declines.
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
creditworth-iness, 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 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 assign estimated useful lives to our long-lived assets, including intangible
assets and prepaid or deferred 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 judgment and
make 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, cash flows and useful lives are reasonable, different assumptions
could materially effect our assignment of useful lives. Any changes to the
estimated useful lives of our depreciable or amortizable assets will impact our
results of operations.
Our property, plant and equipment is depreciated or amortized using the
straight-line method over the following useful lives: buildings over 30 to 40
years; gaming operations equipment over 2 to 7 years; manufacturing machinery
and equipment over 2 to 15 years; and leasehold improvements over the lease
term. Maintenance and repairs are expensed as incurred, improvements are
capitalized, and gains or losses on disposal are included in income. See Note 7
for weighted average lives of our intangible assets and the discontinuance of
goodwill amortization in fiscal 2002.
We evaluate the carrying value of our long-lived and intangible assets for
impairment at least annually or 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.
Research and Development
Research and development (R&D) costs are expensed as incurred. R&D performed for
specific customers is charged to cost of product sales when the related sale is
recorded.
Earnings Per Share
Earnings per share is computed based on the weighted average number of common
and potential shares outstanding.
Foreign Currency Translation
The functional currency of certain IGT international subsidiaries is the local
currency. For those subsidiaries, we translate assets and liabilities at
exchange rates in effect at the balance sheet date, and income and expense
accounts at average exchange rates during the year. Resulting currency
translation adjustments are recorded directly to accumulated other comprehensive
income within stockholders' equity. Gains and losses resulting from transactions
in non-functional currencies are recorded in income. For subsidiaries whose
functional currency is the US dollar, gains and losses on non-US dollar
denominated assets and liabilities are recorded in income.
Derivatives and Hedging Activities
With the adoption of Statement of Financial Accounting Standards (SFAS) 133 on
October 1, 2000, we recognize all derivatives as either assets or liabilities on
the balance sheet at the fair value of the instruments. Accounting for changes
in the fair value of derivatives depends on the intended use and resulting
designation. We use derivative financial instruments to minimize our net
exposure resulting from fluctuations in foreign exchange rates and interest
rates. The primary business objective of our hedging program is to minimize the
impact to our earnings resulting from exchange rate changes. The counter parties
to our agreements are major commercial banks and we believe that losses related
to credit risk are remote. We are not a party to leveraged derivatives and do
not hold or issue financial instruments for speculative purposes.
We routinely use derivative financial instruments to hedge our net exposure, by
currency, related to our monetary assets and liabilities denominated in
non-functional foreign currency. These hedging instruments are subject to
fluctuations in value that are generally offset by the value of the underlying
exposures being hedged. These forward exchange contracts are not designated as
hedging instruments under SFAS 133 and resulting gains or losses are recognized
in current earnings.
From time to time, we enter into sales commitments denominated in foreign
currencies. Our policy is to hedge significant firm commitments denominated in
foreign currency with forward exchange contracts to protect the US dollar value
of the revenues. These forward exchange contracts have been designated as fair
value hedges under SFAS 133 and related gains or losses are included as a
component of the hedged transaction when recorded. Gains and losses related to
the hedge ineffectiveness are recorded in other income or expense. Time value is
excluded from effectiveness testing.
We may also enter into interest rate swap agreements to effectively manage
variable interest rate fluctuations. Amounts payable or receivable under these
interest rate swap agreements are accrued as interest rates change and
recognized over the life of the agreement as an adjustment to interest expense.
Cash and Cash Equivalents
Cash and cash equivalents includes operating cash and cash required for funding
progressive systems jackpot payments. Cash in excess of daily requirements is
generally invested in various marketable securities. If these securities have
original maturities of three months or less, they are considered cash
equivalents. Such investments are stated at cost, which approximates market.
Investment Securities
Our investment securities are classified as available-for-sale and stated at
market value. Unrealized gains and losses, net of income tax effects, are
reported as a component of accumulated other comprehensive income. Market value
is determined by the most recently traded price of the security at the balance
sheet date. Net realized gains or losses are determined on the specific
identification cost method.
Investments to Fund Liabilities to Jackpot Winners
These investments represent discounted US treasury or agency securities
purchased to meet obligations for annual payments to progressive systems jackpot
winners. We have both the intent and ability to hold these investments to
maturity and, therefore, classify them as held-to-maturity. Accordingly, these
investments are stated at cost, adjusted for amortization of premiums and
accretion of discounts over the term of the security using the interest method.
Securities in this portfolio have maturity dates through 2027.
Other Assets
Other assets are primarily comprised of deferred offering costs related to
Senior Notes issued and prepaid or deferred royalty costs and deposits.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (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. 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 a result of adopting SFAS 142 at the beginning of fiscal 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
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 broaden the presentation
of discontinued operations to
include more disposal transactions. This statement does not apply to goodwill or
indefinite lived intangible assets. 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.
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 believe that the adoption of this statement will not have a
material impact on our financial condition or results of operations.
2. Acquisitions, Divestitures and Discontinued Operations
Acquisitions
Anchor
On December 30, 2001, we completed our acquisition of 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 $986.9 million,
plus the assumption of Anchor's debt of $337.0 million, net of discount. The
purchase price included just over 14.9 million 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 $3.5 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. The allocation of the purchase price continues to be subject to
refinement as we continue to finalize the integration of Anchor's businesses and
the fair value and estimated useful lives of the intangible assets acquired. Any
changes to the fair value or lives assigned to the intangible assets may impact
the results of operations. See Note 7 for the allocation of the purchase price
to identifiable intangible assets and goodwill.
This acquisition afforded us additional opportunities to use our complementary
resources to develop new games more effectively for the benefit of our
customers. In addition, with Anchor we grew our business presence in the public
gaming sector and expanded our business activities into online lottery systems.
We believe our combined resources make us a more effective supplier to the
gaming and lottery industries. Prior to the Anchor acquisition, the JV
activities were accounted for under the equity method and the revenues, net of
expenses, were reflected as earnings of unconsolidated affiliates on our
statements of income. Subsequent to the acquisition, the JV activities have been
consolidated.
The following table presents our preliminary allocation of the Anchor
acquisition purchase price and the consolidation of the JV:
Discontinued
Casino Operations
Total Reclass Net
- -------------------------------------------------------------------------------------------------
(Amounts in thousands)
Cash acquired $ 123,104 $ - $ 123,104
Assets held for sale 77,000 143,868 220,868
Accounts and notes receivable 88,156 (2,251) 85,905
Inventory 20,459 (510) 19,949
Property and equipment 153,926 (53,155) 100,771
Investments to fund liabilities to jackpot winners 102,880 - 102,880
Identifiable intangible assets 299,929 (68,800) 231,129
Goodwill 842,931 (16,978) 825,953
Investment in JV (64,758) - (64,758)
Other current assets 27,520 (829) 26,691
Other long-term assets 2,446 (1,345) 1,101
---------- -------- ----------
Total assets $1,673,593 $ - $1,673,593
========== ======== ==========
Accounts payable 13,370 (623) 12,747
Liabilities of discontinued operations - 7,367 7,367
Notes payable 377,292 - 377,292
Jackpot liabilities 168,610 - 168,610
Other liabilities 144,944 (6,744) 138,200
---------- -------- ----------
Total liabilities 704,216 - 704,216
---------- -------- ----------
Deferred compensation (13,973) - (13,973)
Common stock and additional paid-in capital 983,350 - 983,350
---------- -------- ----------
Total equity 969,377 - 969,377
---------- -------- ----------
Total liabilities and equity $1,673,593 $ - $1,673,593
========== ======== ==========
The following unaudited pro forma financial information is presented as if the
Anchor acquisition had been made at the beginning of fiscal 2001. Excluding
Anchor's impairment, restructuring, and other one-time charges of $121.5 million
($97.6 million net of tax) in the fiscal year ended September 29, 2001, pro
forma income from continuing operations would have been $251.5 million or $2.70
per diluted share.
Years Ended
-----------------------------
September September
2002 2001
--------------------------------------------------------------------
(Amounts in thousands)
Total revenues $2,032,265 $1,929,991
Income from continuing operations 287,622 153,925
Income from discontinued operations 9,926 13,224
Net income 284,356 167,149
Earnings per share
Basic $ 3.36 $ 1.88
Diluted $ 3.30 $ 1.79
Silicon
In March 2001, we completed the purchase of Silicon Gaming (Silicon), previously
headquartered in Palo Alto, California. Silicon designed and manufactured
innovative wagering products and held a library of game applications. The
purchase method of accounting for business combinations was applied to this
acquisition. The purchase price of $34.0 million was allocated to cash of $3.8
million and net assets of $30.2 million based on the estimated fair values of
assets and liabilities at the date of acquisition. Net assets acquired consist
primarily of identifiable intangibles, offset by deferred tax liabilities and
debt assumed. Intangible assets acquired from Silicon consist primarily of
patent rights valued at $56.4 million to be amortized over their useful lives of
15 to 17 years. There was no excess purchase price over the net assets acquired.
