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 (Fee Required)
For the Fiscal Year Ended September 30, 1996
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.)
5270 Neil Road, Reno, Nevada 89502
(Address of principal executive offices)
Registrant's telephone number, including area code: (702) 448-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, Par Value $.000625 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 30, 1996:
$2,376,602,514
The number of shares outstanding of each of the registrant's classes of
common stock, as of November 30, 1996:
125,198,406 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.
<PAGE>
Table of Contents
Part I
Page
Item 1. Business 2
Item 2. Properties 23
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 8. Consolidated Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 62
Part III
Item 10. Directors and Executive Officers of the Registrant 62
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners and
Management 62
Item 13. Certain Relationships and Related Transactions 62
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 63
Signatures 65
<PAGE>
Part I
Item 1. Business
General
International Game Technology (the "Company") was incorporated in
December 1980 to acquire the gaming licensee and operating entity,
IGT, and facilitate the Company's initial public offering. In
addition to its 100% ownership of IGT, each of the following
corporations is a direct or indirect wholly-owned subsidiary of the
Company: I.G.T.-Argentina S.A. ("IGT-Argentina"); I.G.T.
(Australia), Pty. Ltd. ("IGT-Australia"); IGT do Brasil Ltda. ("IGT-
Brazil"); IGT-Europe b.v. ("IGT-Europe"); IGT-Iceland, Ltd. ("IGT-
Iceland"); IGT-Japan k.k. ("IGT-Japan; International Game Technology-
Africa (Pty.) Ltd. ("IGT-Africa"); and International Game Technology
S.R. Ltda. ("IGT-Peru").
IGT is the largest manufacturer of computerized casino gaming
products and proprietary gaming systems in the world. The Company
believes it manufactures the broadest range of microprocessor-based
gaming machines available. The Company also develops and
manufactures systems which monitor slot machine play and track
player activity, as well as wide area progressive systems. In
addition to gaming product sales and leases, the Company has
developed and sells computerized linked proprietary systems to
monitor lottery video gaming terminals and has developed specialized
lottery video gaming terminals for lotteries and other applications.
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-Australia was established in March 1985 and is located in
Sydney, Australia. IGT-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.
IGT-Europe was established in The Netherlands in February 1992 to
distribute and market gaming products in Eastern and Western Europe
and Northern 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. In April 1993, IGT-Japan was approved to
supply Pachisuro gaming machines to the Japanese market.
IGT-Argentina was established in December 1993 and opened an office
in Buenos Aires, Argentina to distribute and market gaming products
in Argentina and Peru.
IGT-Brazil opened an office in October 1994 in Sao Paulo, Brazil and
subsequently was incorporated in March 1995 to distribute and market
gaming products in Brazil.
IGT-Africa opened an office in September 1994 in Johannesburg, South
Africa and subsequently was incorporated in October 1995 to
distribute and market gaming products in Southern Africa.
IGT-Peru was established in July 1996 and opened an office in Lima,
Peru to support proprietary systems and to distribute and market
gaming products in Peru.
<PAGE>
Item 1. Business (continued)
Unless the context indicates otherwise, references to "International
Game Technology," "IGT," or the "Company" include International Game
Technology and its wholly-owned subsidiaries and their subsidiaries.
The principal executive offices of the Company are located at 5270
Neil Road, Reno, Nevada 89502; its telephone number is (702) 448-
1200.
For information concerning the revenues, operating results,
identifiable assets, and exported sales of the Company's two
principal lines of business and operations by geographic region, see
Note 2 of the Notes to Consolidated Financial Statements.
Gaming Products
Products
The Company develops its gaming products for both domestic and
international markets. In domestic markets, the Company targets the
traditional casino gaming market and the government-sponsored
machine gaming market. In international markets, the Company also
targets casino-style, gaming-hall, and government-sponsored video
gaming markets.
Over the past decade, advancements in gaming machine technology have
attracted a greater number of North American players to slot and
video machines due primarily to higher jackpots and enhanced player
appeal. These improvements have significantly influenced casino
gaming revenues. Generally, annual machine revenues of domestic
casinos exceed revenues from table games.
Internationally, machines have proven to be appealing to players,
but table games represent the majority of earnings. Legalizations of
casino and machine gaming have occurred in South America, Africa,
Eastern Europe, and parts of Asia during the last year.
The Company was the first to develop computerized video gaming, and
today under the Players Edge Plus trademark, sells a variety of
computerized video gaming machines. The machines include video
poker and "blackjack" products in the upright, slant-top and drop-in
bar models. The Players Edge Plus line is also available in slant-
top keno, dual screen keno, bingo, large screen video poker and
video slots. Players Edge Plus machines offer player appeal and
security including multilevel progressives, imbedded and side-mount
bill acceptors, enhanced sound packages, imbedded progressive meters
and data communication devices. These games now offer an extensive
line of partitioned software which allows for faster game
development, jurisdictional approval, and overall customer
convenience.
IGT also offers a complete line of spinning reel slot machines sold
under the trademark S-Plus. The S-Plus series slot machines use an
advanced microprocessor system that accommodates several progressive
link configurations, enhanced audit trail functions, selection of
game software and optional side-mount or imbedded bill acceptors. S-
Plus machines run existing S-slot programs or the latest partitioned
software which facilitates program updates. A game change can occur
quickly by selecting a new program chip from IGT's game library and
by changing the glass and reel strips. The S-Plus machines are
manufactured in various sizes and colors and are offered in several
designs including upright and slant-top.
<PAGE>
Item 1. Business (continued)
The Company manufactures and markets video gaming terminals ("VGTs")
for government-sponsored gaming programs. The VGTs are similar to
the Company's video gaming machines, although the method of prize
payments may differ. After inserting money in a VGT, the player is
issued credit and plays the machine as a traditional video machine.
Player wagers are deducted from the credit meter and winnings are
added instead of coins being dropped into a tray. Upon completion of
play, the VGT prints out a ticket showing the remaining amounts and
value of credit. The ticket is redeemable for cash by a clerk or
teller in the retail establishment. VGTs are typically linked to a
central computer for accounting and security purposes and are
monitored by state lotteries or other government agencies.
In September 1996, IGT and Dreamport Inc., a gaming and entertainment
subsidiary of GTECH Holdings Corporation ("GTECH") announced the
formation of IGDreamport. The new joint venture was formed to pursue
opportunities in the emerging public video lottery gaming market.
IGDreamport plans to pursue the development, improvement, and
marketing of video lottery technology, games and services designed to
expand the products offerings available to government sponsored
lotteries worldwide.
In the video product line, IGT offers the Game King (also named
Winner's Choice in the video gaming territories) which is marketed
in both the traditional casino gaming and government-sponsored
markets. The Reduced Instruction Set Computer ("RISC") processor-
based technology of the Game King uses Intel's Multimedia and
Superscalar processor, the 80960. The Game King product line offers
interactive game play features and graphics in a highly secure and
reliable multi-game package. The internal architecture offers
customers improved game flexibility and expansion capabilities. The
Game King also offers improved security features including silicon
signature chips in all PC boards, enhanced door monitoring, and
extensive event log with time and date stamp available. The
Winner's Choice product is operational in government-sponsored
jurisdictions of Delaware, Oregon, Rhode Island, Sweden, West
Virginia, and the United States Army. Game King is approved and
marketed in the traditional gaming jurisdictions of Australia,
Colorado, Iowa, Louisiana, Mississippi, Missouri, several Native
American markets, Nevada, New Jersey, and South Dakota.
<TABLE>
The following schedule sets forth revenues derived from the sale of
gaming machines:
<CAPTION>
Fiscal Years Ended September 30,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Reel-type slot machines $254,012 $226,216 $312,459
Video products 144,699 125,648 125,483
Pachisuro 16,732 - -
Video gaming terminals/other 2,185 271 10,830
$417,628 $352,135 $448,772
</TABLE>
As an enhancement to its core machine business, IGT created an
Interactive Game Division in August 1996 to develop a broader
variety of gaming machines. This division will pursue products that
offer new, different, and more advanced types of games and explore
uses for new technologies. It is also expected to provide the means
for the Company to introduce certain of its international products
into domestic markets. While interactive games will be developed
under all of the product lines, the primary development is occurring
on the Game King video platform.
<PAGE>
Item 1. Business (continued)
IGT also develops, manufactures and markets microprocessor-based
Slot Marketing and Revenue Tracking "SMART" systems. The SMART
computer system identifies frequent players, records playing
history, provides direct marketing information, automates slot
accounting and provides additional security to casino customers. IGT
provides SMART system 24-hour technical support and a software
maintenance agreement for on-site service by specially trained
system engineers. In August 1996, the Company signed a letter of
intent to form a strategic alliance with Acres Gaming, Inc. to
distribute Acres' Concept III promotions and player tracking
components. The Acres' bonusing system is proposed to be merged
with IGT's SMART system to jointly offer the casinos the broadest
set of marketing and revenue enhancing tools. To date, no
definitive agreement has been executed with Acres Gaming.
The Company's innovations in slot and video technology have
increased the machines' earning potential by improving the ease and
speed of play, utilizing local game preferences, adding bonus
features, and decreasing down-time through improved reliability and
added service features. All new gaming machines offer a wide
variety of games, innovative designs, sophisticated security
features, self-diagnostic capabilities, and various accounting and
data retention functions. The Company's engineering and design
staff continually provide technological improvements and ongoing
game development. The Company has obtained numerous patents on
various aspects of its video and reel-type gaming machines and
systems. The visual aspects of the product are upgraded and
customized by the Company's graphic design and silk-screen
departments.
Markets
Overview
Demand for the Company's products comes principally from four
sources: the establishment of new gaming jurisdictions; expansions of
casinos; additions of new casinos within existing gaming markets; and
the replacement of older machines with newer, technologically-
advanced machines. Historically, gaming machines have a mechanical
life of approximately 10 years. However, in established markets, such
as Nevada, gaming machines are replaced on average between three to
seven years. Replacement occurs as a result of technological
advances, new designs, improvements in visual characteristics, the
development of new games, general wear and tear of use, and the
evolving preference of casino patrons.
IGT has benefited from the significant expansion of legalized gaming.
As part of this expansion, casino-style gaming has become an
increasingly important component of the "leisure time" industry. The
increased legalization and popularity of gaming has presented growth
opportunities for the Company both in the domestic market (North
America) and in the emerging international market. Specifically, in
the past few years, the introduction of riverboat-style gaming in the
U.S. Midwest, the expansion of Native American Class III-style casino
gaming, the growth in the Nevada market and the continued development
of government-sponsored casino gaming have presented expanded markets
for gaming machines.
While the Company anticipates future growth in the gaming industry,
the rate of growth in the North American marketplace has diminished
since the substantial growth experienced in the early 1990s. During
fiscal 1995 and 1996, the gaming industry in the United States was
influenced by organized opposition to legalized gambling, and the
approval and funding by the Senate of the National Gambling Impact
Study Commission. These external influences are outside the control
of the Company. The Company cannot predict the rate at which new
domestic and international markets will develop, and any slowdown or
delay in the growth of new markets will adversely affect the
Company's future results.
<PAGE>
Item 1. Business (continued)
North American Markets
Nevada
The most established North American gaming markets are Nevada and
Atlantic City. Nevada is both the oldest and largest market for the
Company's products with an installed base of approximately 187,200
gaming machines. Of these machines, the Company estimates it
manufactured 146,500.
Over the past several years, there has generally been increased
demand for gaming products, attributed to the construction of new
casino properties and the expansion or refurbishment of existing
operations in Nevada. Demand for new products and increased demand
for gaming machines with imbedded bill acceptors increased the
replacement of existing machines. In fiscal 1996, the Company
provided gaming machines to two significant new casinos: the Monte
Carlo Casino and Stratosphere Tower, both in Las Vegas, Nevada.
Payment has been received for machines sold to these casinos. In
addition, several other Nevada properties to which the Company sold
gaming machines underwent smaller-scale expansions in fiscal 1996.
The Company had unit sales of 21,500 machines to the Nevada market
during fiscal 1996 as compared to 25,300 in fiscal 1995.
Several major new casinos are currently under construction in Las
Vegas and are scheduled to open in late calendar 1996 through early
1998. These properties include: Main Street Station; New York, New
York; Orleans; Sunset Station; and Bellagio. The Company, at
present, has commitments for product purchases from certain of these
casinos anticipated to open in fiscal 1997. Other significant
properties that have been announced, but are not yet under
construction, include: Circus Circus Project X; Planet Hollywood; and
Paris. The Company does not have commitments for product purchases
from these casinos and, due to timing of the scheduled openings of
these properties, does not expect to make sales to these properties
in fiscal 1997.
