FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended March 31, 1994 Commission File Number 001-10684
INTERNATIONAL GAME TECHNOLOGY
(Exact name of registrant as specified in charter)
Nevada 88-0173041
(State of Incorporation) (I.R.S. Employer Identification No.)
5270 Neil Road, Reno, Nevada 89510
(Address of principal executive offices)
Registrant's telephone number, including area code (702) 688-0100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 29, 1994
Common Stock, par value $.000625 per share 128,715,439
<PAGE>
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
FORM 10-Q
The accompanying consolidated financial statements have been prepared
by the Company, without audit, and reflect all adjustments which are, in
the opinion of management, necessary for a fair statement of the results
for the interim periods. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (the "SEC"),
but omit certain information and footnote disclosures necessary to present
the statements in accordance with generally accepted accounting principles.
These financial statements should be read in conjunction with the
financial statements, accounting policies and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1993. Management believes that the disclosures are adequate to make
the information presented herein not misleading.
Organization
International Game Technology (the "Company") was incorporated in
December 1980 to acquire the gaming licensee and operating entity, IGT
(recently renamed IGT-North America), and facilitate the Company's initial
public offering. In addition to its 100% ownership of IGT-North America,
the Company directly or indirectly owns 100% of IGT-International ("IGT-
International"), 100% of IGT-Australia, Pty. Ltd. ("IGT-Australia"), 100%
of IGT-Europe b.v. ("IGT-Europe"), 99.75% of IGT-Iceland Ltd. ("IGT-
Iceland"), 100% of IGT-Japan k.k. ("IGT-Japan") and approximately 11% of
Radica Games Limited ("Radica"). In December 1992 the Company sold its
interest in its riverboat partnerships and on September 30, 1993 sold its
interest in CMS-International ("CMS"). See "Discontinued Operations."
IGT-North America is the largest manufacturer of computerized casino
gaming products and proprietary systems in the world. The Company believes
it manufactures the broadest range of microprocessor-based gaming machines
available. The Company also develops and manufactures "SMART" systems
which monitor slot machine play and track player activity. In addition to
gaming product sales and leases, the Company has developed and sells
computerized linked proprietary systems to monitor video gaming terminals
and has developed specialized video gaming terminals for lotteries and
other applications. IGT-North America also develops and operates
proprietary software linked progressive systems. The Company derives
revenues related to the operations of these systems as well as collects
license and franchise fees for the use of the systems.
IGT-International was established in September 1993 to oversee all
operations outside of North America by the Company's foreign subsidiaries.
IGT-International also conducts sales either directly or through
distributors in countries not served by the Company's foreign subsidiaries.
IGT-Australia, located in Sydney, Australia, manufactures
microprocessor-based gaming products and proprietary systems, and performs
engineering, manufacturing, sales and marketing and distribution operations
for the Australian markets as well as other gaming jurisdictions in the
Southern Hemisphere and Pacific Rim.
<PAGE>
Page 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
FORM 10-Q
IGT-Europe was established in The Netherlands in February 1992 to
distribute and market gaming products in Eastern and Western Europe and
Africa. Prior to providing direct sales, the Company sold its products in
these markets through a distributor.
IGT-Iceland was established in September 1993 to provide system
software, machines, equipment and technical assistance to support Iceland's
video lottery operations.
IGT-Japan was established in July 1990, and in November 1992 opened an
office in Tokyo, Japan. On April 16, 1993, IGT-Japan was approved to
supply Pachisuro gaming machines to the Japanese market, and the Company
began delivery of these machines during the third quarter of fiscal 1993.
Radica designs, develops, manufactures and distributes a variety of
non-gaming casino theme games. Radica maintains production facilities in
China. See Note 8 to the Consolidated Financial Statements for further
discussion.
Discontinued Operations
During fiscal 1993, the Company divested its investments in casino
operations through the sale of its interest in the President Riverboat
Casinos, Inc. ("PRC") and CMS. These dispositions were made as part of the
Company's strategy to focus on its core businesses of manufacturing
machines and the development of proprietary systems software.