The acquisition was funded with cash on hand. Subsequent to the acquisition in
fiscal 2001, we paid off Silicon's long-term debt of $13.4 million. Results of
Silicon subsequent to the closing of the acquisition have been included in our
results of operations.
Divestiture
In July 2000, in a move to eliminate duplication within our operations in Japan,
we sold Barcrest KK, the Japanese subsidiary of Barcrest, for a gain of $3.2
million ($2.0 million net of tax). The net cash proceeds from the sale were $9.8
million and the net assets disposed of were $6.6 million. The purchaser was a
Japanese company engaged in the manufacture, development, and sale of pachinko
and pachisuro slot machines.
Discontinued Operations
In June 2002, we committed to a plan to sell the casino operations acquired with
Anchor. Casino operations includes the Colorado Central Station Casino, the
Colorado Grande Casino and the Nevada slot route operations. We determined that
these assets were not a strategic fit with our core business.
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 for the year ended:
September
2002
---------------------------------------------------
(Amounts in thousands)
Net revenues $88,940
=======
Income before tax $12,261
Provision for income taxes (4,622)
-------
Income from discontinued operations $ 7,639
=======
Included in our consolidated statements of financial position at September 28,
2002 were $2.3 million of deferred compensation and $27.5 million of deferred
tax liabilities related to discontinued operations and assets held for sale.
Assets held for sale and liabilities of discontinued operations were comprised
of the following as of:
September
2002
--------------------------------------------------------------
(Amounts in thousands)
Cash $ 7,837
Accounts receivable, net 1,448
Other current assets 1,423
Property and equipment, net 50,925
Intangible assets 66,492
Goodwill 16,978
Other non-current assets 2,041
--------
Total assets held for sale 147,144
--------
Current liabilities 9,561
Minority interest 1,625
--------
Total liabilities of discontinued operations 11,186
--------
Net assets of discontinued operations $135,958
========
3. Investment Securities
Available-for-sale investment securities consisted of the following:
Gross Unrealized
Net ------------------ Market
Cost Gains Losses Value
----------------------------------------------------------------------
(Amounts in thousands)
September 28, 2002
Equity securities $13,767 $ - $ (274) $ 13,493
======= ===== ======= ========
September 29, 2001
US Treasury securities $ 3,000 $ 35 $ - $ 3,035
Equity securities 11,663 225 (1,838) 10,050
------- ----- ------- --------
Total investment securities $14,663 $ 260 $(1,838) $ 13,085
======= ===== ======= ========
Below is a summary of sales of available-for-sale securities for the years
ended:
September September September
2002 2001 2000
-------------------------------------------------------------------
(Amounts in thousands)
Proceeds from sales $8,030 $13,891 $12,758
Gross realized gains - 548 1,441
Gross realized losses (15) (110) (403)
4. Investments to Fund Liabilities to Jackpot Winners
Held-to-maturity investments to fund liabilities to jackpot winners consisted of
the following:
Gross Unrealized
Amortized ------------------ Market
Cost Gains Losses Value
-----------------------------------------------------------------------
(Amounts in thousands)
September 28, 2002
US Treasury and Agency
securities $369,734 $62,601 $ (208) $432,127
======== ======= ======= ========
September 29, 2001
US Treasury securities $262,955 $32,065 $(2,368) $292,652
======== ======= ======= ========
For a short time after July 1999, past winners were allowed to retroactively
elect a lump-sum distribution in lieu of future annual installments for jackpots
won before legislation was passed in October 1998 permitting lump-sum jackpot
payments. At that time, we sold investments held to settle lump-sum payment
elections. This offer expired in fiscal 2001. All proceeds from these sales were
paid to winners and the net realized gain or loss was offset by an equal gain or
loss on the settlement of winner liabilities. During fiscal 2000, proceeds from
sales of these securities totaled $3.0 million, gross realized gains totaled
$99,000 and gross losses totaled $10,000.
5. Notes and Contracts Receivable
IGT grants customers extended payment terms under contracts of sale. These
contracts are generally for terms of one to five years, with interest recognized
at prevailing rates, and are secured by the related equipment sold. The
following table presents our estimated future collections of notes and contracts
receivable, net of allowances, as of September 28, 2002:
Fiscal Year Estimated Receipts
----------------------------------------------
(Amounts in thousands)
2003 $ 61,357
2004 33,031
2005 28,928
2006 15,780
2007 15,242
Thereafter 45,298
--------
$199,636
At September 28, 2002 and September 29, 2001, the following allowances for
doubtful notes and contracts were netted against current and long-term
maturities. The increase in the current year is predominantly related to the
devaluation of the Argentine peso.
September September
2002 2001
------------------------------------------------------
(Amounts in thousands)
Current $22,068 $15,480
Long-term 15,062 11,461
------- -------
$37,130 $26,941
======= =======
Occasionally, we provided financing to customers for purposes other than the
purchase of gaming equipment, generally for terms of one to ten years with
interest at prevailing rates. Included in our total notes and contracts
receivable were financing loans of this nature totaling $121.3 million at
September 28, 2002 and $80.9 million at September 29, 2001. Allowances for
doubtful loans totaled $2.8 million at September 28, 2002 and $5.7 million at
September 29, 2001.
On December 23, 2001, Anchor entered into an agreement with the Pala Band of
Mission Indians (Pala) and Jerome H. Turk to sell its 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 agreed to pay 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 was classified as an asset held for sale in the Anchor purchase
price allocation and we recorded no gain or loss on the transaction.
In September 1993, we sold our equity ownership interest in CMS-International
(CMS) to Summit Casinos-Nevada, Inc., whose owners included senior management of
CMS. CMS was restructured in November 1999, at which time we purchased the notes
from the lender and restructured the terms with the new owners. The revised
notes call for monthly payments of principal and interest with a maturity date
of December 31, 2008. The notes remain fully collateralized by the respective
casino properties. As September 28, 2001, the outstanding balances of these
notes totaled $14.0 million.
6. Concentrations of Credit Risk
The financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents and accounts,
contracts, and notes receivable. We maintain cash balances at several banks.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. We also maintain accounts with several stock
brokerage firms. These accounts contain both cash and securities insured up to
$500,000, with a limit of $100,000 for cash, by the Securities Investor
Protection Corporation.
Our revenues and resulting receivables are concentrated in specific legalized
gaming regions. We also distribute a portion of our products through third party
distributors resulting in significant distributor receivables. We did not have
sales to a single customer that exceeded 10% of revenues during fiscal 2002,
2001 or 2000.
Accounts, contracts, and notes receivable by region as a percentage of total
receivables at September 28, 2002 were as follows:
Domestic Region
Native American casinos 40%
Nevada 20
Atlantic City (distributor and other) 12
Riverboats (greater Mississippi River area) 7
Other US regions 9
---
Total domestic 88
---
International Region
Europe 5
Other international 7
---
Total international 12
---
Total 100%
===
7. 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 require the completion of a
transitional impairment test within six months of the date of adoption. In
conjunction with adopting SFAS 142, we 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 Gaming and
Barcrest acquisitions and concluded there was no goodwill impairment.
The allocation of the Anchor acquisition purchase price continues to be subject
to refinement as we continue to finalize the integration of Anchor's businesses
and the fair value and estimated useful lives of the intangible assets acquired.
Our preliminary allocation of the Anchor purchase price to identifiable
intangible assets and goodwill is detailed in the table below. Anchor's
in-process R&D of $1.0 million was charged to R&D expense immediately subsequent
to acquisition because no future alternative uses existed. The goodwill related
to the Anchor acquisition is not deductible for tax purposes. 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. Changes to the fair value or lives
assigned to goodwill and intangibles acquired resulted from adjustments to our
preliminary purchase price allocation.