The Company received replacement orders in fiscal 1996 from various
Nevada casinos for machines with imbedded bill acceptors. In 1997,
the Company expects that demand for machines with imbedded bill
acceptors will continue but the level of demand cannot be predicted.
Demand for these products is dependent, in part, upon the
competitiveness of casinos and the willingness of casinos to incur
the costs associated with replacing existing older gaming machines
with new machines.
Atlantic City
Atlantic City is the second-largest gaming market in the Northern
Hemisphere. The installed base for the Atlantic City market is
approximately 32,900 gaming machines. Of these machines, the Company
estimates it manufactured 15,000. In April 1996, the New Jersey
Casino Control Commission repealed regulations that limited to 50%
the share of gaming machines that any one manufacturer could supply
to an Atlantic City casino. In fiscal 1996, several casinos in
Atlantic City underwent expansions or made machine upgrades. The
Company, through its distributor Atlantic City Coin & Slot Service
Company, sold approximately 5,300 machines to the various Atlantic
City and Caribbean properties in fiscal 1996 as compared to 4,600 in
fiscal 1995. Due to the rescission of the 50% rule, the Company
anticipates continued future demand for replacement machines with
imbedded bill acceptors in Atlantic City, but the level of demand
cannot be predicted.
<PAGE>
Item 1. Business (continued)
Expansion in the Atlantic City market began in March 1996, when
Mirage Resorts, Inc. announced that it had entered into an agreement
with the city to develop 178 acres of land in the marina area of
Atlantic City known as the H tract. Pending approval of an accessway
into the marina district, Mirage has proposed the development of a
large-scale casino project in Atlantic City with Circus Circus
Enterprises, Inc. and Boyd Gaming Corporation as tentative partners.
The project would open in late 2001 or early 2002, assuming it
proceeds. ITT Corporation recently announced a joint venture with
Planet Hollywood to develop a hotel and casino on the Atlantic City
boardwalk, to be completed in 1998. If completed, this will be the
first newly constructed casino into the Atlantic City gaming market
since the opening of the Trump Taj Mahal in April 1990. The new
casinos will be a substantial competitive addition to the Atlantic
City marketplace. Other casino operators that have announced plans
to develop in the Atlantic City market include MGM Grand, Inc. and
Sun International Entertainment. Assuming any of these projects are
constructed, other Atlantic City casinos may make machine upgrades to
remain competitive. The Company cannot predict the eventual
construction or timing of completion and the Company does not have
commitments for product purchases with these casinos.
Riverboat Gaming
Riverboat-style gaming began in Iowa during 1991 and as of September
1996 was operating in six states: Illinois, Indiana, Iowa, Louisiana,
Mississippi, and Missouri. The state of Indiana began riverboat
gaming operations during fiscal 1996. The state issued 9 licenses
during fiscal year 1996, and is expected to grant a total of 11
casino licenses by the end of fiscal 1997. Of the 9 issued licenses
in Indiana, 5 boats were opened by the end of fiscal year 1996. At
the end of fiscal 1996, the riverboat gaming installed base was
estimated at 68,100 operating on more than 75 riverboats. Of these
machines, the Company estimates it manufactured 56,800. In fiscal
1996, the Company delivered gaming machines to the new casino
operations of the Empress III Casino in Hammond County, Indiana;
Indiana Gaming Company (Argosy) in Indiana; Majestic Star Casino, LLC
in Gary, Indiana; Trump Casino in Indiana; Grand Casino in Tunica,
Mississippi; Riverfront Station in Kansas City, Missouri; Harvey's
Iowa Management, Council Bluff, Iowa; and Greenville Riverboat, LLC
in Mississippi. The Company delivered 15,000 gaming machines to
riverboat casino operators during fiscal 1996 as compared to 13,300
in fiscal 1995. The Harrah's Jazz Casino in New Orleans, Louisiana
opened in late fiscal 1995 and purchased approximately 1,500 machines
from the Company. The Harrah's Jazz Casino has subsequently closed
and is currently undergoing a reorganization. The Company has
received payment in full for the machines purchased by Harrah's Jazz.
The growth rate in the riverboat gaming market is expected to decline
compared to fiscal 1996; however, several major riverboat operations
are scheduled to open throughout fiscal 1997 and 1998. These
properties include Imperial Palace (Mississippi); Players and
Harrah's (Missouri); and Showboat Marina and ITT Corporation -
Caesars (Indiana). The Company currently has orders for the product
purchases from three of these riverboat operations.
During fiscal 1996, several states expressed interest in introducing
new gaming legislation. Throughout this period, few of these states
have made significant legislative progress towards this goal.
Several of these states may again pursue the approval issue in 1997.
The further expansion of casino-style gaming in these and in any
other potential jurisdictions will continue to be the subject of
intense public debate with legalization typically requiring a public
referendum or other legislative action. In addition, any favorable
public referendum or legislative action may be the subject of legal
challenges. These factors have and will continue to influence and
potentially delay the timing and opening of casino-style gaming in
new domestic jurisdictions.
During the November 1996 elections, voters in Michigan and West
Virginia approved certain forms of gaming: land-based casinos in
Michigan and machines at West Virginia racetracks. However,
Arkansas, Colorado, Ohio and Washington defeated ballot measures that
would have allowed various forms of machine gaming: land-based
casinos in Arkansas; limited stakes casinos in Trinidad, Colorado;
riverboats in Ohio; and Native American casinos in Washington.
Voters in Dallas County, Iowa and DeSoto County, Mississippi defeated
local option proposals to allow riverboat gaming in those
communities. Certain parishes in Louisiana defeated video poker.
<PAGE>
Item 1. Business (continued)
Native American Gaming
Casino-style gaming continued to expand on Native American lands
during fiscal 1996. Native American gaming is regulated under the
Indian Gaming Regulatory Act of 1988 which permits specific types of
gaming. Pursuant to these regulations, permissible gaming devices
are denoted as "Class III Gaming" which requires, as a condition to
implementation, that the Native American tribe and the state
government in which the Native American lands are located enter into
a compact governing the terms of the proposed gaming. IGT machines
are placed only with Native American tribes who have negotiated
compacts with their respective states and have received approval by
the U.S. Department of the Interior.
The Company, through its distributor Sodak Gaming, Inc. ("Sodak"),
began selling machines to authorized Native American casinos in 1990.
The Company has either directly or through its distributor sold
machines to Native American casinos in the following 17 states:
Arizona, Colorado, Connecticut, Iowa, Kansas, Louisiana, Michigan,
Minnesota, Mississippi, Montana, Nevada, New Mexico, North Carolina,
North Dakota, Oregon, South Dakota and Wisconsin. In addition to the
approved states, Class III compacts are either under consideration,
or there has been ongoing litigation between Native American tribes
and the state governments, in several other states. The favorable
resolution and approval of compacts in any of these states would
provide additional market opportunities for the Company's products.
The Company cannot, however, predict when and whether any such
approvals will occur. During fiscal 1996, the U.S. District Court
for the District of New Mexico ruled that the Governor exceeded his
authority in signing the compact and held the compacts were invalid.
Subsequently, nine New Mexico Pueblos filed a motion with the
District Court seeking to stay the court's ruling pending an appeal.
On July 12, 1996, the stay was granted and the nine Pueblos have
remained open under the terms of the stay. One of the Pueblos closed
its facility in September, 1996 under a separate lawsuit that was not
included as part of the District Court's stay; however, it has also
subsequently reopened pursuant to a no-action letter issued by the
U.S. Attorney for New Mexico.
At the end of fiscal 1996, the installed base of Class III gaming
machines within Native American operations was approximately 65,900
gaming machines. Of these machines, the Company estimates it
manufactured and sold through its distributor 49,100. In fiscal
1996, the Company sold gaming machines in the following tribal
locations: Casino Rama, Chippewa of Rama Tribe in Ontario Canada; the
Mohegan Sun Resort, Mohegan Tribe of Connecticut; Soaring Eagle
Casino, Saginaw Chippewa Indian Tribe of Michigan; and the Dakota
Magic Casino, Sisseton Wahpeton Tribe of North Dakota. The Company
estimates it sold 13,200 gaming machines to approved Native American
casinos in fiscal 1996 as compared to 8,800 in fiscal 1995.
Limited Stakes Gaming
The states of Colorado and South Dakota offer limited stakes casino-
style gaming throughout specified historic "mining towns." Colorado
currently has an installed base of nearly 13,300 gaming machines in
the cities of Black Hawk, Central City and Cripple Creek. Of these
gaming machines, IGT estimates it manufactured 11,800. In fiscal
1996, the Company sold approximately 1,500 gaming machines to
Colorado casino operators as compared to 3,000 in fiscal 1995. South
Dakota has an installed gaming machine base of nearly 2,200 gaming
machines in Deadwood. Of these machines, IGT estimates it
manufactured 1,600.
<PAGE>
Item 1. Business (continued)
Racetrack Gaming and Government Sponsored Public Gaming
In September 1992, the state of Rhode Island approved gaming machines
for its Lincoln Park and Newport Jai Alai facilities. The Company
has installed approximately 300 machines of the total 1,600 gaming
machines. In fiscal 1995, the State of Iowa legalized the
introduction of gaming machines at the various racetrack facilities
within the state. There were a total of 2,800 gaming machines
installed among the Iowa racetracks of Bluff's Run, Dubuque Greyhound
Park and Prairie Meadows. Of these machines, the Company estimates
it manufactured 2,400. The introduction of gaming machines at
various racetracks was approved by the State of Delaware and
operations began in December 1995 at the Delaware Park and Dover
Downs. In September 1996, a third track opened operations at
Harrington Racing. The Company has manufactured approximately 1,250
of the total 2,500 machines at the Delaware tracks. Delaware
legislation includes a "50% rule" which prohibits a racetrack from
having more than fifty percent of its machines manufactured by the
same vendor. The Company receives on-going participatory revenue from
the State for use and support of these machines. In fiscal 1996, West
Virginia added 2,000 gaming machines installed at the Mountaineer
Park, Wheeling Downs, and Tri-State Greyhound Park. The Company has
manufactured approximately 800 of the total gaming machines at these
facilities. In fiscal 1996, the Company sold approximately 500
gaming machines to the race track jurisdictions as compared to 1,900
in fiscal 1995.
Future expansion is anticipated to continue in the pari-mutuel
wagering industry; however, the rate and the level of expansion is
uncertain and cannot be predicted by the Company. In fiscal 1995 and
1996, racetracks in Delaware, Iowa, Rhode Island, and West Virginia
installed gaming machines. In November 1996, the Charlestown Races
located in Charlestown, West Virginia approved gaming machines in its
racetrack facilities. Other areas considering the addition of gaming
machines to the racetrack facilities are Kentucky, Massachusetts, and
New Hampshire. Racetrack gaming is dependent upon enabling
legislation passed by the appropriate state legislatures and cannot
be predicted by the Company.
Government-sponsored gaming in North America is also a market for the
Company's gaming products. The Company's video gaming terminals are
currently operational in Louisiana, Oregon, South Dakota, and the
Canadian provinces of Alberta, Manitoba, New Brunswick, Newfoundland,
Nova Scotia, Prince Edward Island, Quebec and Saskatchewan. The
Company has supplied its Security Accounting Management System (SAMS)
central computer for government-sponsored gaming in Louisiana,
Manitoba and Oregon and has manufactured approximately 21,500 of the
114,200 total video gaming terminals installed in North America. In
fiscal 1996, the Company sold 1,400 video gaming terminals in the
Canadian government-sponsored marketplace compared to approximately
200 units in fiscal 1995.
In addition to video gaming, various Canadian provincial governments
have approved and are operating casino-style gaming. Several
provinces including Manitoba, Nova Scotia, Ontario and Quebec have
casino operations. At the end of fiscal 1996, the total installed
base of gaming machines in the Canadian provinces was approximately
10,000 gaming machines. Of these machines, the Company estimates it
manufactured 5,700. In fiscal 1996, the Company sold approximately
2,300 gaming machines in the Canadian marketplace as compared to 800
in fiscal 1995.
In May 1996, the Ontario Parliament announced its intention to pursue
video lottery gaming for racetracks, bar and taverns, and charitable
casinos. The legislative process was completed in November 1996.
The final operational parameters are scheduled to be completed in
fiscal 1997. The Company is not able to predict the timing nor the
final outcome of the policy decision, and the Company does not have
commitments for product purchases in this market.
<PAGE>
Item 1. Business (continued)
Cruise Ship Gaming
The Company also markets its machine products to international cruise
ship operators. The Company estimates that the cruise ship market
has approximately 12,500 gaming machines in place. Of these
machines, the Company estimates it manufactured 8,700. In fiscal
1996, the Company sold approximately 1,400 gaming machines to various
licensed cruise ship operators as compared to 1,900 in fiscal 1995.