Iowa Riverboat Corporation ("IRC"), a wholly-owned subsidiary of the
Company, established in March 1990, was a 40% partner in an Iowa
partnership that owned and operated the President Riverboat Casino and the
Blackhawk Hotel in Davenport, Iowa. International Acceptance Corporation
("IAC"), also a wholly-owned subsidiary of the Company, owned 45% of a
riverboat excursion operation and the permanently docked Admiral riverboat
in St. Louis, Missouri. In December 1992, the Company contributed the
assets of IRC and IAC to PRC in exchange for 1,671,429 shares of PRC common
stock. These shares were subsequently sold to the public as part of an
initial public offering of PRC common stock on December 17, 1992 (see Note
5 to the Consolidated Financial Statements).
CMS, established in August 1988, operated casinos and hotel/casinos
for the Company including the Silver Club hotel and casino and The Treasury
Club casino in Sparks, Nevada, the El Capitan Club in Hawthorne, Nevada and
the King's Casino on the island of Antigua in the Caribbean. Effective
September 30, 1993, the Company sold its ownership interest in CMS.
The consolidated financial statements include the accounts of the
Company and all its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
<PAGE>
Page 4
<TABLE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, THREE MONTHS ENDED SIX MONTHS ENDED
except per share amounts) MARCH 31, MARCH 31,
1994 1993 1994 1993
REVENUES:
<S> <C> <C> <C> <C>
Product sales.............. $127,026 $67,024 $240,445 $122,072
Gaming operations.......... 37,511 31,698 73,859 63,913
Total revenues........... 164,537 98,722 314,304 185,985
COSTS AND EXPENSES:
Cost of product sales...... 66,677 33,509 127,158 61,304
Gaming operations.......... 16,475 15,010 33,411 27,748
Selling, general and
administrative........... 23,013 12,491 39,837 24,412
Depreciation and
amortization............. 4,686 4,835 9,245 9,864
Research and development... 5,262 4,256 9,138 7,884
Provision for bad debts.... 3,241 1,153 4,807 2,114
Total costs and expenses. 119,354 71,254 223,596 133,326
INCOME FROM OPERATIONS....... 45,183 27,468 90,708 52,659
OTHER INCOME (EXPENSE):
Interest income ........... 7,103 7,006 13,838 12,431
Interest expense........... ( 2,901) ( 3,342) ( 5,754) ( 6,368)
Gain on the sale of assets. 1,611 710 2,088 6,631
Other...................... ( 164) ( 813) ( 871) 498
Other income net.......... 5,649 3,561 9,301 13,192
INCOME FROM CONTINUING OPER-
ATIONS BEFORE INCOME TAXES. 50,832 31,029 100,009 65,851
PROVISION FOR INCOME TAXES... 19,418 12,151 38,204 25,793
INCOME FROM CONTINUING
OPERATIONS................... 31,414 18,878 61,805 40,058
DISCONTINUED OPERATIONS:
Income (loss) from opera-
tions, including tax
benefit of $17 and $23... - ( 139) - 217
Gain on disposition, net of
taxes of $9,573.......... - - - 14,013
Income from discontinued
operations............... - ( 139) - 14,230
NET INCOME................... $ 31,414 $18,739 $ 61,805 $ 54,288
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
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Page 5
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
(Shares in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1994 1993 1994 1993
PRIMARY EARNINGS PER SHARE:
<S> <C> <C> <C> <C>
Income from continuing
operations.............. $ 0.24 $ 0.15 $ 0.48 $ 0.32
Income from discontinued
operations.............. - - - 0.12
NET INCOME.................. $ 0.24 $ 0.15 $ 0.48 $ 0.44
FULLY DILUTED EARNINGS PER
SHARE:
Income from continuing
operations.............. $ 0.23 $ 0.15 $ 0.46 $ 0.31
Income from discontinued
operations.............. - - - 0.10
NET INCOME.................. $ 0.23 $ 0.15 $ 0.46 $ 0.41
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING............... 129,959 122,557 129,778 123,634
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
ASSUMING FULL DILUTION.... 136,634 136,427 136,593 138,137
</TABLE>
Earnings per share are calculated on the basis of the weighted average
number of common and, if dilutive, common equivalent share outstanding.