Discontinued
Continuing Casino
Operations Operations Total
--------------------------------------------------------------------------
(Amounts in thousands)
Finite Lived Intangible Assets
Patents $166,400 $ - $166,400
Contracts 32,654 47,500 80,154
Developed technology 10,540 - 10,540
Trademarks 7,787 - 7,787
In-Process R&D 1,000 - 1,000
-------- ------- --------
218,381 47,500 265,881
Indefinite Lived Intangible Assets
Trademarks 12,748 21,300 34,048
-------- ------- --------
Total Intangible Assets $231,129 $68,800 $299,929
======== ======= ========
Goodwill $825,953 $16,978 $842,931
======== ======= ========
Other current year additions to our intangible assets included purchased patents
totaling $30.7 million and capitalized patent and trademark application costs of
$5.2 million. We amortized our 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 category:
Years
-------
Patents 14.6
Contracts 9.7
Developed technology 12.7
Trademarks 9.4
The following table identifies our intangible asset balances by category,
excluding discontinued operations, as of the years ended:
September 2002 September 2001
------------------------------- ------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
- ---------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Finite Lived Intangible Assets
Patents $242,269 $19,178 $223,091 $42,636 $2,560 $ 40,076
Contracts 32,660 7,685 24,975 - - -
Developed technology 10,583 1,956 8,627 - - -
Trademarks 7,787 743 7,044 - - -
-------- ------- -------- ------ ------ --------
Total 293,299 29,562 263,737 42,636 2,560 40,076
Indefinite Lived Assets
Trademarks 12,748 - 12,748 - - -
-------- ------- -------- ------- ------ --------
Net Carrying Amount $306,047 $29,562 $276,485 $42,636 $2,560 $ 40,076
======== ======= ======== ======= ====== ========
Our aggregate amortization expense totaled $27.0 million in fiscal 2002, $5.0
million in 2001, and $4.2 million in 2000. In accordance with SFAS 142, the
current year results reflect no amortization of goodwill. The following table
presents our estimated amortization expense for each of the five succeeding
years.
Fiscal Year Amortization
------------------------------------------
(Amounts in thousands)
2003 $ 31,715
2004 31,704
2005 31,630
2006 30,934
2007 30,571
Changes in the carrying amount of goodwill for the year ended September 28,
2002, by operating segment, are presented below. The distribution of goodwill by
segment has been adjusted to reflect changes in management's view of our
business lines and adjustments to our preliminary Anchor purchase price
allocation. No goodwill was allocated to the Lottery Systems acquired from
Anchor.
Product Proprietary
Sales Gaming Total
--------------------------------------------------------------------------------
(Amounts in thousands)
Aggregate amount acquired $94,611 $ 53,998 $148,609
Less accumulated amortization recognized
prior to adoption of SFAS 142 (8,071) (980) (9,051)
------- --------- --------
Balance as of September 29, 2001 86,540 53,018 139,558
Goodwill acquired during the period 6,121 819,832 825,953
Foreign currency translation adjustment 1,913 - 1,913
------- -------- --------
Balance as of September 28, 2002 $94,574 $872,850 $967,424
======= ======== ========
The following table presents a reconciliation of previously reported net income
and earnings per share for the comparative prior years adjusted for the
exclusion of goodwill amortization, net of related tax effects.
Years Ended
-----------------------------------
September September September
2002 2001 2000
---------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Reported net income $271,165 $213,935 $156,792
Goodwill amortization, net of tax - 2,328 2,422
-------- -------- --------
Adjusted net income $271,165 $216,263 $159,214
======== ======== ========
Reported basic earnings per share $ 3.21 $ 2.90 $ 2.05
Goodwill amortization, net of tax - 0.03 0.03
-------- -------- --------
Adjusted basic earnings per share $ 3.21 $ 2.93 $ 2.08
======== ======== ========
Reported diluted earnings per share $ 3.15 $ 2.80 $ 2.00
Goodwill amortization, net of tax - 0.03 0.03
-------- -------- --------
Adjusted diluted earnings per share $ 3.15 $ 2.83 $ 2.03
======== ======== ========
8. Impairment of Assets and Restructuring Costs
During fiscal 2000, we recorded additional restructuring charges of $1.9 million
predominantly related to our plan established in 1999 to eliminate certain
administrative and manufacturing positions in Australia. We eliminated 130
positions resulting in payments of $2.3 million. Other restructuring costs of
$1.1 million were also paid during fiscal 2000.
As a result of the government in Brazil rescinding the law allowing gaming
devices in bingo halls, in fiscal 1999 we recorded impairment charges of $5.3
million related to our assessment of the inventories and receivables recoverable
in Brazil. We received payments of $1.1 million in fiscal 2001 and $1.9 million
in fiscal 2000 for receivables and inventories previously considered fully
impaired.
Impairment and restructuring charges, net of recoveries, have been presented in
our income statement as a component of selling, general and administrative
costs. Net recoveries totaled $1.1 million in fiscal 2001 and net charges
totaled $6,000 in fiscal 2000.
9. Notes Payable and Capital Lease Obligations
Notes payable and capital lease obligations consisted of the following:
September September
2002 2001
----------------------------------------------------------------------------
(Amounts in thousands)
Senior notes, net of unamortized discount $969,010 $984,742
Credit facilities 2,863 5,023
Capital lease obligations (see Note 10) 7,893 -
Other notes 128 -
-------- --------
Total 979,894 989,765
Less current maturities (8,519) (5,023)
-------- --------
Long-term notes payable, net of current maturities $971,375 $984,742
======== ========
The following table presents our future principal payment obligations related to
notes payable and capital leases as of September 28, 2002:
Fiscal Year Principal Payments
-----------------------------------------------------------------
(Amounts in thousands)
2003 $ 8,519
2004 402,237
2005 -
2006 -
2007 -
2008 and after 574,943
--------
Total principal payments 985,699
Less unamortized discount (5,805)
--------
Net notes payable $979,894
========
Our domestic and foreign borrowing facilities totaled $275.3 million at
September 28, 2002. Of this amount, $2.9 million was drawn with an average
interest rate of 2.38%, $8.2 million was reserved for letters of credit and the
remaining $264.2 million was available for future borrowings. We are required to
comply with certain covenants contained in these agreements, which, among other
things, limit our ability to incur indebtedness, grant liens, make investments,
acquisitions, dispositions, or to pay dividends or make certain other restricted
payments without the written consent of the lenders and require the maintenance
of certain financial ratios. At September 28, 2002, we were in compliance with
all applicable covenants.
IGT assumed approximately $337.0 million, net of discount, of Anchor's long-term
debt upon the completion of the acquisition. Immediately following the
acquisition, we fully repaid and terminated Anchor's senior credit facility of
$89.5 million using available cash. During the current fiscal year we
repurchased $249.9 million face value of Anchor's outstanding 9.875% fixed rate
Senior Subordinated Notes due 2008, primarily in a cash tender offer in July
2002, using available cash. This transaction extinguished substantially all of
the debt outstanding that was assumed in the Anchor acquisition. We recognized
an extraordinary loss of approximately $12.5 million, net of tax, or $0.14 per
diluted share related to the early extinguishment of this debt.
In fiscal 1999, we issued $1.0 billion of Senior Notes in two tranches, $400
million at 7.875% due May 15, 2004 and $600 million at 8.375% due May 15, 2009,
in a private placement subsequently exchanged for registered notes. During the
current fiscal year, we repurchased $17.2 million of these Senior Notes using
available cash recognizing an extraordinary loss of approximately $700,000, net
of tax, or $0.01 per diluted share. The indenture contains a number of
covenants, which restricts our ability to incur indebtedness, create or incur
liens on our assets, or enter into sale/leaseback transactions. At September 28,
2002, we were in compliance with all applicable covenants.
10. Commitments
We lease certain of our facilities and equipment under various agreements for
periods through the year 2009. The following table shows future minimum payments
required under these leases that have initial or remaining non-cancelable lease
terms in excess of one year as of September 28, 2002. The current year increase
was due primarily to agreements assumed with the Anchor acquisition. Certain of
the facility leases provide that we pay utilities, maintenance, property taxes,
and certain other operating expenses applicable to the leased property,
including liability and property damage insurance. For certain leased properties
that we no longer use, we have accrued for payments, net of anticipated sublease
receipts. The cost and accumulated depreciation of equipment under capital
leases totaled $11.3 million and $2.9 million as of September 28, 2002. At
September 29, 2001 we had no equipment under capital lease.
Continuing Discontinued
Operating Operating Capital
Fiscal Year Leases Leases Leases Total
-------------------------------------------------------------------------------------
(Amounts in thousands)
2003 $11,143 $11,017 $ 5,995 $ 28,155
2004 8,700 10,598 2,248 21,546
2005 5,546 8,798 - 14,344
2006 3,356 8,770 - 12,126
2007 1,196 8,770 - 9,966
2008 and after 779 32,803 - 33,582
------- ------- ------- --------
Total minimum payments $30,720 $80,756 8,243 $119,719
======= ======= ========
Less amount representing interest (350)
-------
Capital lease obligation 7,893
Less current portion (5,645)
-------
Long-term capital lease obligations $ 2,248
=======
Our total rental expense in continuing operations was approximately $11.0
million for fiscal 2002, $7.5 million for fiscal 2001, and $5.9 million for
fiscal 2000. Rental expense in discontinued operations was $15.0 million for
fiscal 2002.
11. Jackpot Liabilities
IGT receives a percentage of the amounts wagered or fees for machine rental and
service from the linked WAP systems to fund the related jackpot payments.
Winners may elect to receive a single payment of the discounted value of the
jackpot won or equal annual installments paid over 20 to 26 years without
interest.