International Markets
Demand for casino-style gaming products also exists in international
jurisdictions. Traditionally, gaming in international markets has
consisted of both North American casino-style gaming, private clubs
and, in some countries, smaller-scale "gaming halls." International
casinos commonly target the tourist population and are usually
located in large urban areas or designated tourist locations. The
number of large-scale casinos per jurisdiction may be limited by the
government. The casinos may be privately-owned, government-owned or
a joint venture between the state and a private operator.
Frequently, the investment in these facilities is significant and
therefore often managed by world-wide casino operators. In addition,
there are corporate and charity-run operations in the international
arena.
The number of machines within "gaming halls" is usually fewer than
what is found in casinos, but it is common to find numerous halls
located throughout a jurisdiction. The types of games within the
halls can include amusement-with-prize machines ("AWP") as well as
gaming machines. In some foreign jurisdictions, the machines pay out
in the form of tickets, vouchers or tokens, rather than actual coins.
These gaming establishments are usually privately-owned and, due to
the smaller size of the locations, the investment required is
significantly less than that for casino developments.
Australia and New Zealand
The Australian market is the most established international
jurisdiction for gaming products outside of North America. Casino-
style gaming has existed in Australia since 1973 and in the pub and
club market since 1956. Currently, a total of 12 casinos operate in
Australia within the states of Queensland, the Northern Territory,
Western Australia, South Australia, Victoria, Tasmania and the
Australian Capital Territory. The installed base for the Australian
market is approximately 137,000 gaming machines in legalized casinos,
pubs and clubs. The Company began selling gaming machines in
Australia in 1986 and of the installed machine base in the Australian
market, the Company estimates it manufactured 29,000. In fiscal
1996, the Company had sales of approximately 5,100 gaming machines in
Australia as compared to 4,200 gaming machines in fiscal 1995.
The state of New South Wales is the largest market in Australia for
gaming machines, with an estimated total of 80,000 gaming machines in
2,100 pubs and 1,500 not-for-profit clubs. Gaming operations have
expanded in New South Wales, as a casino operator has been licensed
for the temporary Sydney Casino which began operations at the end of
fiscal 1995. In addition to New South Wales, several Australian
jurisdictions have implemented or are considering the legalization or
expansion of gaming operations within their borders. In calendar
1996, the Reef Casino at Cairns and the Treasury Casino in Brisbane
opened in Queensland. The Government of the Northern Territory has
also announced the expansion of gaming machine operations into clubs
and hotels to commence in fiscal 1997. The Government of Tasmania
has approved a similar expansion of gaming into clubs and hotels, in
the island state during calendar 1997.
<PAGE>
Item 1. Business (continued)
Gaming also exists in New Zealand in the form of casino-style gaming,
and gaming in pubs and clubs. Casino-style gaming was introduced in
New Zealand during fiscal 1995 with the commencement of operations at
the Christchurch Casino. The installed base for the New Zealand
market is approximately 9,500 gaming machines. Of these machines,
the Company estimates it manufactured 4,900. In fiscal 1996, the
Company had sales of approximately 900 gaming machines in New Zealand
as compared to 600 gaming machines in fiscal 1995. The New Zealand
market expanded with the opening of the Sky City project in Auckland
in 1996.
Europe, Middle East and North Africa
The European, Middle Eastern and North African markets are serviced
by the Company's sales and distribution center located in The
Netherlands. The Company has had a direct sales presence in Europe
since February 1992. Since that time, increasing customer awareness
of product availability, combined with service and training
assistance, has contributed to improvements in the Company's share of
this market. The Company has identified a significant number of
customers for the Company's gaming machines in Eastern Europe,
Western Europe, the Middle East and Northern Africa. The European
market is a unique market as many countries also have established AWP
machines which provide competition for the casino-style gaming
machines manufactured by the Company.
The Company estimates that throughout Europe, the Middle East and
North Africa, the market base of legally installed gaming machines is
in excess of 55,000 gaming machines. Of these machines, the Company
estimates it manufactured 14,000. In fiscal 1996, the Company made
sales of 4,500 machines in this market, compared to 3,900 machines in
fiscal 1995. The majority of these machines were sold to casino
operations in France, Greece, Slovenia, Turkey, and other European
casino jurisdictions. During the year, the Company also made its
first sales of video gaming terminals and a SAMS central monitoring
system linking terminals in Sweden.
During fiscal 1993, the Company completed an agreement with the
University of Iceland Lottery ("UIL") to supply video terminals and a
central system linking the video terminals. The central system
incorporates a progressive jackpot feature. The Iceland system,
managed by the UIL, began operating in December 1993 and continues to
operate with 390 video lottery terminals manufactured by the Company.
The Company also delivered 300 video gaming terminals and a central
system to Norges Handikapforbund in Norway in fiscal 1995, and
participates in the revenue generated by these machines. At the end
of September 1996, approximately 160 terminals were fully
operational.
Africa
The Company has targeted the African market as a developing market
for its products. Currently, there are several legalized
jurisdictions to which the Company sells its products including
Kenya, Namibia, Botswana, Lesotho, Mozambique and South Africa.
The government of South Africa has recently taken steps to expand
legalized gaming. New gaming legislation in South Africa permits the
nine provinces to license a total of 40 casinos. There are currently
17 licensed casinos in the country, although it is anticipated that
at least eight of the existing operations will be required to close
under the provisions of the National Gambling Act. The Company
anticipates, therefore, that as many as 31 new casinos will be
licensed in the country over the next several years. The legislative
process is outside the control of the Company and the Company cannot
predict the approval of gaming in these new markets.
<PAGE>
Item 1. Business (continued)
All of the nine South African provinces are in various stages of the
process of implementing the provisions of the National Gambling Act.
The Province of Mpumalanga recently began accepting applications for
casino licenses and expects to begin issuing licenses in the first
half of 1997, although there is no guarantee that the Provincial
Gambling Board will adhere to its announced timetable. Five other
provinces - Gauteng, Western Cape, KwaZulu-Natal, Free State, and
Northern Province - have enacted provincial gambling laws and have
appointed or are now appointing their provincial gambling boards.
The three remaining provinces are currently considering drafting
gambling legislation.
The National Gambling Act and most of the provincial gambling bills
also authorize limited gaming machines (limited in number, wager and
payout) in other venues such as bars, taverns, and social or sports
clubs. The specific limitations will be defined in regulations. In
response to these developments, the Company established IGT-Africa
with a sales and service office in Sandton, a suburb of Johannesburg,
South Africa.
During fiscal 1996, the Company made sales of approximately 300
gaming machines of which approximately 200 were to Sun International,
the operator of the 17 approved casinos in South Africa. In fiscal
1997, contingent upon final enactment of all the necessary
legislation and regulatory approval of the South African government,
the Company is exploring the possibility of sales of gaming machines
to the new facilities contemplated under the South African gaming
legislation.
Asia
The Company has identified Japan as an important market for its
products. The Japanese market consists of more than 3,600,000
Pachinko machines and 700,000 Pachisuro machines which operate in
18,000 parlors throughout the country. The Company designed its
first Pachisuro machine (Japanese-style slot machine) for this market
which was approved in April 1993 by the Japanese technical testing
laboratory SECTA (Security Electronics and Communications Technology
Association). In November 1995, IGT-Japan became the first non-
Japanese company to be admitted as a full member to Japan's 20-member
Nichidenkyo, an association of Pachisuro manufacturers. IGT-Japan's
new membership status gives the Company the opportunity to compete
for a share of Japan's Pachisuro machine replacement market,
estimated at approximately 300,000 machines annually. In response,
IGT-Japan has established a regional distribution network to market
the Company's Pachisuro machines.
During fiscal 1995, the Company increased its investment in design,
sales and support staff of the IGT-Japan office to pursue the
Japanese market and continued this investment throughout fiscal 1996.
IGT-Japan designed a machine which received regulatory approval in
May 1996. The model theme is Red, White, and Blue, borrowed from the
Company's traditional Nevada-style slot machine model. IGT-Japan
sold approximately 7,200 units in the fourth quarter of fiscal year
1996 compared to no sales in this market during fiscal 1995.
Delivery of signed orders of the Red, White, and Blue model will
continue into the first quarter of fiscal year 1997. At the same
time, IGT-Japan has submitted a follow-up model to SECTA and
continues to work on enhancements for upcoming models.
The Company also targets China as a potential future market for its
products. Although gaming is generally prohibited under the current
central government within China, the Central Government allows
Provincial and Municipal Governments to draft region-specific
regulations for the establishment of entertainment centers and the
regulation thereof. Recent Central Government Policy Statements are
more restrictive, and the Company has been working closely with
national, provincial and municipal governments to adapt its products
to the requirements. The Company currently has a representative
office in Shanghai, which will be used as the "hub" to distribute
products in China when and if the market develops.
<PAGE>
Item 1. Business (continued)
During fiscal 1995, the Company initiated operations with
international partners to develop a bingo and entertainment center
in Zhengzhou, Henan Province, China. The center, which has been
closed since December 1995, will remain closed pending further
analysis of the recently issued Central Government Policy Statement.
In addition, the Company participated in machine operations in two
different locations in Shenyang, Liaoning Province, China. In light
of the recently published Central Government Policy, the Company has
closed both operations to await regulations that clarify the
recently issued policy statements. In fiscal 1996, the number of
machines sold was minimal.
Latin America
The Company has established offices in Sao Paulo, Brazil; Buenos
Aires, Argentina; and Lima, Peru in Latin America to market its
products. Casino gaming is currently legal in some form in
Argentina, Chile, Colombia, Ecuador, Paraguay, Peru, and Uruguay.
The pace and timing of developments within these markets cannot,
however, be predicted. Machine system gaming for sports entities and
lotteries was authorized in Brazil in fiscal 1996. The Company is
exploring business opportunities within approved jurisdictions in the
Latin American marketplace. In response to the developing Latin
American marketplace, the Company has customized existing products
for the Latin American market by translating more than 25 games into
Spanish and Portuguese and by adapting graphics and language to local
cultures. During fiscal 1996, the Company sold 4,800 gaming machines
in the Latin American market as compared to 1,500 machines in fiscal
1995.
Privatization efforts are underway in Argentina and Panama and may
occur in Uruguay where the governments currently own the casino
gaming halls. During fiscal 1995, the Company also entered into a
joint venture for gaming development within Argentina (See Note 12 to
the Consolidated Financial Statements); however, in fiscal 1996 this
joint venture was dissolved. In Venezuela, Paraguay, Bolivia and
Mexico the governments are reviewing and updating current regulations
governing a wide array of gaming.
In August 1996, Sodak entered into an agreement with CBF-Brazilian
Soccer Federation that will allow Sodak to operate video gaming
machines in Brazil. The Company has formed a relationship with Sodak
to deliver video lottery machines and a central system for their
linked gaming project in Brazil. In fiscal year 1997, the Company is
planning to operate a wide area progressive system in Lima, Peru,
pending governmental approval. The Company has no control over the
outcome or timing of such approval.
Gaming Operations
Proprietary Systems
In 1996, the Company celebrated its ten-year anniversary of the
development and introduction of the world's first electronically-
linked, inter-casino proprietary gaming machine system. These
systems link gaming machines in various casinos to a central
computer. The systems build a large "progressive" jackpot which
increases with every wager made throughout the system. The systems
are designed to increase gaming machine play for participating
casinos by giving players the opportunity to win jackpots
substantially larger than those available from gaming machines which
are not linked to a progressive system. The following are linked
progressive systems developed and operated by the Company.
In Nevada, nine systems are operated under the names Megabucks,
Quartermania, Nevada Nickels, Fabulous Fifties, High Rollers,
Quarters Deluxe, Dollars Deluxe, Nickels Deluxe and Keno Deluxe. Of
the total 4,650 gaming machines linked to these systems, 3,090 are
owned by the Company and 1,560 are owned by casinos.
<PAGE>
Item 1. Business (continued)
In Atlantic City, New Jersey, eight systems operate under the names
Megabucks, Quartermania, Fabulous Fifties, High Rollers, Megapoker,
Pokermania Dollars Deluxe and Quarters Deluxe. These systems are
operated by a trust managed by representatives from participating
casinos. The Company owns all of the approximately 1,450 machines
linked to these progressive systems.
In Mississippi, nine systems are operated under the names Megabucks,
Quartermania, Fabulous Fifties, Mississippi Nickels, Pokermania, High
Rollers, Quarters Deluxe, Dollars Deluxe, and Nickels Deluxe. Of the
total 1,000 gaming machines linked to these systems, 600 are owned by
the Company and 400 are owned by casinos.