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
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Page 6
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
(Dollars in thousands) MARCH 31, SEPT. 30,
1994 1993
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................ $ 48,864 $ 85,346
Short-term investments, at cost (market
value of $160,421 and $147,123)........ 151,223 131,994
Accounts receivable, net of allowances
for doubtful accounts of $9,946
and $7,935............................. 100,155 81,857
Current maturities of long-term notes
and contracts receivable, net of
allowances............................. 70,021 60,673
Inventories:
Raw materials.......................... 51,566 40,225
Work-in-process........................ 8,555 4,998
Finished goods......................... 37,807 29,855
Total inventories.................... 97,928 75,078
Deferred income taxes................... 12,152 10,932
Prepaid expenses and other.............. 15,673 14,255
Total current assets.................. 496,016 460,135
LONG-TERM NOTES AND CONTRACTS RECEIVABLE,
net of allowances and current
maturities............................... 52,738 46,908
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land..................................... 1,990 989
Buildings ............................... 4,213 4,213
Gaming and casino operations equipment... 45,672 39,375
Manufacturing machinery and equipment.... 54,498 43,456
Leasehold improvements................... 6,787 5,529
113,160 93,562
Less accumulated depreciation and
amortization........................... ( 51,340) ( 42,689)
Property, plant and equipment, net... 61,820 50,873
INVESTMENTS TO FUND LIABILITIES
TO JACKPOT WINNERS....................... 104,001 82,266
OTHER ASSETS............................... 20,725 6,411
TOTAL ASSETS............................... $735,300 $646,593
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Page 7
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
(Dollars in thousands) MARCH 31, SEPT. 30,
1994 1993
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term notes
payable and capital lease
obligations............................. $ 474 $ 462
Accounts payable.......................... 23,412 22,620
Jackpot liabilities....................... 15,192 11,882
Accrued employee benefit plan
liabilities............................. 8,416 19,651
Accrued interest payable.................. 931 1,352
Accrued vacation liability................ 4,972 3,771
Accrued and deferred income taxes......... 1,913 11,649
Other accrued liabilities................. 31,545 12,362
Total current liabilities............... 86,855 83,749
LONG-TERM NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current maturities.. 443 617
CONVERTIBLE SUBORDINATED NOTES PAYABLE.. 42,919 59,998
LONG-TERM JACKPOT LIABILITIES........... 124,599 106,476
DEFERRED INCOME TAXES................... 13,079 17,187
OTHER LIABILITIES....................... 19 17
Total liabilities....................... 267,914 268,044
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.000625 par value;
320,000,000 shares authorized;
142,681,698 and 138,938,605 shares
issued ................................. 89 87
Additional paid-in capital................ 183,516 146,869
Retained earnings......................... 313,844 259,125
Treasury stock; 14,157,246 and
14,071,460 shares at cost............... ( 30,063) ( 27,532)
Total stockholders' equity.............. 467,386 378,549
Total liabilities and
stockholders' equity.................. $735,300 $646,593
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Page 8
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
(Dollars in thousands) SIX MONTHS ENDED
MARCH 31,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
NET INCOME ........................... $61,805 $54,288
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization....... 9,245 9,864
Amortization of long-term debt
discount and offering costs....... 410 898
Provision for bad debts............. 4,807 2,113
Gain on sale of assets.............. ( 2,088) ( 6,631)
Gain on sale of discontinued
operations........................ - ( 14,013)
Donated common stock................ 500 250
(Increase) decrease in assets:
Receivables ...................... ( 38,287) ( 23,257)
Inventories....................... ( 22,850) ( 6,215)
Prepaid expenses and other........ 789 ( 58)
Other assets...................... ( 4,434) 4,425
Increase (decrease) in liabilities:
Accounts payable and accrued
liabilities..................... 9,428 ( 13,194)
Accrued and deferred income taxes
payable, net of tax benefit
of stock option and purchase
plans........................... ( 10,388) 1,584
Other............................... 7 ( 145)
Total adjustments................. ( 52,861) ( 44,379)
Net cash provided by
operating activities................ 8,944 9,909
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
<PAGE>
Page 9
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from previous page)
(Unaudited)
<TABLE>
(Dollars in thousands) SIX MONTHS ENDED
MARCH 31,
1994 1993
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant
and equipment......................... ($ 22,905) ($ 17,641)
Proceeds from sale of property,