The following schedule sets forth the future gross payments due to jackpot
winners under WAP systems at September 28, 2002:
Fiscal Year Payments
-----------------------------------------
(Amounts in thousands)
2003 $ 55,949
2004 39,774
2005 39,774
2006 39,774
2007 39,774
2008 and after 375,405
--------
$590,450
Jackpot liabilities include discounted payments due to winners for jackpots
previously won, as well as amounts accrued for the cost of funding jackpots not
yet won that are contractual obligations of IGT. Jackpot liabilities consist of
the following as of:
September September
2002 2001
-----------------------------------------------------------------------------
(Amounts in thousands)
Gross payments due to jackpot winners $ 590,450 $ 412,455
Unamortized discount on payments to jackpot winners (200,804) (144,944)
Accrual for jackpots not yet won 158,018 76,055
--------- ---------
Total jackpot liabilities 547,664 343,566
Less current portion (167,097) ( 85,109)
--------- ----------
Long-term jackpot liabilities $ 380,567 $ 258,457
========= =========
We amortize the discounts on the jackpot liabilities to interest expense. We
recorded interest expense on jackpot liabilities totaling $21.7 million in
fiscal 2002, $17.1 million in fiscal 2001, and $17.3 million in fiscal 2000. We
were required to maintain cash and investments relating to systems liabilities
totaling $90.4 million at September 28, 2002 and $42.2 million at September 29,
2001.
12. Financial Instruments
The carrying amounts reflected in our consolidated balance sheets for cash, cash
equivalents and other notes payable approximate their respective fair values.
The fair value of investment securities, investments to fund jackpot
liabilities, jackpot liabilities, Senior Notes and foreign currency contracts
are based on quoted market prices. We estimated the fair value of our notes and
contracts receivable by discounting the expected future cash flows. With the
adoption of SFAS 133 in fiscal 2001, all foreign currency derivatives are now
recorded at fair value on the balance sheet. The following table presents the
carrying amount and estimated fair value of our financial instruments as of:
September 2002 September 2001
---------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------------------------------------------
(Amounts in thousands)
Assets
Cash and cash equivalents $423,694 $ 423,694 $364,234 $ 364,234
Investment securities 13,493 13,493 13,085 13,085
Notes and contracts receivable 199,636 181,677 153,583 139,456
Investments to fund jackpot payments 369,734 432,127 262,955 292,652
Liabilities
Jackpot liabilities 547,664 610,050 343,566 373,264
Notes payable obligations 979,894 1,052,088 989,765 1,009,034
Foreign Currency Management
At September 28, 2002, we had net foreign currency exposure of $28.9 million
related to our monetary assets and liabilities denominated in non-functional
foreign currency and $54.9 million for a firm sales commitment denominated in
Canadian dollars. These exposures were hedged with $86.5 million in forward
currency contracts. The hedge for the firm commitment was designated as a fair
value hedge under SFAS 133 and in fiscal 2002 the amount of the hedge
ineffectiveness was not material. At September 29, 2001, we had net foreign
currency exposure of $44.6 million related to our monetary assets and
liabilities denominated in non-functional foreign currency, hedged with $40.5
million in forward contracts. We had no firm commitment hedges in fiscal 2001.
Interest Rate Management
During October 2001, Anchor entered into an interest rate swap agreement
designated as a fair value hedge on a portion of their fixed rate debt. 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. In July 2002, upon completion of our cash tender to repurchase
Anchor's outstanding 9.875% fixed rate Senior Subordinated Notes due 2008, the
interest rate swap agreement was terminated.
Off-Balance Sheet Instruments
In the normal course of business, we are a party to financial instruments with
off-balance sheet risk such as performance bonds and other guarantees, which are
not reflected in our balance sheet. We do not expect any material losses to
result from these off balance sheet instruments and we are not dependent on
off-balance sheet financing arrangements to fund our operations.
We had performance bonds outstanding that related to our operation of several
lottery systems and a gaming machine route, totaling $77.1 million at September
28, 2002 and $2.1 million at September 29, 2001. The amount outstanding at
September 28, 2002 included $75.0 million related to lottery systems acquired
with Anchor. We are liable to reimburse the bond issuer in the event the bond is
exercised as a result of our non-performance. We had outstanding letters of
credit, issued under our line of credit (see Note 9), totaling $8.2 million at
September 28, 2002 and $6.6 million at September 29, 2001, which were issued to
insure payment by IGT to certain vendors and governmental agencies.
Our linked progressive systems in Iowa and New Jersey are administered by trusts
consisting of participating casino members. We have agreed to loan to these
trusts, upon request, and subject to certain limitations, amounts necessary to
meet substantially all obligations of the trusts. Trust assets and liabilities
are primarily related to jackpot liabilities and the cash and investments
(principally US government securities) used to fund those jackpot liabilities.
At September 28, 2002, trust assets were greater than liabilities to third
parties and we had no trust loans outstanding.
13. Earnings Per Share
The following table shows the reconciliation of basic and diluted earnings per
share (EPS) for income from continuing operations for the years ended:
September September September
2002 2001 2000
-------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Income from continuing operations $276,718 $213,935 $156,792
======== ======== ========
Weighted average common shares outstanding 84,593 73,851 76,586
Dilutive effect of stock options outstanding 1,456 2,674 1,643
-------- -------- --------
Weighted average common and potential
shares outstanding 86,049 76,525 78,229
======== ======== ========
Basic earnings per share $ 3.28 $ 2.90 $ 2.05
Diluted earnings per share $ 3.21 $ 2.80 $ 2.00
Number of common shares excluded from
diluted EPS because option exercise price
was greater than average market price 1,512 91 358
Stock Repurchase Plan
Our Board of Directors authorized IGT's stock repurchase plan in 1990. As of
November 5, 2002, the remaining share repurchase authorization, as amended,
totaled 4.7 million additional shares. During fiscal 2002, we repurchased 3.6
million shares for an aggregate price of $214.0 million. During fiscal 2001, we
repurchased 2.5 million shares for an aggregate price of $100.7 million. During
fiscal 2000, we repurchased 15.7 million shares for an aggregate price of $318.5
million, including 11.0 million shares repurchased pursuant to an issuer-tender
offer at $21 per share.
14. Contingencies
Litigation
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.
Acres
In February 1999, the JV 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 JV. In April 1999, Acres responded by filing an
answer and counterclaim against the JV and Anchor. In addition, in April 1999,
Acres filed an action in Oregon state circuit court against the JV 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.
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 US 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 US 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.
Bally
On November 4, 2002, Bally Gaming, Inc. filed a complaint (U.S. District Court,
D. NV, Southern Division, CVS-02-1448) against IGT and Anchor for declaratory
relief seeking a non-monetary judgment that Bally has not infringed certain
patents owned by IGT or Anchor (U.S. Patent Nos.: 5,823,874; 5,848,932;
5,788,573; 6,162,121; 6,168,520 B1; 5,885,158; 5,643,086; 6,135,884; and
6,315,666 B1).
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. 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 on September 4, 2002, it
was granted by a three judge panel of the Court. IGT timely filed a Petition for
Rehearing en banc. Rather than consider the Petition, the South Carolina Court
of Appeals requested that the South Carolina Supreme Court take the case on
certification. Further proceedings on all issues are now pending before the
South Carolina Supreme Court. In September 2002, we accrued $17.1 million
related to this case, including interest of $2.1 million.
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), Anchor's online lottery subsidiary recently renamed to IGT
Online Entertainment Systems, 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 online 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 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 online system not later than the first quarter of
2003 with the new system to be implemented by January 1, 2005.
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 payouts. 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.
Poulos
Along with a number of other public gaming corporations, IGT is a defendant in
three class action lawsuits: one filed in the US District Court of Nevada,
Southern Division, entitled Larry Schreier v. Caesars World, Inc., et al, and
two filed in the US 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. An appeal
of that denial was filed timely with the US Court of Appeals for the Ninth
Circuit. The appellants' (class plaintiffs) opening brief on appeal must be
filed on or before January 31, 2003.
WMS
Under a resolution of matters reached in December 1999, all previously initiated
lawsuits involving the infringement of our Telnaes patent by WMS Gaming, Inc.
(WMS) were dismissed. WMS agreed to refrain from making, using, selling or
offering for sale any machine that infringes the Telnaes patent until February
24, 2002 when the Telnaes patent expires. IGT received $27.0 million in the
settlement that was included in other income in fiscal 2000, as well as $1.7
million in fees related to certain WMS operations previously conducted under
license from IGT.