In Colorado, three systems are operated under the names Megabucks,
Quartermania and Colorado Nickels. Of the total 370 gaming machines
linked to these systems, 160 are owned by the Company and 210 are
owned by casinos.
In Louisiana, five systems are operated under the names Megabucks,
Quartermania, Louisiana Nickels, Fabulous Fifties and High Rollers.
Of the total 300 gaming machines, 275 are owned by the Company and 25
are owned by casinos.
In Native American casinos, seven systems are operated under the
names Megabucks, Quartermania, Nickelmania, Dollars Deluxe, Fabulous
Fifties, and separate Megabucks and Quartermania systems in Arizona.
Approximately 1,030 casino-owned machines operate on these systems in
the states of Arizona, Connecticut, Iowa, Louisiana, Michigan, New
Mexico, North Dakota, Oregon, South Dakota, and Wisconsin. The
systems in Native American casinos began operating in August 1994.
Other systems in operation include a Quartermania system in Deadwood,
South Dakota, which includes approximately 30 machines owned by
casinos. In Iceland, one system developed by the Company operates
under the name Gullnaman with approximately 390 Company-owned
machines operating on this system. A Megabucks system in Macau
consists of approximately 200 machines owned by casinos. The Company
has also investigated the possibility of operating proprietary
systems within four additional Midwestern jurisdictions. The Company
is also pursuing the placement of progressives in the country of
Peru.
To further develop its proprietary gaming systems market, the Company
has entered into separate joint marketing alliances with Anchor
Gaming, Shuffle Master, Inc. and Mikohn Gaming Corporation. The
intent of these strategic alliances is to combine the game
development efforts of other creative companies with the Company's
wide-area progressive system expertise and its strong distribution
channels.
The operation of linked progressive systems varies among
jurisdictions as a result of different gaming regulations. In
Louisiana, Mississippi, Nevada, South Dakota and Native American
locations, the casinos retain the net win, less a percentage of the
pay table dedicated to fund the progressive jackpot which is
administered by the Company. These jackpots are paid in equal
installments over a ten to twenty-five year period. In Atlantic
City, the casinos retain the net win, less a percentage of the pay
table dedicated to fund the progressive jackpot which is administered
by a trust managed by representatives of the participating casinos to
pay the jackpots and other system expenses. The trust records a
liability to the Company for an annual casino licensing fee as well
as an annual machine rental fee for each machine. In Colorado, the
casinos retain the net win less a percentage of the pay table
dedicated to fund the progressive jackpot which is administered by a
separate fund managed by the Company which pays the jackpots.
Progressive system lease fees are paid to the Company from this fund.
The Company also offers a "leased" link progressive system which
links gaming machines within a single casino or multiple casinos of
common ownership. Currently, three major hotel casinos operate
leased link progressive systems with approximately 235 gaming
machines linked on all such systems.
<PAGE>
Item 1. Business (continued)
In September 1992, Rhode Island began operating a video lottery
system linking approximately 850 video lottery terminals at two pari-
mutuel facilities. As of September 30, 1996, an estimated 1,600
terminals were operating on the system. IGT, one of four
manufacturers providing terminals, supplied approximately 325
terminals installed on this system and receives revenue for the use
of the terminals. The Rhode Island Lottery has the authorization to
place up to 5,000 machines under current legislation.
In December 1995, video gaming became operational in the state of
Delaware. Under a technology provider license with the Delaware
State Lottery, the Company leases approximately 1,250 machines to the
state. These machines are located at three pari-mutuel facilities
across the State. The Company receives a percentage of revenue for
use and maintenance of these machines. The lease agreement between
the Company and the Delaware Lottery will expire in December 2002.
The Company presently has 800 machines installed at Mountaineer Race
Track in Chester, West Virginia. These machines are connected to the
IGT SAMS central computer, which is installed at the West Virginia
lottery offices in Charleston, West Virginia.
In May 1996, the Company sold its SAMS central computer system to
Tipstjanst AB, the National Swedish Lottery. Under the terms of a
software license agreement and purchase of equipment agreement, the
Company provided a usage license for its SAMS 4.1 video gaming
central computer system. Additionally, the Company agreed to provide
approximately 1,000 Winner's Choice machines on-line with certain
other technology and services. This sale represents the Company's
first entry into the European lottery community. This sale, however,
does not assure future sales into the Swedish market or any other
European market.
Lease Operations
The Company also leases gaming equipment to its customers. As of
September 30, 1996, the Company leased approximately 4,450 gaming
machines primarily in the Midwestern riverboat, Colorado, and Nevada
markets. The Company has also provided approximately 2,075 machines
under participation and rental agreements primarily in the Nevada
casino market and in the Iceland, Norway, and China markets.
Video gaming in Oregon commenced in March 1992, and IGT was awarded
the contract to supply the central computer system that currently
links approximately 8,500 terminals. In October 1995, the state of
Oregon issued a request for proposal (RFP) for a new video gaming
central computer monitoring system. The Company elected not to
submit a proposal in response to this RFP, but will remain its
computer system supplier until March 1997. After March 1997, GTECH
will provide the Oregon State Lottery with a new video lottery
central system in an agreement separate from IGT. The Company
currently leases approximately 2,300 machines to the Oregon State
Lottery and will continue to provide them with video gaming terminals
under a separate lease agreement which will expire in April 1997.
The Company anticipates this agreement to be extended and has
completed shipping 1,075 Game King video gaming terminals to replace
the older equipment, which will be part of a new five-year lease
agreement.
In January 1993, the Company began operating approximately 190 gaming
machines at the Reno/Tahoe International Airport under a contract
with the Airport Authority. The Company and the Airport Authority
share in the net win of the approximate 160 machines currently
operating with a minimum annual guaranteed amount.
<PAGE>
Item 1. Business (continued)
<TABLE>
The following table shows the revenues recorded from gaming
operations.
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Proprietary Systems $234,859 $191,607 $146,800
Lease Operations 16,941 12,755 13,540
Total $251,800 $204,362 $160,340
</TABLE>
Marketing And Sales
IGT markets gaming products and proprietary systems through its
internal sales staff, agents and distributors. The Company employs
175 sales personnel in offices in several United States locations as
well as Asia, Australia, Canada, Europe, Latin America and South
Africa.
IGT uses distributors for sales to specific markets including
Louisiana, New Jersey, Native American reservations, the Miami cruise
ship market, a Canadian maritime province, the Caribbean, Japan, and
France. The Company's agreements with distributors do not specify
minimum purchases but generally provide that the Company may
terminate the distribution agreement if certain performance standards
are not met.
The Company considers its customer service department an important
aspect of the overall marketing strategy. IGT typically provides a 90-
day service and parts warranty for its gaming machines. The Company
currently has approximately 327 trained service personnel for
customer assistance and maintains service offices domestically in
Colorado, Florida, Mississippi, Missouri, Montana, Nevada, New
Jersey, and internationally in Argentina, Australia, Brazil, Canada,
Japan, New Zealand, South Africa and The Netherlands. A customer
hotline is available 24 hours a day, seven days a week to respond to
customer questions.
The overall marketing philosophy is to offer its customers not only
the broadest product line but also ongoing game development. IGT's
game library contains numerous game variations. Reprogramming
machines for the newest games and changing the graphics design can be
accomplished quickly. In international markets, the Company's
strategy is to respond to developing markets with local presence,
customized games, new product introductions and local production
where feasible.
In addition to offering an expansive product line, the Company
provides customized services in response to specific casino requests.
These services include high quality graphics design, silk-screen
printing of gaming machine glass, video graphics, customized game
development and interior design services. During fiscal 1996, IGT
developed more than 25 new games which included a variety of custom
artwork for casinos that opened, renovated or expanded in fiscal
1996. The Company also offers customized design services that
utilize computer-aided design and three-dimensional studio software
programs. The Company's design department has the ability to
generate a casino floor layout and can create a proposed casino slot
mix for its customers. The final design incorporates casino colors,
themes, signage, custom graphics and includes either an overhead
floor plan layout, viewable from any angle, or a three-dimensional
moving walk-through of the casino.
<PAGE>
Item 1. Business (continued)
The Company's products and services are sold to gaming operators in
jurisdictions where gaming is legal. Its products and services are
also sold to government entities which conduct gaming operations.
During fiscal 1996, the Company's ten largest customers accounted for
34% of its gaming product sales. Sodak, the Company's principal
distributor of gaming products to Native American reservations, was
the largest purchaser of the Company's products, accounting for
approximately 13% of total product sales. The Company believes the
loss of this customer would not have a long-term material adverse
effect on product sales of the Company, as other means of
distribution to this market are available. There were no other
individual customers accounting for greater than 10% of the Company's
product sales.
The nature of the Company's business encompasses large initial orders
of gaming products upon the opening, expansion or renovation of a
casino, as well as for the start-up of government-sponsored video
gaming operations. Subsequent orders from established customers
result from remodeling or expansion of existing facilities, as well
as replacement of machines due to technological advancements, new
designs and upgrades.
Sales of the Company's products can fluctuate from quarter to quarter
as new jurisdictions legalize gaming and new casinos in established
gaming markets are opened.
Competition
Product Sales
The most significant factor influencing the purchase of all types of
gaming machines is player appeal followed by a mix of elements
including service, price, reliability, technical capability and the
financial condition and reputation of the manufacturer. Player
appeal is key because it combines the machine design, hardware,
software and play features that ultimately improve the earning power
of gaming machines and the customer's return on investment. IGT
devotes substantial resources to continually upgrade its products and
conduct ongoing game development. The Company's customer service
organization is also a significant contributor to IGT's overall
competitive position.
The Company has made significant investment in research and
development of products tailored toward the specific demands of its
customers (casino operators) as well as the users of its products.
In this context, IGT has for a number of years developed annually
more than 25 different game themes which are tested to measure
consumer appeal. IGT uses Megatest, an on-line computerized testing
and monitoring system, to evaluate and forecast acceptance of new
products. Megatest uses the Company's wide-area progressive
technology to monitor from a central computer the performance of
games placed in a representative sample of casinos throughout the
state of Nevada. The new product test games are measured against a
control group to evaluate the performance of the test games in real-
time. The Megatest program allows IGT to test more games with
greater accuracy and in a shorter time frame and then release high-
performing games.
IGT also offers its customers educational programs and several
customer-related services. The Company provides customer education
in the form of installation training at IGT locations, on-site
training and videotape instruction. Other custom services include a
24-hour customer service hotline, a monthly technical services
bulletin, customer notifications, a Slot Line newsletter for slot
floor managers, and program summary reports designed to answer
specific software systems questions. In early 1995, IGT opened the
Technical Assistance Center ("TAC"), a fully staffed facility to
provide 24-hour telephone support to all types of system customers.
The TAC has access to a range of field support engineering resources
to resolve technical issues.
IGT also provides customers information through an electronic
bulletin board system. Customers can access this system 24 hours a
day, seven days a week. The system lets users view and download a
variety of information related to IGT products and services. This
system gives customers information on demand and provides a direct
link for two-way communication between the customer and IGT.
<PAGE>
Item 1. Business (continued)
The Company competes with U.S. and foreign manufacturers in the
casino-style gaming machine market. The primary competitors are Bally
Gaming, Inc. ("Bally") and Sigma Game, Inc. ("Sigma"). Bally is a
Nevada company and was recently acquired by Alliance Gaming
Corporation, a Nevada slot route operator. Sigma is a Japanese
company. In addition to the existing competitors, the Company faces
the prospect of new competition from four other manufacturers, WMS
Industries, Inc., Sega Enterprises Ltd., Casino Data Systems ("CDS")
and Video Lottery Consultants, Inc. All have recently developed
casino products and are either authorized to sell products or are in
the licensing process in many U.S. gaming jurisdictions. There are
several competitors for the international arena including Aristocrat,
Atronic, Cirsa, Franco and Novomatic among others.
The Company's slot marketing and revenue tracking system (SMART)
provides accounting and player tracking analytical support to
operators. The Company views this product line as an increasingly
important complementary offering. In the accounting and player
tracking systems product market, the Company competes with CDS, Bally
and several other system manufacturers. IGT's strategic alliance
with Acres Gaming, Inc., combined with its Integrated Gaming System
offering, is intended to strengthen its position in this marketplace.
The Company considers itself one of five primary competitors in the
video gaming terminal market, with no one supplier dominating the
market. Competitors in this market include three large domestic
lottery suppliers, GTECH, WMS Industries, Inc. and Video Lottery
Technologies, Inc. as well as Spielo, a supplier based in Canada.