plant and equipment................... 1,950 3,990
Purchase of short term investments...... ( 148,302) ( 74,159)
Proceeds from sale of short term
investments........................... 131,801 37,395
Proceeds from investments to fund
liabilities to jackpot winners........ 7,979 5,653
Purchase of investments to fund
liabilities to jackpot winners........ ( 31,920) ( 25,329)
Proceeds from sale of discontinued
operations............................ - 28,749
Net cash used in investing activities. ( 61,397) ( 41,342)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt.............. ( 161) ( 1,110)
Payments on liabilities to
jackpot winners....................... ( 7,979) ( 5,653)
Collections from systems to fund
liabilities to jackpot winners........ 29,412 21,249
Proceeds from stock options
exercised............................. 655 2,656
Proceeds from employee stock purchases.. 1,034 869
Payments of cash dividend............... ( 7,683) -
Proceeds of long-term debt.............. - 5
Foreign currency exchange gain ......... 693 197
Net cash provided by
financing activities................ 15,971 18,213
NET DECREASE IN CASH AND CASH
EQUIVALENTS............................. ( 36,482) ( 13,220)
CASH PROVIDED BY DISCONTINUED OPERATIONS.. - 12,487
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD..................... 85,346 69,159
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.................................. $ 48,864 $ 68,426
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Page 10
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were netted
against current and long-term maturities:
<TABLE>
March 31, September 30,
(Dollars in thousands) 1994 1993
(Unaudited)
<S> <C> <C>
Allowances for doubtful notes and
contracts:
Current............................ $4,750 $5,588
Long-term.......................... 2,554 3,363
$7,304 $8,951
</TABLE>
2. Lines of Credit
As of December 31, 1993, IGT-North America had a $7.5 million
unsecured bank line of credit with various interest rate options available
to the Company. The line of credit is used for the purpose of facilitating
standby letters of credit, and the Company is charged a nominal fee on
amounts used against the line as security for letters of credit. Funds
available under this line are reduced by any amounts used as security for
letters of credit. At March 31, 1994, $3,779,000 was available under this
line of credit. As of April 1, 1994, the amount of the line of credit was
decreased to $5 million resulting in an availability of $1,279,000 as of
that date.
IGT-Australia had a $440,000 (Australian) bank line of credit
available as of March 31, 1994. Interest is paid at the lender's reference
rate plus 1%. This line is secured by equitable mortgages, and has a
provision for review and renewal annually in May. At March 31, 1994, no
funds were drawn under this line.
The Company is required to comply, and is in compliance, with certain
covenants contained in the IGT-North America line of credit agreement
which, among other things, limit financial commitments the Company may make
without written consent of the lender and require the maintenance of
certain financial ratios, minimum working capital and net worth of the
Company.
3. Debt Offering
In May 1991, the Company completed a $115,000,000 public offering of
5-1/2% Convertible Subordinated Notes (the "Notes") maturing June 1, 2001.
The Notes were issued at a price of 80.055% of the principal amount due at
maturity, representing an original issue discount of 19.945% from the
principal amount payable at maturity. Semi-annual interest payments at 5-
1/2% along with the original issue discount represent a yield of 8.5% per
annum. Net proceeds from the issue and sale of the Notes were $89,426,800.
<PAGE>
Page 11
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the Notes, the Company has called for redemption on
June 1, 1994 all of the outstanding Notes. As of March 31, 1994, $50.9
million of principal amount was outstanding. The redemption price is
84.414% of principal amount due at maturity. An interest payment of $27.50
per $1,000 principal amount of Notes will be paid on June 1, 1994 to Note
holders of record on May 15, 1994. At the option of the holder, the Notes
are convertible into common stock of the Company at a conversion rate of
129.384 shares per each $1,000 principal amount. This conversion option
expires on May 31, 1994.
The conversion option as stated above has been available since the
issuance of the Notes. During the six months ended March 31, 1994 and 1993,
notes with a face amount of $21,317,000 and $22,097,000 were converted to
2,758,058 and 2,858,988 shares of the Company's common stock, respectively.
4. Income Taxes
The provision for income taxes is computed on pre-tax income reported
in the financial statements. The provision differs from income taxes
currently payable because certain items of income and expense are
recognized in different periods for financial statement and tax return
purposes. The Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," effective as of October 1, 1992.
There was no material effect on the Company's financial statements due to
the adoption of this statement.