Environmental Matters
Colorado Central Station Casino (CCSC), one of our discontinued casino
operations, is located in an area that has been designated by the Environmental
Protection Agency (EPA) as a superfund site on the National Priorities List,
known as the Central City-Clear Creek Superfund Site (Site) as a result of
contamination from historic mining activity in the area. The EPA is entitled to
proceed against owners and operators of properties located within the Site for
remediation and response costs associated with their properties and with the
entire Site. CCSC is located within the drainage basin of North Clear Creek and
is therefore subjected to potentially contaminated surface and ground water from
upstream mining related sources. Soil and ground water samples on the Site
indicate that several contaminants exist in concentrations exceeding drinking
water standards. Records relating to historical uses of the Site are uncertain
as to whether mining actually occurred below the casino's property. Records do
indicate that an ore loading dock for a railroad depot was once located on an
adjacent property, and railroad tracks were present on CCSC's property. CCSC
applied the guidance in Statement of Position 96-1 "Environmental Remediation
Liabilities" and determined that a liability has not been incurred.
15. Income Taxes
SFAS No. 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred income taxes reflect the net tax
effects of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carry forwards. We determine the
net current and noncurrent deferred tax assets or liabilities separately for
federal, state, and foreign jurisdictions.
The effective income tax rates differ from the statutory US federal income tax
rates as follows for the years ended:
September September September
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
(Amounts in thousands) Amount Rate Amount Rate Amount Rate
-------- ---- --------- ---- -------- ----
Taxes at federal statutory rate $155,460 35.0% $118,815 35.0% $85,745 35.0 %
Foreign subsidiaries tax, net 3,151 0.7 3,615 1.1 2,410 0.9
State income tax, net 10,105 2.3 5,307 1.5 5,109 2.3
R&D credits (1,116) (0.2) (3,167) (0.9) (750) (0.3)
Valuation allowance, foreign subsidiaries - - 2,769 0.8 2,063 0.7
Adjustment to estimated income tax accruals - - - - (3,010) (1.2)
Other, net (147) (0.1) (1,802) (0.5) (3,372) (1.4)
-------- ---- -------- ---- ------- -----
Provision for income taxes $167,453 37.7% $125,537 37.0% $88,195 36.0 %
======== ==== ======== ==== ======= ====
Components of our provision for income taxes were as follows for the years
ended:
September September September
2002 2001 2000
-------------------------------------------------------------------------
(Amounts in thousands)
Current
Federal $ 176,872 $ 127,611 $ 80,893
State 12,316 8,652 5,645
Foreign 4,744 4,698 4,478
---------- ---------- ---------
Total current 193,932 140,961 91,016
---------- ---------- ---------
Deferred
Federal (22,275) (14,162) (2,270)
State (4,307) (1,631) 222
Foreign 103 369 (773)
---------- ---------- ---------
Total deferred (26,479) (15,424) (2,821)
---------- ---------- ---------
Provision for income taxes $ 167,453 $ 125,537 $ 88,195
========== ========== =========
Significant components of our deferred tax assets and liabilities are detailed
in the table below. Our valuation allowance relates to uncertainty regarding
realization of deferred tax assets in IGT-Australia and IGT-Japan.
September September
2002 2001
------------------------------------------------------------------------------------
(Amounts in thousands)
Current deferred tax assets
Reserves not currently deductible $ 27,674 $ 20,267
Unrealized loss on currency translation adjustments 2,841 5,408
Other 509 4,378
--------- --------
31,024 30,053
--------- --------
Current deferred tax liabilities
Acquired assets held for sale (27,513) -
--------- --------
Net current deferred tax asset $ 3,511 $ 30,053
========= ========
Non-current deferred tax assets
Jackpot payment timing difference $ 137,009 $ 95,639
Foreign subsidiaries 15,229 11,182
State income taxes 15,430 6,563
Goodwill and intangibles 25,976 25,766
Net operating loss carry forwards 11,722 9,801
Other - 2,276
--------- --------
205,366 151,227
--------- --------
Non-current deferred tax liabilities
Difference between book and tax basis of property (20,970) (4,950)
Intangibles acquired (84,617) -
Other (1,634) (1,650)
Valuation allowance (15,229) (10,899)
--------- --------
(122,450) (17,499)
--------- --------
Net non-current deferred tax assets 82,916 133,728
--------- --------
Net deferred tax assets $ 86,427 $163,781
========= ========
16. Other Comprehensive Income (Loss)
The components of IGT's other comprehensive income (loss) are as follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
- ----------------------------------------------------------------------------------------------
(Amounts in thousands)
Year ended September 28, 2002
Unrealized holding gains (losses) $ 1,289 $ (451) $ 838
Reclassification adjustment to net income 15 (5) 10
------- ------- --------
Net unrealized gains (losses) 1,304 (456) 848
Foreign currency translation adjustments 5,528 (1,935) 3,593
------- ------- --------
Other comprehensive income (loss) $ 6,832 $(2,391) $ 4,441
======= ======= ========
Year ended September 29, 2001
Unrealized holding gains (losses) $ (205) $ 72 $ (133)
Reclassification adjustment to net income (438) 153 (285)
------- ------- --------
Net unrealized gains (losses) (643) 225 (418)
Foreign currency translation adjustments 520 (182) 338
------- ------- --------
Other comprehensive income (loss) $ (123) $ 43 $ (80)
======= ======= ========
Year ended September 30, 2000
Unrealized holding gains (losses) $ 1,651 $ (578) $ 1,073
Reclassification adjustment to net income (1,038) 364 (674)
------- ------- --------
Net unrealized gains (losses) 613 (214) 399
Foreign currency translation adjustments (1,900) 665 (1,235)
------- ------- --------
Other comprehensive income (loss) $(1,287) $ 451 $ (836)
======= ======= ========
The components of our accumulated other comprehensive loss are as follows:
Unrealized Foreign Accumulated Other
Gains (Losses) Currency Comprehensive
on Securities Translation Loss
---------------------------------------------------------------------------------
(Amounts in thousands)
Balance at September 30, 2000 $ (607) $(9,206) $(9,813)
Annual net change (418) 338 (80)
------- ------- -------
Balance at September 29, 2001 (1,025) (8,868) (9,893)
Annual net change 848 3,593 4,441
------- ------- -------
Balance at September 28, 2002 $ (177) $(5,275) $(5,452)
======= ======= =======
17. Employee Benefit Plans
We have established a variety of employee benefit programs to attract, retain
and motivate our employees.
Employee Incentive Plans
Our profit sharing and 401(k) plan was adopted for IGT employees working in the
US. IGT matches 100% of an employee's contributions up to $750 per year.
Participants immediately vest in their contributions and IGT's matching
contributions. Additionally, we contribute a portion of our profits to eligible
employees, which vest over a seven year period. Cash sharing is distributed
semi-annually to all eligible employees and management bonuses are paid annually
to selected employees.
Our non-qualified deferred compensation plan, implemented in September 1999,
provides an unfunded incentive compensation arrangement for eligible management
and highly compensated employees. Participants may elect to defer up to 50% of
their annual earnings with a minimum deferral of $2,000. Distributions can be
paid out as short-term payments or at retirement. Retirement benefits can be
paid out as a lump sum or in annual installments over a term of up to 15 years.
Total annual contributions from operating profits for these plans totaled $64.7
million in fiscal 2002, $59.8 million in fiscal 2001, and $38.6 million in
fiscal 2000.
Stock Based Compensation Plans
Employee Stock Purchase Plan
We maintain a Qualified Employee Stock Purchase Plan (ESPP) under which each
eligible employee may be granted an option to purchase shares of IGT's common
stock. The term of each option is 12 months and the exercise date is the last
day of the option period. Employees who have completed 90 days of service prior
to the beginning of the plan year are eligible. Employees who are 5% or more
shareholders and employees of certain subsidiaries are excluded. Employees may
participate in this plan through payroll deductions up to a maximum of 10% of
their base pay. The option price is equal to 85% of the market value of the
common stock on the date of grant or on the date of exercise, which ever is
less. An aggregate of 2.4 million shares have been authorized under our ESPP
plan, of which 275,604 shares remain available for future grants as of September
28, 2002. Based on payroll contributions through September 2002, we expect to
issue approximately 69,000 shares at $57.46 per share in fiscal 2003.
In January 1999, we made 300,000 shares of common stock available under the
Barcrest Savings Related Share Option Scheme (ShareSave). Eligible employees may
enroll in ShareSave each year and must elect to vest over three, five, or seven
years. The option price is equal to 80% of the fair market value of the common
stock on the date of grant. Employees may contribute up to (pound)3,000
(approximately $4,700) annually. At September 28, 2002 there were 207,974 shares
available for grant under this plan. Based on enrollment through September 2002,
we expect to issue approximately 17,800 shares in fiscal 2003.
Stock Incentive Plan
Under the Amended and Restated International Game Technology 2002 Stock
Incentive Plan (SIP), our eligible employees and non-employee directors may be
granted non-qualified and incentive options to purchase shares of common stock,
stock appreciation rights, restricted stock awards, or performance share awards
and stock bonuses.