These suppliers have an established presence in the lottery market,
substantial resources and specialize in the development and marketing
of gaming terminals to governments. The Company continues to view
the video lottery industry as an important market for its products
and has initiated the IGDreamport joint venture to further pursue
this market.
Gaming Operations
IGT has introduced progressive systems within both existing and new
gaming jurisdictions. The Company currently has in operation 44 wide-
area progressives systems throughout ten gaming jurisdictions
including Native American casinos, Macau and Iceland. Wide-area
progressive systems link machines within a given jurisdiction to
offer large slot jackpots (often exceeding $1 million), with the
primary jackpot paid in annual installments. The most significant
factor influencing the play on progressive systems is enhanced player
appeal resulting from the large slot jackpot payouts. The systems
appeal to casinos due to the games' earnings premium and because they
emphasize strong security and control features.
The competition in the progressive systems business has increased
with the introduction of CDS's "Cool Millions" progressive system.
This product offering competes with IGT's Megabucks and Dollars
Deluxe progressive systems. CDS currently has its progressive system
installed in the casino gaming markets of Nevada and Mississippi
within North America. In addition, CDS has developed a quarter slot
progressive system to compete with the Company's Quartermania and
Quarters Deluxe products. CDS has started progressive systems in the
Native American territory of Wisconsin and has applied for gaming
approval in Louisiana.
IGT provides substantial marketing and advertising support for its
wide-area progressive systems products and competes on the basis of
the Company's progressive systems brand names, product market appeal,
large jackpot awards, player loyalty, and technical and marketing
experience.
<PAGE>
Item 1. Business (continued)
Manufacturing and Suppliers
The Company's manufacturing operations primarily involve assembly of
electronic and computer components, including chips, video monitors
and prefabricated parts purchased from outside sources. The Company
also operates custom wood cabinet manufacturing and silk-screen
facilities. The Company is not dependent upon any one supplier for
any raw material. The Company purchases certain components from
subcontractors and believes that alternative sources of these
components are available. The Company believes its relations with
its vendors are good. The Company uses technical staff to assure
quality control.
The Company generally carries a significant amount of inventory due
to the broad range of products it manufactures and to facilitate its
capacity to fill customer orders on a timely basis.
Patents, Copyrights and Trade Secrets
The Company's computer programs and technical know-how are its main
trade secrets, and management believes that they can best be
protected by using technical devices to protect the computer
programs and by enforcing contracts with certain employees and
others with respect to the use of proprietary information, trade
secrets and covenants not to compete. The Company has obtained
patents and copyrights with respect to aspects of its games, and has
patent applications on file for protection of certain developments
it has created. No assurance can be given that the pending
applications will be granted. These patents range in subject matter
from new game designs, including interactive video games and new
slot game techniques, as well as gaming device components such as,
coin-handling apparatus, fiber-optic light pens, coin-escalator
mechanisms, optical door interlock, and a variety of other aspects
of video and mechanical slot machines and systems. There can be no
assurance that the patents will not be infringed or that others will
not develop technology that does not violate the patents.
The Company's intellectual property portfolio includes United States
Patent No. 4,448,419, sometimes referred to as the Telnaes patent or
the "virtual reel" patent. The Telnaes patent expires in 2004. The
Company believes that rights under the Telnaes patent are important
to the manufacture of spinning reel slot machines. In addition to
IGT's ownership interest in the patent, the following companies
currently hold licenses of various forms under this patent: CDS,
Bally, Sigma, and Universal Distributing.
Employees
As of September 30, 1996, the Company, including all subsidiaries,
employed approximately 2,800 persons, including 480 in
administrative positions, 175 in sales and 450 in engineering. Of
the total employees, IGT (the Company's North American operations)
accounted for 2,443; IGT-Australia, 311; IGT-Europe, 29; and IGT-
Japan, 14; IGT-Argentina, 5; IGT-Brazil, 5; IGT-Africa, 8; and IGT-
Peru, 8. The total number of employees increased in fiscal 1996 by
approximately 400 as compared with the number of employees at
September 30, 1995, due to the increase in production levels.
<PAGE>
Item 1. Business (continued)
Government Regulation
Nevada Regulation
The manufacture, sale and distribution of gaming devices in Nevada
are subject to extensive state laws, regulations of the Nevada
Gaming Commission and State Gaming Control Board (the "Nevada
Commission"), and various county and municipal ordinances. These
laws, regulations and ordinances primarily concern the
responsibility, financial stability and character of gaming
equipment manufacturers, distributors and operators, as well as
persons financially interested or involved in gaming operations.
The manufacture, distribution and operation of gaming devices
require separate licenses. The laws, regulations and supervisory
procedures of the Nevada Commission seek to (i) prevent unsavory or
unsuitable persons from having a direct or indirect involvement with
gaming at any time or in any capacity, (ii) establish and maintain
responsible accounting practices and procedures, (iii) maintain
effective control over the financial practices of licensees,
including establishing minimum procedures for internal fiscal
affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports
with the Nevada Commission, (iv) prevent cheating and fraudulent
practices, and (v) provide a source of state and local revenues
through taxation and licensing fees. Changes in such laws,
regulations and procedures could have an adverse effect on the
Company's operations.
A Nevada gaming licensee is subject to numerous restrictions.
Licenses must be renewed periodically and licensing authorities have
broad discretion with regard to such renewals. Licenses are not
transferable. Each type of machine sold by the Company in Nevada
must first be approved by the Nevada Commission, which may require
subsequent machine modification. Substantially all material loans,
leases, sales of securities and similar financing transactions must
be reported to or approved by the Nevada Commission. Changes in
legislation or in judicial or regulatory interpretations could occur
which could adversely affect the Company.
A publicly traded corporation must be registered and found suitable
to hold an interest in a corporate subsidiary which holds a gaming
license. International Game Technology has been registered by the
Nevada Commission as a publicly traded holding company and was
permitted to acquire IGT as its wholly-owned subsidiary. As a
registered holding company, it is required periodically to submit
detailed financial and operating reports to such Commission and
furnish any other information which the Commission may require. No
person may become a stockholder of, or receive any percentage of
profits from, a licensed subsidiary without first obtaining licenses
and approvals from the Nevada Commission. Officers, directors and
key employees of a licensed subsidiary and of the Company who are
actively engaged in the administration or supervision of gaming must
be found suitable. No proceeds from any public sale of securities
of a registered holding corporation may be used for gaming
operations in Nevada or to acquire a gaming property without the
prior approval of the Nevada Commission. The Company believes it has
all required licenses to carry on its business in Nevada.
Officers, directors, and certain key employees of the Company who
are actively and directly involved in gaming activities of the
Company's licensed gaming subsidiary may be required to be licensed
or found suitable. Officers, directors, and certain key employees
of the Company's licensed gaming subsidiary must file applications
with the Nevada Commission and may be required to be licensed or
found suitable. Employees associated with gaming must obtain work
permits which are subject to immediate suspension under certain
circumstances. In addition, anyone having a material relationship
or involvement with the Company may be required to be found suitable
or licensed, in which case those persons would be required to pay
the costs and fees of the State Gaming Control Board (the "Control
Board") in connection with the investigation. An application for
licensure or finding of suitability may be denied for any cause
deemed reasonable by the Nevada Commission. A finding of
suitability is comparable to licensing and both require submission
of detailed personal and financial information followed by a
thorough investigation. Changes in licensed positions must be
reported to the Nevada Commission. In addition to its authority to
deny an application for a license or finding of suitability, the
Nevada Commission has jurisdiction to disapprove a change in
position by such officer, director, or key employee. The Nevada
Commission has the power to require the Company and its licensed
gaming subsidiary to suspend or dismiss officers, directors or
other key employees and to
<PAGE>
Item 1. Business (continued)
sever relationships with other persons who refuse to file
appropriate applications or whom the authorities find unsuitable to
act in such capacities. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial review
in Nevada.
The Company and its licensed gaming subsidiary are required to
submit detailed financial and operating reports to the Nevada
Commission. If it were determined that gaming laws were violated by
a licensee, the gaming licenses it holds could be limited,
conditioned, suspended or revoked subject to compliance with certain
statutory and regulatory procedures. In addition to the licensee,
the Company and the persons involved could be subject to substantial
fines for each separate violation of the gaming laws at the
discretion of the Nevada Commission. In addition, a supervisor
could be appointed by the Nevada Commission to operate the Company's
gaming property and, under certain circumstances, earnings generated
during the supervisor's appointment could be forfeited to the State
of Nevada. The limitation, conditioning or suspension of any gaming
license or the appointment of a supervisor could (and revocation of
the gaming license would) materially and adversely affect the
Company's operations.
The Nevada Commission may also require any beneficial holder of the
Company's voting securities, regardless of the number of shares
owned, to file an application, be investigated, and be found
suitable, in which case the applicant would be required to pay the
costs and fees of the Control Board investigation. If the
beneficial holder of voting securities who must be found suitable is
a corporation, partnership, or trust, it must submit detailed
business and financial information including a list of beneficial
owners. Any person who acquires 5% or more of the Company's voting
securities must report the acquisition to the Nevada Commission; any
person who becomes a beneficial owner of 10% or more of the
Company's voting securities must apply for a finding of suitability
within 30 days after the Chairman of the Nevada Board mails the
written notice requiring such finding.
Under certain circumstances, an Institutional Investor, as such term
is defined in the Nevada Regulations, which acquires more than 10%,
but not more than 15%, of the Company's voting securities may apply
to the Nevada Commission for a waiver of such finding of suitability
requirements, provided the institutional investor holds the voting
securities for investment purposes only. An institutional investor
will not be deemed to hold voting securities for investment purposes
unless the voting securities were acquired and are held in the
ordinary course of business as an institutional investor and not for
the purpose of causing, directly or indirectly, the election of a
majority of the board of directors of the Company, any change in the
Company's corporate charter, bylaws, management, policies or
operations of the Company, or any of its gaming affiliates, or any
other action which the Nevada Commission finds to be inconsistent
with holding the Company's voting securities for investment purposes
only. Activities which are not deemed to be inconsistent with
holding voting securities for investment purposes only include: (i)
voting on all matters voted on by stockholders; (ii) making
financial and other inquiries of management of the type normally
made by securities analysts for informational purposes and not to
cause a change in its management, policies or operations; and (iii)
such other activities as the Nevada Commission may determine to
be consistent with such investment intent.
The Nevada Commission has the power to investigate any debt or
equity security holder of the Company. The Clark County Liquor and
Gaming Licensing Board, which has jurisdiction over gaming in the
Las Vegas area, may similarly require a finding of suitability for a
security holder. The applicant stockholder is required to pay all
costs of such investigation. The bylaws of the Company provide for
the Company to pay such costs as to its officers, directors or
employees.
<PAGE>
Item 1. Business (continued)
Any person who fails or refuses to apply for a finding of
suitability or a license within 30 days after being ordered to do so
by the Nevada Commission or Chairman of the Nevada Board may be
found unsuitable. The same restrictions apply to a record owner if
the record owner, after request, fails to identify the beneficial
owner. Any stockholder found unsuitable and who holds, directly or
indirectly, any beneficial ownership of the Common Stock beyond such
period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to
disciplinary action, and possible loss of its approvals, if, after
it receives notice that a person is unsuitable to be a stockholder
or to have any other relationship with the Company, the Company (i)
pays that person any dividend or interest upon voting securities of
the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by
that person, (iii) gives remuneration in any form to that person,
for services rendered or otherwise, or (iv) fails to pursue all
lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value. Additionally the
Clark County authorities have taken the position that they have the
authority to approve all persons owning or controlling the stock of
any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of
any debt security of the Company to file applications, be
investigated and be found suitable to own the debt security of the
Company. If the Nevada Commission determines that a person is
unsuitable to own such security, then pursuant to the Nevada Act,
the Company can be sanctioned, including the loss of its approvals,
if without the prior approval of the Nevada Commission, it: (i)
pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such
unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any
payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Commission at any time. If any
securities are held in trust by an agent or by a nominee, the record
holder may be required to disclose the identity of the beneficial
owner to the Nevada Commission. A failure to make such disclosure
may be grounds for finding the record holder unsuitable. The
Company is also required to render maximum assistance in determining
the identity of the beneficial owner. The Nevada Commission has the
power at any time to require the Company's stock certificates to
bear a legend indicating that the securities are subject to the
Nevada Gaming Control Act (the "Nevada Act") and the regulations of
the Nevada Commission. To date, the Nevada Commission has not
imposed such a requirement.