5. Discontinued Operations
In connection with the Company's focus on gaming machine manufacture
and proprietary software systems development, the Company divested its
investments in casino operations during fiscal 1993 through the sale of its
interest in CMS and President Riverboat Casinos, Inc. ("PRC"). The
disposition of these investments has been accounted for as discontinued
operations. The revenues from these operations totaled $7,851,000 and
$16,600,000 for the quarter and six months ended March 31, 1993,
respectively. The separate sales transactions of these investments are
described below.
Riverboat Operations
During December 1992, the Company transferred 100% of its ownership
interest in three riverboat partnerships to PRC. In exchange for the
transfer of its ownership interests, the Company received 1,671,429 shares
of PRC common stock representing approximately 32% ownership of PRC.
The Company, under a selling agreement with the principal stockholders
of PRC, offered all of its 1,671,429 shares of PRC common stock as a
selling shareholder in the Initial Public Offering ("IPO") of PRC,
effective December 17, 1992. The Company received proceeds from the IPO of
$28.7 million and recognized a pre-tax gain of $23.6 million on the sale.
PRC additionally repaid $16.2 million in outstanding notes to the Company,
plus all accrued interest.
<PAGE>
Page 12
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CMS International
Effective September 30, 1993, the Company sold its equity ownership
interest in CMS to Summit Casinos-Nevada, Inc., ("Summit"), whose owners
include senior management of CMS. The sale consisted of $750,000 in cash
for the Company's ownership of CMS's preferred stock and $250,000 in cash
and a note of $2,043,529 for CMS's common stock. Additionally, the Company
acquired a stock purchase warrant entitling the Company to purchase 4.84%
of CMS at a per share price approximately equal to the book value of CMS
("the CMS Warrant"). The CMS Warrant, which expires on the earlier of
September 30, 2003 or the closing of an underwritten public offering of
CMS, is exchangeable for a Warrant to purchase shares of common stock of
any other affiliate of Summit which proposes an underwritten public
offering of its common stock.
The Company recognized a pre-tax loss of approximately $2.0 million on
the sale and will remain as guarantor on certain indebtedness of CMS, which
had at March 31, 1994 an aggregate balance of $18.6 million. The notes
that have been guaranteed are also collateralized by the respective casino
properties. Summit has agreed to indemnify and hold the Company harmless
against any liability arising under these guarantees. Management believes
the likelihood of losses relating to these guarantees is remote.
The composition of income from discontinued operations for the quarter
ended March 31, 1993 is as follows:
<TABLE>
(Dollars in Thousands) Riverboat CMS
Operations Int'l Total
<S> <C> <C> <C>
Loss from operations............ ($ 120) ($ 36) ($ 156)
Gain on disposal................ - - -
Loss on discontinued
operations before taxes....... ($ 120) ($ 36) ($ 156)
Income tax benefit.............. - 17 17
Loss on discontinued operations,
net of taxes.................. ($ 120) ($ 19) ($ 139)
</TABLE>
The composition of income from discontinued operations for the six
months ended March 31, 1993 is as follows:
<TABLE>
(Dollars in Thousands) Riverboat CMS
Operations Int'l Total
<S> <C> <C> <C>
Income (loss) from operations... $ 245 ($ 51) $ 194
Gain on disposal................ 23,586 - 23,586
Income (loss) on discontinued
operations before taxes....... $23,831 ( 51) 23,780
Income tax (provision)
benefit....................... ( 9,573) 23 ( 9,550)
Income (loss) on discontinued
operations, net of taxes...... $14,258 ($ 28) $14,230
</TABLE>
<PAGE>
Page 13
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Disposition of Other Operations
The route and Megapoker operations and Keno systems business were sold
during fiscal 1992 and 1993. The Company's route and Megapoker operations
were sold to Jackpot Enterprises, a Nevada corporation in August and
November of 1992, respectively. The route operations included all the
route equipment and operating contracts for the Nevada participation
locations involving approximately 1,380 gaming machines in 160 locations.
This sale resulted in a net loss of $893,000. The Megapoker sale included
all gaming services and associated equipment used on the Megapoker route
along with licenses for all Megapoker software, trademarks, and tradenames.
A net gain of $242,000 was realized on this sale.
In the first quarter of 1993, the Company completed the sale of its
computerized Keno system business to Imagineering systems, Inc. of Reno,
Nevada. All development, manufacturing, sales and service functions for
the Keno systems were included in the sale. The sale did not have a
material effect on the Company's consolidated financial statements.
7. Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts, contracts, and notes receivable. The Company
maintains cash and cash equivalents with various financial institutions in
amounts, which at times, may be in excess of the FDIC insurance limits.
Product sales and the resulting receivables are concentrated in
specific legalized gaming regions. The Company also distributes a portion
of its products through third party distributors resulting in significant
distributor receivables. At March 31, 1994 accounts, contracts, and notes
receivable by region as a percentage of total receivables are as follows:
<TABLE>
Regions
<S> <C>
Riverboats (greater Mississippi
River area).................. 42.2%
Nevada......................... 25.0%
Colorado....................... 8.0%
Louisiana (distributor)........ 5.1%
</TABLE>
8. Acquisition of Investment in Radica
During February 1994, the Company purchased 11.2% of Radica Games
Limited ("Radica") for cash of $5,850,000 and 374,436 shares of the
Company's common stock, valued upon issuance at $10,250,000. Radica is a
Hong Kong corporation which designs, develops, manufactures, and
distributes non-gaming casino theme games. Radica maintains production
facilities in China. The Company believes this investment will provide
manufacturing capacity for the international market and enhance its
business knowledge of the China market.
<PAGE>
Page 14
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not reflected
in the consolidated statements of cash flows. The Company incurred capital
lease obligations to obtain property, plant and equipment in the six months
ended March 31, 1994 and 1993 of zero and $38,000, respectively. The
Company had additions to long term notes payable during the six months
ended March 31, 1994 and 1993 of zero and $5,000, respectively.
Payments of interest for the six months ended March 31, 1994 and 1993
were $5,765,000 and $4,100,000, respectively. Payments for income taxes
for the first six months of fiscal 1994 and 1993 were $47,940,000 and
$21,500,000, respectively.
During the six months ended March 31, 1994, the Company purchased a
portion of Radica Games Limited for cash of $5,850,000 and 374,436 shares
of the Company's common stock, valued upon issuance at $10,250,000.
During the six months ended March 31, 1994 and 1993, notes with a face
amount of $21,317,000 and $22,097,000 were converted to 2,758,058 and
2,858,988 shares of the Company's common stock, respectively.
On February 22, 1994, the Board of Directors declared a quarterly cash
dividend of $.03 per share. The dividend is payable on June 1, 1994 to
shareholders of record at the close of business on May 1, 1994. At March
31, 1994, the Company had accrued $3,856,000 for the payment of this
dividend.
<PAGE>
Page 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1994
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1993
Net income from continuing operations grew to $31.4 million or $.23
per fully diluted share in the second quarter of fiscal 1994. This
represents a 66% increase in net income and a 53% increase in per share
earnings in comparison to the same period in fiscal 1993. The Company's
continued net income gains were primarily driven by increased product
sales.
Revenues and Cost of Sales
Product sales for the quarter increased approximately 90% to $127
million in comparison to $67 million reported in the second quarter of
1993. Demand for the Company's products was strongest in the riverboat and
Nevada markets. Unit sales to riverboat gaming properties grew 227% over
the prior quarter with the majority of the current quarter sales to
properties operating in Mississippi and Louisiana. Nevada continues to
provide a strong market for the Company's gaming products. Sales were
influenced primarily by replacement demand in the second quarter. As
large, new casinos open and other properties expand, competitive pressure
accelerates the replacement of existing machines. Demand is anticipated to
remain strong as planned expansions open and replacement continues. The
Company's imbedded bill acceptor product has proven popular, accounting for
approximately 70% of total machine shipments during the quarter.
The Company also sold approximately 1,100 machines to the first new
casino in Ontario, Canada, representing 65% of the machines installed. The
casino is operated by the strategic alliance of Caesars World, Inc., Circus
Circus Enterprises, Inc., and Hilton Hotels.
Gaming operations revenue increased approximately 18% to $37.5 million
during the three months ended March 31, 1994 compared to $31.7 million
during the same period last year. This increase is a result of the
introduction of new systems in Mississippi and Colorado as well as a larger
installed machine base in Nevada. The growth in these revenues was
partially offset by reduced Colorado lease revenues due to leases being
converted to sales.