An employee option grant typically vests ratably over five years and allows the
option holder to purchase stock over specified periods of time, generally 10
years from the date of grant, at a fixed price equal to the market value at the
date of grant. At the date of acquisition, all outstanding stock options under
Anchor's stock option plans were converted into options for IGT's common stock
at the same terms and conditions as originally granted. Approximately 1.6
million converted options vested upon acquisition and 624,000 converted options
required services subsequent to the acquisition in order to vest. The fair value
of all converted options were included in the purchase price allocation and we
recorded $14.0 million in deferred compensation related to the unvested
converted options to be amortized over the remaining service period of
approximately 3 years. No options for additional shares may be granted under
Anchor plans and any options cancelled under the Anchor plans may not be
reissued.
As of August 2001, all restricted stock awards previously issued during fiscal
1997 and 1999 were fully vested. Non-cash compensation for restricted stock
awards, option modifications, and deferred compensation related to Anchor's
converted options totaled $3.3 million in fiscal 2002, $1.3 million in fiscal
2001, and $1.2 million in fiscal 2000.
A summary of SIP activity for the last three years is presented below:
Number Weighted Average Shares
of Option Shares Exercise Price Available for
Outstanding (per share) Grant
-----------------------------------------------------------------------------------------------
Outstanding at October 2, 1999 5,617,669 $16.43 3,500,000
Granted options 456,208 21.98 (456,208)
Restricted stock awards - .01 (50,000)
Forfeited or expired (236,767) 19.99 236,767
Exercised (718,485) 15.76 -
---------- ----------
Outstanding at September 30, 2000 5,118,625 16.85 3,230,559
Granted options 2,431,000 46.14 (2,431,000)
Forfeited or expired (65,141) 23.12 65,141
Exercised (2,751,575) 16.08 -
---------- ----------
Outstanding at September 29, 2001 4,732,909 32.27 864,700
Additional shares authorized - - 4,900,000
Granted options 1,627,700 66.31 (1,627,700)
Anchor acquisition 2,212,583 27.99 -
Forfeited or expired (67,270) 34.54 67,270
Expired - - (204,270)
Exercised (2,541,669) 27.29 -
---------- ----------
Outstanding at September 28, 2002 5,964,253 $42.11 4,000,000
========== ==========
Options exercisable at:
September 28, 2002 1,533,775 $25.40
September 29, 2001 1,365,361 16.00
September 30, 2000 3,341,790 15.44
The following table summarizes information for stock options outstanding and
exercisable at September 28, 2002, assessing the number and timing of shares
that may be issued and the cash that may be received as a result of options
exercised:
Outstanding Exercisable
------------------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------- ----------- ---------------- -------------- ----------- --------------
$ 6.0000 - $23.0000 1,603,099 4.76 $16.27 952,088 $15.35
23.1875 - 45.0000 1,395,154 7.06 37.92 359,037 37.81
45.1250 - 46.4500 1,202,100 8.48 46.44 181,200 46.44
46.6250 - 70.0900 1,763,900 9.22 65.94 41,450 56.22
--------- ---------
$ 6.0000 - $70.0900 5,964,253 7.37 $42.11 1,533,775 $25.40
========= =========
The following table summarizes equity compensation plans approved by
shareholders and equity compensation plans that were not approved by the
shareholders as of September 28, 2002:
Number of securities
Number of securities to Weighted average remaining available for
be issued upon exercise exercised price of future issuance under
of outstanding options, outstanding options, equity compensation
Plan category warrants, and rights warrants and rights plans
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by shareholders (1) 5,964,253 $42.11 4,275,604
Equity compensation plans
not approved by shareholders (2) 62,608 38.00 207,974
--------- ---------
Total 6,026,861 $42.07 4,483,578
========= =========
(1) Includes the Amended and Restated International Game Technology 2002
Stock Incentive Plan and 275,604 shares under the 1987 Qualified
Employee Stock Purchase Plan.
(2) In January 1999, we made 300,000 shares of our common stock available
under the Barcrest Savings Related Share Option Scheme (ShareSave).
ShareSave is a broad-based employee stock purchase program available to
certain of our employees in the UK. ShareSave was designed to satisfy
certain tax requirements under applicable UK tax law. ShareSave is
generally intended to replicate for our UK employees the same incentives
that are made available to our US employees through our Employee Stock
Purchase Plan. Stockholder approval for ShareSave was not required.
Eligible employees may enroll in ShareSave each year and must elect to
vest over three, five, or seven years. The option price is equal to 80%
of the fair market value of the common stock on the date of grant.
Employees may contribute up to (pound)3,000 (approximately $4,700)
annually for the purchase of stock under ShareSave. At September 28,
2002, shares totaling 92,026 had been issued under this plan, 62,608
shares were outstanding ShareSave options, and 207,974 shares remained
available for future ShareSave option grants.
Pro forma Stock Based Compensation Expense
On October 1, 1996, we adopted SFAS 123, Accounting for Stock Based
Compensation, which establishes a fair value based method of accounting for
stock compensation plans with employees and others. As permitted by SFAS 123, we
continue to account for stock based compensation plans in accordance with APB
25, which determines the compensation cost of stock options issued for
non-variable plans such as ours as the difference between the quoted market
value at the measurement date and the amount, if any, required to be paid by
employees. Our stock based compensation plans are predominantly non-compensatory
plans where the option price is equal to or greater than the price the stock
would be in an offer to all shareholders and therefore, no compensation cost is
recorded. Compensation cost is incurred, however, when the terms of an
outstanding option are modified, or converted in an acquisition and a portion of
the purchase price is allocated to the unvested options.
We have provided the following pro forma financial information reflecting the
difference between compensation cost charged to operations pursuant to APB 25
and compensation cost that would have been charged to operations had SFAS 123
fair value based methods been applied using a Black-Scholes option pricing
model. This valuation model was developed for use in estimating the fair value
of traded options, which have no vesting restrictions and are fully
transferable. Option valuation models require the input of highly subjective
assumptions. IGT's employee stock based compensation has characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate. In
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock based compensation.
Years Ended
-----------------------------------------
September September September
2002 2001 2000
---------------------------------------------------------------------------------------------------------
(Amounts in thousands, except earnings per share and assumptions)
Net income
As reported $271,165 $213,935 $156,792
Pro forma 254,690 204,415 153,395
Basic earnings per share
As reported $ 3.21 $ 2.90 $ 2.05
Pro forma 3.01 2.77 2.00
Diluted earnings per share
As reported $ 3.15 $ 2.80 $ 2.00
Pro forma 2.96 2.67 1.96
Weighted average fair value of options
granted during the year $ 22.29 $ 16.74 $ 10.06
Weighted average assumptions:
Interest rates 2.98% 4.30% 6.50%
Dividend yields - - -
Volatility factors of the expected market
price of common stock .42 .41 .43
Weighted average expected life of stock options (years) 3.51 3.85 4.81
Expected life of employee stock purchase (years) 1.00 1.00 1.00
18. Related Party Transactions
Joint Ventures
We operate certain proprietary games and gaming related equipment under joint
venture agreements with various gaming or gaming related companies. Subsequent
to the Anchor acquisition, we consolidated our largest joint venture. As of
September 28, 2002, we had only one active joint venture of this nature that
remained unconsolidated.
We recorded the following transactions with unconsolidated joint ventures as of
and for the years ended:
September September September
2002 2001 2000
--------------------------------------------------------------------------------
(Amounts in thousands)
Net earnings of unconsolidated affiliates $32,470 $142,630 $105,991
Asset and expense transfers 9,109 40,359 46,516
Capital contributions 1,040 420 -
Accounts receivable (payable), net 67 (139) 5,007
Largest amount receivable during the year 5,584 16,345 9,615
Financial information for the JV is summarized below as of and for the periods
ended prior to consolidation in conjunction with the Anchor acquisition.
Three Months Years Ended
Ended ------------------------
December September September
2001 2001 2000
-----------------------------------------------------------------------
(Amounts in thousands)
Revenues $127,071 $504,321 $375,379
Costs and expenses 60,123 225,459 168,716
Operating income 66,948 278,862 206,663
Net income 67,728 283,425 211,932
Current assets $174,007 $173,499 $143,461
Non-current assets 129,366 127,282 109,603
-------- -------- --------
Total assets $303,373 $300,781 $253,064
======== ======== ========
Current liabilities $ 61,572 $ 50,127 $ 30,736
Non-current liabilities 112,294 102,176 81,575
-------- -------- --------
Total liabilities $173,866 $152,303 $112,311
======== ======== ========
Other Related Parties
During fiscal 2002 and 2001, a member of our board was also a partner in a law
firm that we retained as outside counsel. During fiscal 2000, a member of our
board was also a board member and officer of one of our Nevada gaming customers.
In Iowa, our progressive jackpot systems are administered by a trust that we
manage from which net profits are transferred to IGT.