The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or
proceeds therefrom are intended to be used to construct, acquire or
finance gaming facilities in Nevada, or retire or extend obligations
incurred for such purposes. Such approval, if given, does not
constitute a finding, recommendation, or approval by the Nevada
Commission or the Nevada Board to the accuracy or adequacy of the
prospectus or investment merits of the securities. Any
representation to the contrary is unlawful. Changes in control of
the Company through merger, consolidation, acquisition of assets,
management or consulting agreements or any form of takeover cannot
occur without the prior investigation of the Control Board and
approval of the Nevada Commission. Entities seeking to acquire
control of the Company must satisfy the Nevada Board and Nevada
Commission in a variety of stringent standards prior to assuming
control of the Company. The Nevada Commission may also require
controlling stockholders, officers, directors and other persons
having a material relationship or involvement with the entity proposing
to acquire control, to be investigated and licensed as part of the
approval process relating to the transaction.
<PAGE>
Item 1. Business (continued)
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other
corporate defense tactics that affect corporate gaming licensees in
Nevada, and corporations whose stock is publicly-traded that are
affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established
a regulatory scheme to ameliorate the potentially adverse effects of
these business practices upon Nevada's gaming industry and to
further Nevada's policy to (i) assure the financial stability of
corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and
(iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before the Company can make
exceptional repurchases of voting securities above the current
market price thereof and before a corporate acquisition opposed by
management can be consummated. Nevada's gaming laws and regulations
also require prior approval by the Nevada Commission if the Company
were to adopt a plan of recapitalization proposed by the Company's
Board of Directors in opposition to a tender offer made directly to
its stockholders for the purpose of acquiring control of the
Company.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such
persons (collectively, "Licensees"), and who proposes to become
involved in a gaming venture outside of Nevada is required to
deposit with the Control Board, and thereafter maintain, a revolving
fund in the amount of $10,000 to pay the expenses of investigation
by the Control Board of the licensee's participation in foreign
gaming. The revolving fund is subject to increase or decrease at the
discretion of the Nevada Commission. Thereafter, Licensees are
required to comply with certain reporting requirements imposed by
the Nevada Act. A licensee is also subject to disciplinary action
by the Nevada Commission if it knowingly violates any laws of the
foreign jurisdiction pertaining to the foreign gaming operation,
fails to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming
operations, engages in activities that are harmful to the State of
Nevada or its ability to collect gaming taxes and fees, or employs a
person in the foreign operation who has been denied a license or
finding of suitability in Nevada on the grounds of personal
unsuitability.
Other Jurisdictions
Many other jurisdictions in which the Company does business require
various licenses, permits, and approvals in connection with the
manufacture and/or the distribution of gaming devices, and operation
of progressive systems, typically involving restrictions similar in
most respects to those of Nevada.
Thus far the Company has never been denied any such necessary
governmental licenses, permits or approvals. No assurances, however,
can be given that such required licenses, permits or approvals will
be given or renewed in the future.
Item 2. Properties
In May 1994, the Company purchased a 78 acre parcel in Reno, Nevada
for the purpose of consolidating its corporate headquarters,
manufacturing, and warehousing facilities into one location. The
manufacturing and warehousing facility, totaling approximately
890,000 square feet, was completed in January 1996 and at September
30, 1996, substantially all manufacturing had been relocated to this
facility. The corporate office facility, totaling 220,000 square
feet, is under construction and scheduled to be completed in January
1997, absent unexpected delays.
<PAGE>
Item 2. Properties (continued)
During the reporting period, the Company owned two adjoining office
buildings in Reno, Nevada, totaling 92,000 square feet. The
Company's research and development and corporate office personnel
occupy approximately 72,000 square feet of the buildings. The
remaining square footage is leased to third parties. During October
1996, the Company sold these two buildings and will rent from the
buyer until the new office facility is completed.
The Company currently leases seven buildings with a total square
footage of approximately 390,000. These facilities have various
lease expiration dates through the year 2001. The Company will
occupy a total of 309,000 square feet of these buildings until the
office facility is completed. As the buildings are vacated, the
Company will pursue subleasing to third parties.
Additionally, IGT leases approximately 140,000 square feet of office
and warehouse space in Las Vegas, Nevada along with approximately
98,000 square feet in other Nevada locations and various
jurisdictions where it conducts business including Canada, Colorado,
Connecticut, Delaware, Florida, Louisiana, Mississippi, Missouri,
Montana and New Jersey.
IGT-Europe leases approximately 35,000 square feet of office and
warehouse space in Holland, The Netherlands.
IGT-Australia owns a 304,000 square foot office, production and
warehouse facility in Sydney, New South Wales, Australia.
Currently, IGT-Australia utilizes approximately 292,000 square feet
of this space and subleases the remainder of the facility. In
Wellington, New Zealand, IGT-Australia owns a 12,000 square foot
office and warehouse facility. Additionally, IGT-Australia leases
approximately 15,500 square feet of office and warehouse space in
various locations throughout Australia.
Internationally, the Company leases approximately 19,000 square feet
of office and warehouse space in Argentina, Brazil, China, Japan,
and Peru.
Item 3. Legal Proceedings
The Company 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 the Company's financial
position or results of future operations. For a description of
these matters, see Note 11 of the Notes to the Consolidated
Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
The Company's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol "IGT". The following table sets forth the
high and low sales prices of the common stock as traded on the NYSE:
<TABLE>
<CAPTION>
Fiscal 1996 High Low
<S> <C> <C>
First Quarter $ 13 3/4 $ 10 3/4
Second Quarter 15 1/8 10 3/4
Third Quarter 18 1/4 14 1/8
Fourth Quarter 21 3/8 15 1/2
Fiscal 1995 High Low
First Quarter $ 20 7/8 $ 14 7/8
Second Quarter 15 3/4 12 1/2
Third Quarter 17 12 3/8
Fourth Quarter 15 7/8 13
</TABLE>
As of December 5, 1996, there were approximately 7,618 record
holders of the Company's common stock which had a closing price of
$19.875 on the same date.
The Company declared four quarterly dividends of $.03 per share in
both fiscal 1995 and fiscal 1996. It is anticipated that comparable
cash dividends will continue to be paid in the future.
The Company's transfer agent and registrar is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, New York 10004, (212)
509-4000.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
The following information has been derived from the Company's
consolidated financial statements:
<CAPTION>
Years Ended September 30,
1996 1995 1994 1993 1992
(Amounts in thousands, except
per share data)
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data
Total revenues $ 733,452 $620,786 $674,461 $478,030 $363,594
Income from continuing
operations $ 118,017 $ 92,648 $140,447 $105,578 $ 63,284
Income from discontinued
operations <F1> $ - $ - $ - $ 13,447 $ 1,500
Net income $ 118,017 $ 92,648 $140,447 $119,025 $ 64,784
Income per primary share
from continuing
operations $ 0.93 $ 0.71 $ 1.07 $ 0.85 $ 0.53
Income per fully diluted
share from continuing
operations $ 0.92 $ 0.71 $ 1.05 $ 0.80 $ 0.51
Net income per primary
share $ 0.93 $ 0.71 $ 1.07 $ 0.96 $ 0.54
Net income per fully diluted
share $ 0.92 $ 0.71 $ 1.05 $ 0.90 $ 0.52
Cash dividends declared
per common share $ 0.12 $ 0.12 $ 0.12 $ 0.09 $ -
Average primary common and
common equivalent shares
outstanding 127,412 131,094 131,380 123,618 120,081
Average common and common
equivalent shares
outstanding assuming full
dilution 128,160 131,094 135,858 136,611 135,448
Selected Balance Sheet Data
Working capital $ 488,150 $508,917 $480,698 $379,680 $257,063
Total assets $1,154,187 $971,698 $868,008 $646,593 $489,973
Convertible subordinated
notes payable $ - $ - $ - $ 59,998 $ 93,999
Long-term notes payable
and capital lease
obligations $ 107,155 $107,543 $111,468 $ 617 $ 19,965
Stockholders' equity $ 623,200 $554,090 $520,868 $378,549 $214,062
<FN>
<F1> Discontinued operations consist of casino operations which the
Company sold during fiscal 1993.
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The Company operates principally in two lines of business: the
manufacture and sale of gaming products (product sales), and
proprietary systems and gaming equipment leasing (gaming
operations).
Fiscal 1996 Compared to Fiscal 1995
Net income for fiscal 1996 totaled $118.0 million or $.92 per fully
diluted share compared to $92.6 million or $.71 per fully diluted
share in fiscal 1995. Total operating income growth of 22%
contributed significantly to the increase in net income over the
prior year.
Revenues and Cost of Sales
Total revenues for the year ended September 30, 1996 rose 18% due
to a $65.2 million or 16% increase in product sales and a $47.4
million or 23% increase in gaming operations revenues. Product
sales shipments grew to 85,300 units in fiscal 1996 compared to
73,100 units in fiscal 1995. Shipments to gaming operators in North
America were consistent, with 62,000 units sold in both fiscal 1996
and 1995. Shipments during the year decreased slightly in the
traditional Nevada casino market due to fewer casino expansions in
Northern Nevada compared to the prior year. This decrease was offset
by increased sales to Midwestern riverboat and Native American
markets where shipments totaled 15,000 and 13,000, respectively.
Total revenue related to Native American markets increased $18.7
million or 5% due to slightly higher average prices.
Product sales in international markets grew to $104.9 million due to
machine shipments of 22,000, which increased 105% over the prior
year. The largest international sales for fiscal 1996 were in
Japan, where the Company sold more than 7,000 pacishuro machines.
Sales in Turkey, Greece, Argentina, and New South Wales also
contributed to the revenue growth.
The gross margin on product sales improved to 45% in fiscal 1996
compared to 44% in fiscal 1995. This increase is primarily due to
operating efficiencies including cost reductions and process
improvements achieved in domestic production. This increase was
partially offset by lower margins realized in the Japanese market
and inventory reserves in Australia.
The Company anticipates that the slower growth of the U.S. market
experienced in fiscal 1996 will continue in the near future. This
decreased rate of growth may be offset, in part, by future growth in
international markets. The Company continues to pursue
international opportunities in a variety of jurisdictions including
Japan, South America, and South Africa. The pace of growth within
domestic and international markets is, however, outside the control
of the Company and has been and continues to be influenced by public
opinion and the legal and electoral processes. As a result, the
Company cannot predict the rate at which domestic and international
markets will develop and any slowdown or delay in the growth of new
markets will adversely affect the Company's future results.
Additionally, the Company anticipates increased competition in the
sale of gaming products with the recent and anticipated future
governmental licensing of competitors.
Gaming operations revenue totaled $251.8 million and $204.4 million
for the years ended September 30, 1996 and 1995, respectively.
Growth in proprietary systems was the primary contributor to the
year over year increase. As of September 30, 1996, the Company
operated approximately 9,400 machines on 44 systems compared to
approximately 8,700 machines on 36 systems as of September 30, 1995.
Lease revenues also increased due to participation revenue from
Delaware racetracks. The Company will continue to pursue additional
markets, domestically and internationally, for its linked
progressive games. However, growth in proprietary systems is
dependent on government approval and subject to increasing
competition in all markets.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
The gross margin on gaming operations declined from 46% in fiscal
1995 to 45% in fiscal 1996 as a result of the higher cost of
interest sensitive assets the Company purchases to fund jackpot
payments. The Company has reclassified depreciation expense for
gaming equipment related to progressive systems and leases from
operating expenses to the cost of gaming operations for all periods
presented. This presentation more accurately reflects the results
of gaming operations.
Expenses
Selling, general and administrative expenses were $108.5 million for
fiscal 1996, an increase of $19.9 million over the prior year.
Nearly half of this increase, $8.2 million, is attributable to one-
time charges for the abandonment of leased buildings in connection
with the move to the Company's new facilities and management changes
occurring during 1996. The remaining increase is a result of
increased sales, marketing, and administrative costs both
domestically and internationally.
Depreciation and amortization totaled $12.6 million and $14.4
million in fiscal 1996 and fiscal 1995, respectively. The decline is
a result of the acceleration of depreciation in fiscal 1995 on
leasehold improvements in response to the construction of the
Company's new facility. All such improvements had been fully
depreciated as of the beginning of fiscal 1996.
Research and development expenses were $2.8 million or 10% lower in
fiscal 1996 than in fiscal 1995. Although staffing levels have
remained consistent year over year, a larger percentage of custom
engineering was directly charged to the customer during fiscal 1996.
The provision for bad debts was $11.6 million for fiscal 1996 versus
$5.9 million for fiscal 1995. Higher sales volume during fiscal
1996 contributed to this increase. The Company also reserved an
additional $3.4 million related to receivables in the developing
Asian and Papua New Guinea markets.