The gross margin on product sales, 47.5% and 50% for the quarter ended
March 31, 1994 and 1993, respectively, was lower primarily due to discounts
associated with high volume sales to several customers and costs of
starting up additional production facilities with new, inexperienced
personnel. The gross margin on gaming operations improved due to recent
increases in interest rates which lowered the cost of funding jackpot
annuity payments associated with the Company's linked progressive systems.
Expenses
Selling, general, and administrative costs totaled $23 million for the
quarter ended March 31, 1994 compared to $12.5 million for the same period
last year. This increase is a result of higher employee levels, continued
international selling efforts and market development costs. Legal
compliance costs associated with selling gaming machines in new
jurisdictions also contributed to this increase. Depreciation and
amortization decreased slightly compared to last year due to a decrease in
the number of leased machines in Colorado as many of these leases were
converted to sales. This decline was partially offset by the depreciation
recorded on the office buildings acquired in September 1993.
<PAGE>
Page 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1994
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1993
Research and development expense grew 24% to $5.3 million in the
second quarter as a result of added engineering personnel. The Company
continues to invest resources in developing technology for its products.
Bad debt expense increased $2 million in comparison to the prior year in
response to increased sales and receivables balances resulting from higher
sales.
Other Income and Expense
Interest expense decreased $441,000 to $2.9 million for the second
quarter of 1994. This decline was primarily due to interest savings from
the conversion of $64 million of the Company's convertible subordinated
notes to common stock. This savings was partially offset by increased
interest expense on jackpot liabilities. Both interest income on jackpot
investments and interest expense on jackpot liabilities have increased in
response to the overall growth in play and jackpots in connection with the
Company's linked progressive systems. The increase to interest income
resulting from jackpot investments was reduced by lower investment yields
on the remainder of the portfolio.
Discontinued Operations
During the second quarter of last year, the Company realized a loss
from discontinued casino operations of $139,000. See Note 5 of the
Consolidated Financial Statements regarding discontinued operations.
<PAGE>
Page 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS - SIX MONTHS ENDED MARCH 31, 1994
COMPARED TO THE SIX MONTHS ENDED MARCH 31, 1993
Net income from continuing operations for the six months ended March
31, 1994 was $61.8 million or $.46 per fully diluted share, representing a
54% and 48% increase over the comparable prior year period. The primary
factor for this growth was an approximate 97% increase in product sales and
a 16% increase in game operations revenue over the prior year.
Revenues and Cost of Sales
Product sales revenue totaled $240.4 million and $122 million in the
six months ended March 31, 1994 and 1993, respectively. This growth was
driven by both the emerging Midwest riverboat market and the traditional
Nevada market. Sales to the riverboat markets were strong this year
primarily in Mississippi and Louisiana. The Company has secured a large
percentage of the sales to these new gaming areas. The riverboat market is
expected to provide continued demand as new jurisdictions open and expand.
Nevada also provided strong demand during the period through new
casino openings and replacement of machines at existing casinos. New Nevada
casino properties included the Luxor, MGM Grand, and Treasure Island
Casinos. The Company supplied over 80% of the gaming machines installed at
these locations. Replacement of existing machines also grew in response to
the competitive pressures of the new, large casinos and due to the
popularity of the company's imbedded bill acceptor product. Additional
expansions and replacements are anticipated as the Nevada market maintains
its dominance as a gaming destination.
Gaming operations revenues were $73.8 million in the first half of
fiscal 1994 compared to $63.9 million for the same period in fiscal 1993.
This increase was influenced by the introduction of new systems in
Mississippi and Colorado and a greater number of machines operating on the
existing Nevada systems. The additional revenues from these systems were
offset by decreasing lease revenues in Colorado, due to the conversion of
leases into sales. The success of the Company's linked progressive systems
is expected to continue into the future through expansion into new
riverboat and Indian gaming jurisdictions.
The gross margin on product sales was 47% and 50% for the six months
ended March 31, 1994 and 1993, respectively. This decrease is primarily
due to discounts on high volume sales to several customers in Nevada and
the riverboat markets and costs associated with the addition of new
facilities and personnel needed to meet current and future manufacturing
demands. The gross margin on gaming operations also decreased slightly due
to overall lower interest rates which increased the costs of the annuity
jackpot payments associated with the Company's linked progressive systems.