We recorded the following transactions with these related parties as of and for
the years ended:
September September September
2002 2001 2000
--------------------------------------------------------------------------
(Amounts in thousands)
Revenues $5,082 $6,359 $14,048
Accounts receivable, net of payables 4,356 4,158 2,530
Largest net receivable during the year 5,892 4,423 5,762
19. Business Segments
Since the Anchor acquisition and related integration efforts, we have
restructured our business segments. We now operate principally in the following
three lines of business. The casino operations acquired from Anchor have been
reclassified to discontinued operations. See Note 2.
* Product sales encompasses the development, manufacturing, marketing,
distribution and sales of computerized gaming products and systems.
* Proprietary gaming includes the development, marketing and operation of
WAP systems, stand alone games, and gaming equipment leasing. This
segment is comprised of our wholly-owned gaming operations, which
includes activities that we perform on behalf of our strategic
marketing alliances, as well as our unconsolidated joint venture
activities reported as earnings of unconsolidated affiliates. Prior to
the Anchor acquisition, the JV activities were accounted for under the
equity method and the revenues were reflected net of expenses as
earnings of unconsolidated affiliates on the income statements.
Subsequent to the acquisition, the JV activities have been
consolidated.
* Lottery systems consist of the development, manufacturing, operation
and sale of online lottery and pari-mutuel systems.
On a consolidated basis we do not recognize inter-segment revenues or expenses
upon the transfer of gaming products between subsidiaries. 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, net.
The following tables present our business segment information by geographic
regions and lines of business as of and for the years ended September 2002,
2001, and 2000. The prior year amounts have been restated to conform to the
current year presentation. Our revenues are generated domestically in the US and
Canada, and internationally in Australia, Europe, Japan, Latin America, New
Zealand and South Africa and the United Kingdom.
Geographic Regions Domestic International Total
-----------------------------------------------------------------------------------
(Amounts in thousands)
2002
Unaffiliated customers:
Total revenues $1,585,627 $ 261,941 $1,847,568
Earnings of unconsolidated affiliates 32,470 - 32,470
Inter-company sales 106,509 1,774 108,283
Identifiable assets 1,943,095 128,814 2,071,909
Additions to long-lived assets 108,059 2,324 110,383
-----------------------------------------------------------------------------------
2001
Unaffiliated customers:
Total revenues $ 978,307 $ 220,902 $1,199,209
Earnings of unconsolidated affiliates 142,630 - 142,630
Inter-company sales 171,655 6,405 178,060
Identifiable assets 1,604,144 139,661 1,743,805
Additions to long-lived assets 93,463 4,294 97,757
-----------------------------------------------------------------------------------
2000
Unaffiliated customers:
Total revenues $ 658,044 $ 240,360 $ 898,404
Earnings of unconsolidated affiliates 105,991 - 105,991
Inter-company sales 87,082 8,107 95,189
Identifiable assets 1,324,787 155,191 1,479,978
Additions to long-lived assets 33,761 5,382 39,143
Product Proprietary Lottery
Lines of Business Sales Gaming Systems Corporate Consolidated
-----------------------------------------------------------------------------------------------
(Amounts in thousands)
2002
Total revenues $846,080 $ 882,432 $ 119,056 $ - $1,847,568
Earnings of unconsolidated
affiliates - 32,470 - - 32,470
Segment profit (loss) 179,825 363,295 5,539 (104,488) 444,171
Interest income 18,237 25,100 242 7,086 50,665
Interest expense 429 21,682 857 93,911 116,879
Depreciation and amortization 24,554 105,919 15,628 - 146,101
Total assets 695,446 2,004,816 94,910 520,646 3,315,818
Additions to long-lived tangible
assets 2,341 80,599 4,130 23,313 110,383
----------------------------------------------------------------------------------------------
2001
Total revenues $824,267 $ 374,942 $ - $ - $1,199,209
Earnings of unconsolidated
affiliates - 142,630 - - 142,630
Segment profit (loss) 163,171 262,162 - (85,861) 339,472
Interest income 17,568 21,993 - 10,258 49,819
Interest expense 126 17,123 - 84,790 102,039
Depreciation and amortization 17,029 46,319 - - 63,348
Total assets 713,188 732,798 - 477,453 1,923,439
Additions to long-lived tangible
assets 8,560 65,457 - 23,740 97,757
----------------------------------------------------------------------------------------------
2000
Total revenues $603,381 $ 295,023 $ - $ - $ 898,404
Earnings of unconsolidated
affiliates - 105,991 - - 105,991
Segment profit (loss) 91,436 202,186 - (48,635) 244,987
Interest income 14,923 22,648 - 13,406 50,977
Interest expense 140 17,301 - 84,729 102,170
Depreciation and amortization 17,996 36,391 - - 54,387
Total assets 665,892 649,411 - 308,413 1,623,716
Additions to long-lived tangible
assets 6,670 22,464 - 10,009 39,143
20. Selected Quarterly Financial Data (Unaudited)
First Qtr Second Qtr Third Qtr Fourth Qtr
----------------------------------------------------------------------------------------
(Amounts in thousands, except per share amount and stock prices)
2002
Total revenues $301,493 $500,878 $522,367 $522,830
Gross profit 136,402 239,466 248,223 257,957
Earnings of unconsolidated
affiliates 33,865 (748) (345) (302)
Income from operations 97,790 136,222 146,671 151,749
Net income 51,790 73,900 82,628 62,847
Diluted earnings per share $ 0.70 $ 0.81 $ 0.91 $ 0.71
Stock price
High $ 71.03 $ 70.09 $ 64.42 $ 70.09
Low $ 41.10 $ 60.80 $ 53.75 $ 49.55
----------------------------------------------------------------------------------------
2001
Total revenues $270,429 $312,745 $320,134 $295,901
Gross profit 121,171 136,741 137,511 139,498
Earnings of unconsolidated
affiliates 31,302 34,163 38,584 38,581
Income from operations 88,668 99,550 103,374 103,687
Net income 48,191 53,556 56,718 55,470
Diluted earnings per share $ 0.64 $ 0.70 $ 0.73 $ 0.73
Stock price
High $ 48.50 $ 56.75 $ 65.31 $ 64.11
Low $ 32.81 $ 43.87 $ 47.35 $ 38.90
----------------------------------------------------------------------------------------
2000
Total revenues $185,651 $193,284 $236,030 $283,439
Gross profit 84,140 85,140 104,288 124,280
Earnings of unconsolidated
affiliates 20,866 24,769 27,640 32,716
Income from operations 49,636 54,163 72,167 91,562
Net income 42,404 24,760 37,627 52,001
Diluted earnings per share $ 0.49 $ 0.33 $ 0.51 $ 0.70
Stock price
High $ 20.63 $ 22.44 $ 28.56 $ 34.50
Low $ 17.56 $ 17.44 $ 20.25 $ 26.88
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
For the equity compensation plan information table, see Note 17 of
Notes to Consolidated Financial Statements, which is incorporated by
reference in response to this item.
Item 13. Certain Relationships and Related Transactions
The information required by Items 10, 11, 12 and 13, other than the
equity compensation plan information table, is incorporated by
reference from the Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the end of the fiscal year
covered by this report.
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our Chief
Executive Officer and the Chief Financial Officer concluded that IGT's
disclosure controls and procedures are effective.
Changes In Internal Controls
There have not been any significant changes in our internal controls or
in other factors that could significantly affect these controls
subsequent to the date of their evaluation. There were no significant
deficiencies or material weaknesses, and therefore no corrective
actions were taken.
Part IV
Item 15. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(a)(1) Consolidated Financial Statements:
Reference is made to the Index to Financial Statements and
Related Information under Item 8 in Part II hereof where these
documents are listed.
(a)(2) Consolidated Financial Statement Schedule: Page
----
II Valuation and Qualifying Accounts 82
Other financial statement schedules are either not required or
the required information is included in the Consolidated
Financial Statements or Notes thereto.
Parent Company Financial Statements - Financial Statements of
the Registrant only are omitted under Rule 3-05 as modified by
ASR 302.
(a)(3) Exhibits:
3.1 Articles of Incorporation of International Game Technology, as amended
(incorporated by reference to Exhibit 3.1 to Registrants Report on Form
10-K for the year ended September 30, 1995).
3.2 First amendment to Bylaws of International Game Technology dated May 5,
1998 (incorporated by reference to Exhibit 3.1 to Registrant's Report
on Form 10-Q for the quarter ended March 30, 2002).
3.2A Second amendment to Second Restated Code of Bylaws of International
Game Technology, dated March 4, 2002 (incorporated by reference to
Exhibit 3.2 to Registrants Report on Form 10-Q for the quarter ended
March 30, 2002).
4.1 Indenture, dated as of May 19, 1999 by and between International Game
Technology and The Bank of New York (incorporated by reference to
Exhibit 4.2 to Registration Statement No. 333-81257, Form S-4 filed by
Registrant).