Other Income and Expense
Interest income totaled $39.2 million for fiscal 1996, a $1.6
million or 4% increase over the prior year. This increase resulted
primarily from higher balances of interest income producing assets
associated with the Company's progressive systems. Partially
offsetting this increase, interest income earned on the Company's
note and contracts receivable decreased due to lower interest rates
and lower average balances.
Interest expense for fiscal 1996 increased $3.2 million or 16% over
fiscal 1995. This fluctuation was due to increased interest expense
associated with the growth in jackpot liabilities. Interest expense
related to the private placement of Senior Notes (see Note 13 to the
Consolidated Financial Statements) decreased year over year due to
the capitalization of interest in connection with the construction
of the South Meadows manufacturing and administrative facilities.
The net loss on securities in fiscal 1995 of $12 million was
primarily due to the writedown of the Company's investment in 2.1
million common shares of Radica Games Limited ("Radica") to market
value, resulting in a $14.6 million charge to pre-tax income. During
the current year, the shares were sold back to Radica, resulting in
an additional $1.5 million loss. Loss on assets for fiscal 1996
resulted from the writedown of the Company's investments in joint
ventures within the developing markets of Asia and South America.
Other income and expense for fiscal 1996 was impacted by one-time
legal settlements in Australia and with CDS.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Business Segments Operating Profit (see Note 2 of the Notes to
Consolidated Financial Statements)
Manufacturing and gaming operations operating profit reflects an
allocation of selling, general, administrative and engineering
expenses to each of these business segments.
Manufacturing operating profit for fiscal 1996 increased $16.8
million or 15% compared to the prior year. This positive
fluctuation was primarily due to a 16% increase in product sales and
slightly higher gross profit margins.
Gaming operations operating profit for fiscal 1996 increased 22% or
$12.6 million. This improvement resulted from a 23% growth in
revenues partially offset by a lower gross margin on gaming
operations. The lower margin was due to higher costs of interest
sensitive assets purchased to fund jackpot payments.
Fiscal 1995 Compared to Fiscal 1994
Net income for fiscal 1995 was $92.6 million or $.71 per fully
diluted share compared to fiscal 1994 net income of $140.4 million or
$1.05 per fully diluted share. This decline in net income resulted
from an 8% reduction in revenues, a 1% increase in total costs and
expenses, and a one-time pre-tax charge of $14.6 million related to
the decline in value of the Company's investment in the common stock
of Radica Games Limited, ("Radica"). The Company purchased
approximately 11.2% of Radica for $5.8 million in cash and 374,436
shares of the Company's common stock, representing a total purchase
price of $16.1 million, in fiscal 1994.
Revenues and Cost of Sales
The 8% decline in revenues resulted from a 19% reduction in product
sales partially offset by a 27% increase in gaming operation
revenues. The Company sold 73,100 gaming machines in fiscal 1995,
compared to 95,000 gaming machines in fiscal 1994. The majority of
this decline resulted from reduced sales to the Mississippi,
Louisiana and Missouri riverboat markets and the Nevada casino
market. During fiscal 1994, these markets accounted for a greater
number of high volume sales in conjunction with the opening of a
greater number of new casinos. Sales in the Native American market
also declined in fiscal 1995.
The 27% increase in gaming operations revenue in fiscal 1995 was due
to a 31% increase in proprietary systems revenue. The systems
revenue increase resulted from both the introduction of new games
within existing markets and the addition of new markets. As of
September 30, 1995, there were approximately 8,700 linked
progressive gaming machines operating on 36 systems in nine
jurisdictions compared to approximately 7,400 such machines
operating at September 30, 1994. The increase in gaming operations
revenue was partially offset by a 6% decline in leasing revenues.
The gross margin on product sales declined to 44% in fiscal 1995,
compared to 47% in fiscal 1994. This reduction is primarily
attributable to higher unit costs associated with lower production
levels for the units sold during the first three quarters of the
fiscal year. The gross margin in the fourth quarter improved to
46.0% compared to 43% for the first three quarters of fiscal 1995,
reflecting improved operating efficiencies at lower production
levels. The gross margin on gaming operations declined from 49% in
fiscal 1994 to 46% in fiscal 1995 as a result of higher cost of
interest sensitive assets the Company purchases to fund jackpot
payments.
Expenses
Selling, general and administrative expenses were $88.6 million for
fiscal 1995, an increase of 6% or $4.7 million compared to the prior
year. This increase is attributable to greater personnel and
administrative costs throughout the Company.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Depreciation and amortization expense was $14.4 million during
fiscal 1995, an increase of 59% or $5.3 million compared to the
prior year. This increase is due to depreciable asset additions
during the year and the acceleration of depreciation on existing
leasehold improvements in response to the construction of a new
manufacturing and office facility in Reno (See Note 15 to the
Consolidated Financial Statements). The asset additions primarily
included manufacturing, administrative and engineering equipment and
a new manufacturing and office facility in Australia, which replaced
a leased facility.
Engineering expenses were $28.5 million for fiscal 1995, an increase
of 22% or $5.1 million compared to the prior year. This increase is
a result of additional engineering personnel utilized in the
development of new gaming and systems products. The development of
new gaming products and systems has been and remains an important
part of the Company's long-term strategic plan and the Company
expects to continue to devote substantial resources to research and
development.
The provision for bad debts was $5.9 million for fiscal 1995, a
decline of 18% or $1.3 million compared to the prior fiscal year.
This reduction reflects the 19% decline in product sales during
fiscal 1995 and a 13% decline in receivables from September 30,
1994.
Other Income and Expense
Interest income was $37.6 million for fiscal 1995, an increase of
$8.0 million compared to fiscal 1994. This increase primarily
resulted from the growth in progressive systems play which provides
funds to the Company to pay future jackpot payments along with
higher average interest rates earned on such funds. These funds are
invested in income-providing investments until the amounts are paid
out. Additionally, interest income earned on the Company's notes
and contracts receivable increased due to higher balances during
fiscal 1995 compared to fiscal 1994.
Interest expense was $20.4 million for fiscal 1995, an increase of
$8.6 million compared to fiscal 1994. This increase was primarily
due to the private placement of $100.0 million of 7.84% Senior Notes
in September 1994, (see Note 13 to the Consolidated Financial
Statements), and increased interest associated with the growth in
jackpot liabilities. These increases were partially offset by the
May 1994 conversion of the interest bearing Convertible Subordinated
Notes into common stock.
The net gain (loss) on securities resulted in a loss of $12.0
million in fiscal 1995 compared to a gain of $935,000 in fiscal
1994. In the fourth quarter of fiscal 1995, the Company wrote down
its investment in 2.1 million common shares of Radica to market
value resulting in a $14.6 million charge to pre-tax income. Based
on Radica's financial results for their quarter ended July 31, 1995,
the Company deemed the decline in Radica's stock price was other
than temporary. Radica realized its second consecutive and largest
quarterly loss of $.08 per share for the quarter ended July 31,
1995. This write down was partially offset by net gains on the sale
of other securities from the Company's investment portfolio.
Business Segments Operating Profit (See Note 2 of Notes to
Consolidated Financial Statements)
Manufacturing and gaming operations operating profit reflects an
allocation of a portion of selling, general, and administrative and
engineering expenses to each of these business segments.
Manufacturing operating profit declined 35% or $60.1 million in
fiscal 1995 compared to fiscal 1994 primarily as a result of a 19%
decline in product sales and a reduction in the gross profit margin
to 44% in fiscal 1995 from 47% in fiscal 1994.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Gaming operations operating profit increased 19% or $9.2 million in
fiscal 1995. This improvement resulted from a 27% increase in
gaming operations revenues due to the growth of proprietary systems
revenue in existing and new markets. Partially offsetting this
increase was a lower gross margin on gaming operations and increased
depreciation expense due to the increase in gaming machines utilized
on the linked progressive systems. The lower gross margin was a
result of the higher cost of interest sensitive assets purchased to
fund the jackpot payments.
Foreign Operations
Approximately 22% and 14% of the Company's total product sales in
fiscal 1996 and 1995, respectively, were derived outside of the
United States. International operations are subject to certain
risks, including but not limited to, unexpected changes in
regulatory requirements, fluctuations in exchange rates, tariffs and
other barriers, and political and economic instability. There can
be no assurance that these factors will not have an adverse impact
on the Company's future sales or operating results. To date, the
Company has not experienced significant translation or transaction
losses related to foreign exchange fluctuations due to the limited
size of its foreign operations. As the Company continues to expand
its international operations, exposures to gains and losses on
foreign currency transactions may increase. The Company has not yet
engaged, but may in the future engage, in currency hedging
transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates.
Liquidity and Capital Resources
Working Capital
Working capital totaled $488.2 million at September 30, 1996, a
decrease of $20.8 million or 4%. A $9.0 million increase in current
assets for fiscal 1996 was offset by a $29.7 million increase in
current liabilities.
The fluctuation in current assets for fiscal 1996 was primarily due
to a decrease in cash and cash equivalents offset by increases in
investments, receivables, inventories, and prepaids. Cash and cash
equivalents declined $71.7 million as a result of cash provided by
operating activities of $55.3 million, cash used in investing
activities of $159.8 million and cash provided by financing
activities of $32.4 million. Total investments securities increased
$13.0 million. Total receivables, including accounts receivable and
notes and contracts receivable, increased $26.9 million due to higher
sales levels. Increased sales volume and anticipated sales for the
first quarter of 1997 resulted in a $26.5 million or 36% growth in
inventory levels at fiscal 1996 year end. Prepaid and other assets
increased by $12.3 million as a result of a $8.7 million tax
receivable primarily related to the tax benefit of a carryback
capital loss and $3.6 million of deposits related to the capital
expenditures.
Increases in accounts payable and accrued liabilities led to higher
current liabilities at September 30, 1996 compared to the prior year.
Accounts payable increased $4.3 million due to increased activity in
foreign jurisdictions. Accrued employee benefit plan liabilities,
which are based on the Company's operating profit, were higher for
fiscal 1996. Other accrued liabilities increased $10.9 million
primarily due to the timing of payroll and sales tax payments and
accruals related to increased activity in foreign jurisdictions.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Cash Flow
The Company's cash and cash equivalents decreased from $241.6 at the
end of fiscal 1995 to $169.9 million at September 30, 1996. The
primary factors causing this decrease were the construction of the
Company's new facilities and the repurchase of the Company's stock.
Cash provided by (used in) operating activities for the years ended
September 30, 1996, 1995 and 1994 totaled $55.3 million, $153.4
million and ($.5) million, respectively. During fiscal 1996, 1995
and 1994, fluctuations in receivables, inventories and accrued and
deferred taxes, caused the most significant changes in cash flow
from operating activities.
The Company's primary investing activities included the purchase of
investments to fund liabilities to jackpot winners and the purchase
of property, plant and equipment. Purchases of property, plant and
equipment totaled $71.6 million, $43.5 million and $56.8 million in
fiscal 1996, 1995, and 1994, respectively. In fiscal 1996 and 1995,
these purchases consisted primarily of costs associated with
construction of the Company's manufacturing facility. In fiscal
1994, the Company purchased a manufacturing and office facility in
Sydney, Australia for approximately $13.0 million and a 78-acre site
in Reno, Nevada for the Company's facilities expansion for
approximately $6.0 million. Additionally, purchases of office
furniture and computer equipment to support the Company's expansion
contributed to cash used in investing activities each year. The
funds for capital expenditures anticipated during fiscal 1997 will
be derived from the Company's existing cash flow and the proceeds
received from the September 1994 private placement of Senior Notes.
The primary source of cash from financing activities included $117.1
million, $92.6 million and $62.8 million in proceeds from systems to
fund liabilities to jackpot winners for the years ended September
30, 1996, 1995 and 1994, respectively, and in fiscal 1994, $112.9
million in proceeds received from long-term debt borrowings. The
long-term debt proceeds included a $100.0 million private placement
of Senior Notes (see Note 13 to the Consolidated Financial
Statements) and proceeds from bank borrowings of $13.0 million
($18.0 million Australian). Financing activities offsetting these
increases were the repurchase of $44.9 million, $56.1 million and
$57.1 million of the Company's common stock in fiscal 1996, 1995 and
1994, respectively, and the payment of cash dividends. Cash
dividends were paid in 1996, 1995 and 1994 totaling $15.3 million,
$15.6 million and $15.5 million, respectively.
Stock Repurchase Plan
A stock repurchase plan was originally authorized by the Board of
Directors in October 1990. This repurchase program currently allows
the purchase of up to a total of 50 million shares of the Company's
common stock. As of September 30, 1996, the Company is authorized
to purchase a remaining 27.9 million shares. During the fiscal
years ended September 30, 1996 and 1995, the Company repurchased
3,846,400 shares for an aggregate purchase price of $44.9 million
and 4,169,400 shares for an aggregate purchase price of $56.1
million, respectively. During the period from October 1, 1996 to
December 13, 1996, the Company has purchased 2,049,700 shares for an
aggregate purchase price of $38.7 million.