<PAGE>
Page 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS - SIX MONTHS ENDED MARCH 31, 1994
COMPARED TO THE SIX MONTHS ENDED MARCH 31, 1993
Expenses
Selling, general and administrative costs increased to $39.8 million
in comparison to $24.4 million in the prior year. This increase reflects
the added costs of additional employees and expenses associated with market
development in potential gaming areas, especially in the international
markets. Costs associated with licensing in new jurisdictions has also
contributed to this increase. Depreciation and amortization has decreased
to $9.2 million from $9.9 million in fiscal 1993. The decrease is due to
fewer machine leases in Colorado, where many of the leases have been
converted to sales. This decrease was partially offset by depreciation
recorded on the office buildings purchased by the Company in September of
1993.
Research and development expenses, totaling $9.2 million for the
period, have increased $1.3 million in comparison to the first half of
1993. This growth is primarily due to additional engineering personnel to
support increased product development. Due to the growth in product sales
and corresponding increase in receivables, bad debt expense increased to
$4.8 million compared to $2.1 million recorded in the first six months of
the prior year.
Other Income and Expense
The increase in play and jackpots associated with the Company's linked
progressive systems contributed to the increase in interest income recorded
on investments to fund jackpots and interest expense on the outstanding
jackpot liabilities. This increase in interest expense was more than
offset by interest savings resulting from the conversion of $64 million of
the Company's convertible notes to common stock.
Gains on the sales of assets in both periods relate to gains realized
on the sales of certain securities held in the Company's investment
portfolio.
Discontinued Operations
During the six months ended March 31, 1993, the Company realized a
gain of $14 million from the sale of its investment in riverboat casino
operations as well as a loss from discontinued casino operations of
$217,000. See Note 5 of the Consolidated Financial Statements regarding
discontinued operations.
<PAGE>
Page 19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
CAPITAL RESOURCES AND LIQUIDITY
Working Capital and Cash Flow
Working capital increased $32.8 million to $409 million during the six
months ended March 31, 1994. This growth is primarily due to the following
fluctuations: Accounts receivable rose $18.3 million as a result of
increased sales. Inventory was $22.9 million greater than at September 30,
1993 in anticipation of future increased product demand. Accrued employee
benefit plan liabilities declined $11.2 million as a result of payment of
the incentives. Accrued income taxes also decreased, $9.7 million, due to
payment of the liability. Customer deposits on future sales resulted in a
$19.2 million increase in other accrued liabilities.
During the six month period, the Company generated cash from
operations and financing activities of $8.9 million and $16 million,
respectively. Cash provided by operating activities during the period was
reduced by significant growth in receivables and inventories in connection
with increased sales. This increase in cash was offset by cash used in
investing activities of $61.4 million, primarily associated with purchases
of short term investments, fixed assets, and investments to fund jackpot
liabilities.
Lines of Credit
As of March 31, 1994, IGT-North America had a $7.5 million unsecured
bank line of credit with various interest rate options available to the
Company. The line of credit is used for the purpose of facilitating standby
letters of credit, and the Company is charged a nominal fee on amounts used
against the line as security for letters of credit. Funds available under
this line are reduced by any amounts used as security for letters of
credit. At March 31, 1994, $3,779,000 was available under this line of
credit. As of April 1, 1994, the amount of the line of credit was decreased
to $5 million resulting in an availability of $1,279,00 as of that date.
IGT-Australia had a $440,000 (Australian) bank line of credit
available as of March 31, 1994. Interest is paid at the lender's reference
rate plus 1%. This line is secured by equitable mortgages, and has a
provision for review and renewal annually in May. At March 31, 1994, no
funds were drawn under this line.
Adoption of Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," effective as of October 1, 1992. There
was no material effect on the Company's financial statements due to the
adoption of this statement.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On February 22, 1994, the Company held its annual meeting of
stockholders.
(b) The following directors were re-elected to serve until the next
annual meeting: Albert J. Crosson, Wilbur K. Keating, Charles N.
Mathewson, Warren L. Nelson, Frederick B. Rentschler, John J.
Russell, and Claudine B. Williams. These directors constitute
all of the directors of the Company.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: May 12, 1994
INTERNATIONAL GAME TECHNOLOGY
By: /s/Scott Shackelton
Scott Shackelton
Vice President
Corporate Controller