4.2 Registration Rights Agreement, dated as of May 11, 1999, by and
among International Game Technology, Salomon Smith Barney Inc., BNY
Capital Markets, Inc., Goldman, Sachs & Co., Lehman Brothers Inc. and
Merrill Lynch, Pierce, Fenner & Smith, Incorporated (incorporated by
reference to Exhibit 4.3 to Registration Statement No. 333-81257, Form
S-4 filed by Registrant).
10.1 Stock Option Plan for Key Employees of International Game Technology,
as amended (incorporated by reference to Exhibit 10.26 to Registration
Statement No. 33-12610 filed by Registrant).
10.2 Employee Stock Purchase Plan (incorporated by reference to Exhibit A
to the Proxy Statement for the 1998 Annual Meeting of Shareholders).
10.3 Employment Agreement with Robert A. Bittman, Executive Vice President,
Product Development dated March 12, 1996 (incorporated by reference to
Exhibit 10.9 to Registrants Report on Form 10-K for the year ended
September 30, 1996).
10.4 Form of officers and directors indemnification agreement (incorporated
by reference to Exhibit 10.10 to Registrants Report on Form 10-K for
the year ended September 30, 1996).
10.5 Amended and Restated Credit Agreement by and among International Game
Technology, The Bank of New York, Wells Fargo and other banks, dated
August 10, 2001 (incorporated by reference to Exhibit 10.5E to
Registrant's Report on Form 10K for the year ended September 29, 2001).
10.6 Facility Agreement between I.G.T. (Australia) Pty. Limited and National
Australia Bank Limited, dated March 18, 1998; guarantee from
International Game Technology to National Australia Bank Limited, dated
March 18, 1998 (incorporated by reference to Exhibit 10.9 to
Registrant's Report on Form 10-Q for the quarter ended March 31, 1998).
10.7 IGT Profit Sharing Plan (As Amended and Restated as of December 31,
1998) (incorporated by reference to Exhibit 10.11 to Registrant's
Report on Form 10-Q for the quarter ended April 3, 1999).
10.8 Amendment Notes between Silver Club and CMS-El Capitan and
International Game Technology dated November 5, 1999. (incorporated by
reference to Exhibit 10.12 to Registrant's Report on Form 10-K for the
year ended October 2, 1999).
10.9 Barcrest Savings Related Share Option Scheme (incorporated by reference
to Registration Statement No. 333-94349, Form S-8 filed by Registrant
on January 10, 2000).
10.10 IGT Deferred Compensation Plan (incorporated by reference to Exhibit
10.12 to Registrant's Report on Form 10K/A for the year ended
September 30, 2000).
10.11 Employment Agreement with G. Thomas Baker, Chief Executive Officer,
President, and Chief Operating Officer dated December 6, 2000
(incorporated by reference to Exhibit 10.12 to Registrant's Report on
Form 10K/A for the year ended September 30, 2000).
10.12 International Game Technology 1993 Stock Option Plan (Amended and
Restated Effective as of August 27, 1996)(Composite Plan Document
Incorporating Amendments 1998-I, 1998-II and 2000-I)(incorporated by
reference to Exhibit 10.15 to Registrant's Report on Form 10Q/A for the
quarter ended March 31, 2001.)
10.13 Employment agreement with Maureen Mullarkey, Senior Vice President and
Chief Financial Officer dated January 12, 2001 (incorporated by
reference to Exhibit 10.16 to Registrant's Report on Form 10-Q/A for
the quarter ended March 31, 2001).
10.14 Agreement and Plan of Merger, dated as of July 8, 2001, by and among
International Game Technology, NAC Corporation, and Anchor Gaming
(incorporated by reference to Exhibit 2 to Form 8-K/A, File number
001-10684, filing date July 12, 2001).
10.15 Employment Agreement with Thomas J. Matthews, Chief Operating Officer,
dated July 8, 2001 (incorporated by reference to Exhibit 99.4 to
Registration Statement No. 333-67928, Form S-4, filed by Registrant on
August 20, 2001).
10.16 International Game Technology 2002 Stock Incentive Plan (incorporated
by reference to Exhibit 10.1 to Registrant's Report on Form 10-Q for
the quarter ended March 30, 2002).
21 Subsidiaries
23 Independent Auditors' Consent
24 Power of Attorney (see page 81 hereof)
(b) Reports on Form 8-K
Anchor filed a Current Report on Form 8-K on July 25, 2002, reporting
the tender offer to repurchase 9.875% Senior Subordinated Notes.
Power of Attorney
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 18th
day of December, 2002.
International Game Technology
By:/s/ Maureen T. Mullarkey
-------------------------------------
Maureen T. Mullarkey
Chief Financial Officer, and Sr. Vice
President, Finance (Principal Financial
Accounting Officer), and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to report has been signed below by the following persons in the
capacities and on the dates indicated.
Each person whose signature appears below hereby authorizes G. Thomas Baker,
Maureen Mullarkey and Sara Beth Brown, or any of them, as attorneys-in-fact to
sign on his behalf, individually, and in each capacity stated below, and to file
all amendments and/or supplements to this Annual Report on Form 10-K.
Signature Title Date
/s/ Charles N. Mathewson Chairman of the Board of Directors December 18, 2002
- -----------------------------------
Charles N. Mathewson
/s/ G. Thomas Baker President, Chief Executive Officer, December 18, 2002
- ----------------------------------- and Director (Principal Executive Officer)
G. Thomas Baker
/s/ Thomas J. Matthews Chief Operating Officer and Director December 18, 2002
- -----------------------------------
Thomas J. Matthews
/s/ Maureen T. Mullarkey Chief Financial Officer, and Sr. Vice December 18, 2002
- ----------------------------------- President, Finance (Principal Financial
Maureen T. Mullarkey Accounting Officer), and Treasurer
/s/ Neil Barsky Director December 18, 2002
- -----------------------------------
Neil Barsky
/s/ Robert A. Bittman Director December 18, 2002
- ------------------------------------
Robert A. Bittman
/s/ Richard Burt Director December 18, 2002
- -----------------------------------
Richard Burt
/s/ Wilbur J. Keating Director December 18, 2002
- -----------------------------------
Wilbur J. Keating
/s/ Robert Miller Director December 18, 2002
- -----------------------------------
Robert Miller
/s/ Fred Rentshcler Director December 18, 2002
- -----------------------------------
Fred Rentschler
SCHEDULE II - Consolidated Valuation and Qualifying Accounts
Balance at Increase (Decrease) Balance
Beginning in at End
of Period Provisions Unrealized Gains of Period
- --------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Valuation Allowance on
Investment Securities:
Year ended 09/30/00 $(1,547) $ - $ 613 $ (934)
======= ======= ========= =======
Year ended 09/29/01 $ (934) $ - $ (644) $(1,578)
======= ======= ========= =======
Year ended 09/28/02 $(1,578) $ - $ 1,304 $ (274)
======= ======= ========= =======
Balance at Recoveries Accounts Balance
Beginning and Written at End
of Period Provisions Reclassifications Off of Period
- --------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Allowance for
Doubtful Accounts:
Year ended 09/30/00 $ 8,904 $ 1,902 $ 10,418 $(7,393) $ 13,831
========= ======== ========= ======= =========
Year ended 09/29/01 $ 13,831 $ 5,201 $ (401) $(2,687) $ 15,944
========= ======== ========= ======= =========
Year ended 09/28/02 $ 15,944 $ 525 $ 6,199 $(4,090) $ 18,578
========= ======== ========= ======= =========
Allowance for
Doubtful Notes and
Contracts Receivable:
Year ended 09/30/00 $ 19,654 $ 8,251 $ (5,605) $(4,267) $ 18,033
========= ======== ========= ======= =========
Year ended 09/29/01 $ 18,033 $ 13,872 $ 41 $(5,005) $ 26,941
========= ======== ========= ======= =========
Year ended 09/28/02 $ 26,941 $ 17,938 $ (4,463) $(3,286) $ 37,130
========= ======== ========= ======= =========
Balance at Disposed Balance
Beginning of or at End
of Period Provisions Written Off of Period
- --------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Obsolete Inventory Reserve:
Year ended 09/30/00 $ 23,901 $ 16,001 $(15,598) $ 24,304
========= ========= ======== ========
Year ended 09/29/01 $ 24,304 $ 21,088 $(16,505) $ 28,887
========= ========= ======== ========
Year ended 09/28/02 $ 28,887 $ 16,853 $(21,063) $ 24,677
========= ========= ======== ========
CERTIFICATION
I, G. Thomas Baker certify that:
1. I have reviewed this annual report on Form 10-K of
International Game Technology.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: December 18, 2002
/s/ G. Thomas Baker
-----------------------
G. Thomas Baker
Chief Executive Officer
CERTIFICATION
I, Maureen T. Mullarkey, certify that:
1. I have reviewed this annual report on Form 10-K of
International Game Technology.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: December 18, 2002
/s/ Maureen T. Mullarkey
------------------------
Maureen T. Mullarkey
Chief Financial Officer