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") issued SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" in March 1995. This statement,
effective for the Company's fiscal year ended September 30, 1997,
requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Management believes that if
SFAS No. 121 had been adopted at September 30, 1996, it would not
have had a significant effect on the financial position or results
of operations of the Company.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," which will be effective for the Company's fiscal
year ended September 30, 1997. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees
and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion
No. 25, which recognizes compensation cost based on the intrinsic
value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to
employees and will disclose the required pro forma effect on net
income and earnings per share.
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to be consistent with the
presentation used in fiscal year 1996. Such reclassifications
include the presentation of depreciation expense related to gaming
equipment for proprietary systems and leases as a cost of gaming
operations.
Lines of Credit
As of September 30, 1996, the Company had a $50.0 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 funding
operations and to facilitate standby letters of credit. 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
September 30, 1996, $48.0 million was available under this line of
credit.
IGT-Australia had a $2.5 million (Australian) bank line of credit
available as of September 30, 1996. Interest is paid at published
reference rates plus a margin rate of 1% or less. This line is
supported by a comfort letter and guarantee from the Company, and
has a provision for review and renewal annually in January. At
September 30, 1996, $1.5 million (Australian) was available under
this line.
The Company is required to comply, and is in compliance, with
certain covenants contained in these line of credit agreements and
its Senior Notes which, among other things, limit financial
commitments the Company may make without the written consent of the
lenders and require the maintenance of certain financial ratios,
minimum working capital and net worth of the Company.
Impact of Inflation
Inflation has not had a significant effect on the Company's
operations during the three fiscal years in the period ended
September 30, 1996.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis and other
portions of this report on Form 10-K, contain various "forward-
looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Sections 21E of the
Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events,
including the following: statements regarding the rate of future
growth of domestic and international gaming markets; statements
regarding addition or completion of new casinos; statements
regarding the adoption of favorable gaming legislation in new
domestic and international markets; demand for replacement machines
with imbedded bill acceptors; statements regarding new markets for
linked progressive systems and the statement regarding seasonal
increased demand for the Company's products. In addition,
statements containing expressions such as "believes", "anticipates"
or "expects" used in the Company's periodic reports on Forms 10-K
and 10-Q filed with the SEC are intended to identify forward-looking
statements. The Company cautions that these and similar statements
included in this report and in previously filed periodic reports
including reports filed on Forms 10-K and 10-Q are further qualified
by important factors that could cause actual results to differ
materially from those in the forward-looking statement, including,
without limitation, the following: decline in demand for gaming
products or reduction in the growth rate of new markets; the effect
of economic conditions; a decline in the market acceptability of
gaming; unfavorable public referendums or anti-gaming legislation;
political and economic instability in developing international
markets; a decline in the demand for replacement machines with
imbedded bill acceptors; a decrease in the desire of established
casinos to upgrade machines in response to added competition from
newly constructed casinos; changes in player appeal for gaming
products; the loss of a distributor; changes in interest rates
causing a reduction of investment income or in the market interest
rate sensitive investments loss or retirement of key executives;
approval of pending patent applications or infringement upon
existing patents; the effect of regulatory and governmental actions;
unfavorable determination of suitability by regulatory authorities
with respect to officers, directors or key employees; the
limitation, conditioning or suspension of any gaming license;
adverse results of significant litigation matters; fluctuations in
exchange rates, tariffs and other barriers. Many of the foregoing
factors have been discussed in the Company's prior SEC filings and,
had the amendments to the Securities Act of 1933 and Securities
Exchange Act of 1934 become effective at a different time, would
have been discussed in an earlier filing.
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Financial Statements Page
Independent Auditors' Report 36
Consolidated Statements of Income for the
years ended September 30, 1996, 1995 and 1994 37
Consolidated Balance Sheets,
September 30, 1996 and 1995 38
Consolidated Statements of Cash Flows for the
years ended September 30, 1996, 1995 and 1994 40
Consolidated Statements of Changes in Stockholders'
Equity for the years ended September 30, 1996, 1995
and 1994 42
Notes to Consolidated Financial Statements 43
<PAGE>
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 as of September 30,
1996 and 1995, and the related consolidated statements of income,
cash flows and changes in stockholders' equity for each of the three
years in the period ended September 30, 1996. Our audits also
included the consolidated financial statement schedule listed in the
Index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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
International Game Technology and Subsidiaries as of September 30,
1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended September 30,
1996 in conformity with generally accepted accounting principles.
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 7, 1996
<PAGE>
<TABLE>
Consolidated Statements of Income
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Amounts in thousands except per share amounts)
<S> <C> <C> <C>
Revenues
Product sales $481,652 $416,424 $514,121
Gaming operations 251,800 204,362 160,340
Total revenues 733,452 620,786 674,461
Costs and Expenses
Cost of product sales 265,550 233,367 271,374
Gaming operations 139,706 110,779 81,714
Selling, general and
administrative 108,469 88,551 83,871
Depreciation and amortization 12,570 14,380 9,052
Research and development 25,701 28,491 23,345
Provision for bad debts 11,623 5,877 7,199
Total costs and expenses 563,619 481,445 476,555
Income from Operations 169,833 139,341 197,906
Other Income (Expense)
Interest income 39,178 37,575 29,531
Interest expense (23,535) (20,374) (11,794)
Gain (loss) on investments, net (4,311) (12,033) 935
Gain (loss) on the sale of
assets (793) 83 (797)
Other 4,031 172 (1,021)
Other income, net 14,570 5,423 16,854
Income Before Income Taxes 184,403 144,764 214,760
Provision for Income Taxes 66,386 52,116 74,313
Net Income $118,017 $ 92,648 $140,447
Primary Earnings Per Share $ 0.93 $ 0.71 $ 1.07
Fully Diluted Earnings Per Share $ 0.92 $ 0.71 $ 1.05
Weighted Average Common and Common
Equivalent Shares Outstanding 127,412 131,094 131,380
Weighted Average Common Shares
Outstanding Assuming Full
Dilution 128,160 131,094 135,858
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
September 30,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 169,900 $241,613
Investment securities, at market value 60,858 47,813
Accounts receivable, net of allowances
for doubtful accounts of $5,681 and
$5,182 148,305 113,196
Current maturities of long-term notes
and contracts receivable, net of
allowances 72,063 80,271
Inventories, net of allowances for
obsolescence of $18,165 and $14,902:
Raw materials 54,600 39,526
Work-in-process 4,316 4,836
Finished goods 41,427 29,463
Total inventories 100,343 73,825
Deferred income taxes 19,354 25,336
Investments to fund liabilities to jackpot
winners 27,343 19,465
Prepaid expenses and other 17,426 5,117
Total Current Assets 615,592 606,636
Long-term notes and contracts receivable,
net of allowances and current maturities 46,473 43,511
Property, plant and equipment, at cost
Land 25,610 13,910
Buildings 58,574 14,270
Gaming operations equipment 73,641 68,096
Manufacturing machinery and equipment 77,025 62,454
Leasehold improvements 9,960 12,362
Construction in progress 16,136 23,999
Total 260,946 195,091
Less accumulated depreciation and
amortization (83,144) (75,793)
Property, plant and equipment, net 177,802 119,298
Investments to fund liabilities to jackpot
winners 244,340 167,398
Deferred income taxes 65,194 27,735
Other assets 4,786 7,120
Total Assets $1,154,187 $971,698
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
September 30,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes
payable and capital lease obligations $ 8,119 $ 7,385
Accounts payable 33,145 28,862
Jackpot liabilities 33,489 25,072
Accrued employee benefit plan liabilities 16,175 11,302
Accrued dividends payable 3,767 3,866
Accrued vacation liability 6,271 5,664
Other accrued liabilities 26,476 15,568
Total Current Liabilities 127,442 97,719
Long-term notes payable and capital
lease obligations, net of current
maturities 107,155 107,543
Long-term jackpot liabilities 292,864 212,341
Other liabilities 3,526 5
Total Liabilities 530,987 417,608
Commitments and contingencies - -
Stockholders' equity
Common stock, $.000625 par value; 320,000,000
shares authorized; 150,690,308 and
150,118,534 shares issued 94 94
Additional paid-in capital 237,365 231,338
Retained earnings 567,565 463,039
Treasury stock; 25,114,476 and 21,268,046
shares, at cost (188,143) (143,281)
Net unrealized gain on investment securities 6,319 2,900
Total Stockholders' Equity 623,200 554,090
Total Liabilities and Stockholders' Equity $1,154,187 $971,698
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $118,017 $92,648 $140,447
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 30,502 27,896 20,074
Amortization of long-term debt
discount and offering costs - - 545
Provision for bad debts 11,623 5,877 7,199
Provision for inventory obsolescence 16,550 9,347 8,668
(Gain) loss on investments and sale
of assets 5,104 11,950 (138)
Donated common stock - - 500
Common stock awards 1,236 - -
(Increase) decrease in assets:
Receivables (40,623) 29,929 (89,605)
Inventories (63,220) 9,950 (52,157)
Prepaid expenses and other (14,069) (3,050) (2,688)
Other assets (2,009) (11,477) (8,561)
Increase (decrease) in liabilities:
Accounts payable and accrued
liabilities 21,272 7,992 (3,493)
Accrued and deferred income taxes
payable, net of tax benefit of
stock option and purchase plans (29,187) (27,007) (21,949)
Other 65 (699) 615
Total adjustments (62,756) 60,708 (140,990)
Net cash provided by (used in)
operating activities 55,261 153,356 (543)
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Investing Activities
Investment in property, plant
and equipment (71,575) (43,537) (56,839)
Proceeds from sale of property,
plant and equipment 4,112 6,806 6,334
Purchase of investment securities (31,041) (13,861) (114,265)
Proceeds from sale of investment
securities 23,524 34,385 186,868
Proceeds from investments to fund
liabilities to jackpot winners 28,179 20,353 15,932
Purchase of investments to fund
liabilities to jackpot winners (112,999) (61,075) (70,025)
Net cash used in investing
activities (159,800) (56,929) (31,995)
Cash Flows from Financing Activities
Principal payments on debt (8,297) (458) (523)
Payments on jackpot liabilities (28,179) (20,353) (15,932)
Collections from systems to fund
jackpot liabilities 117,119 92,564 62,776
Proceeds from stock options
exercised 2,839 1,920 1,261
Proceeds from employee stock
purchases 1,046 958 1,035
Payments for purchase of treasury
stock (44,861) (56,121) (57,097)
Payments of cash dividends (15,277) (15,631) (15,495)
Proceeds from long-term debt 7,986 - 112,904
Net cash provided by financing
activities 32,376 2,879 88,929
Effect of Exchange Rate Changes on
Cash and Cash Equivalents 450 (423) 993
Net Increase (Decrease) in Cash and
Cash Equivalents (71,713) 98,883 57,384
Cash and Cash Equivalents at
Beginning of Year 241,613 142,730 85,346
Cash and Cash Equivalents at End of
Year $169,900 $241,613 $142,730
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Amounts in thousands)
<S> <C> <C> <C>
Common Stock
Balance at beginning of year
150,119; 149,466 and 138,939
shares $ 94 $ 93 $ 87
Stock options exercised and other
571; 653 and 1,188 shares - 1 -
Conversion of subordinated notes
9,339 shares - - 6
Balance at end of year
150,690 shares $ 94 $ 94 $ 93
Additional Paid-In Capital
Balance at beginning of year $ 231,338 $ 226,712 $ 146,869
Stock options exercised 3,885 2,877 4,826
Tax benefit of stock options 906 1,749 5,131
Common stock awards 1,236 - -
Donated stock - - 500
Conversion of subordinated notes - - 59,136
Purchase of Radica interest - - 10,250
Balance at end of year $ 237,365 $ 231,338 $ 226,712
Retained Earnings
Balance at beginning of year $ 463,039 $ 385,511 $ 259,125
Currency translation adjustments 1,687 769 1,659
Dividends declared (15,178) (15,889) (15,720)
Net income 118,017 92,648 140,447
Balance at end of year $ 567,565 $ 463,039 $ 385,511
Treasury Stock
Balance at beginning of year $(143,281) $ (87,160) $ (27,532)
Purchase of treasury stock (44,862) (56,121) (59,628)
Balance at end of year $(188,143) $(143,281) $ (87,160)
Net Unrealized Gain (Loss) on
Investment Securities
Balance at beginning of year $ 2,900 $ (4,288) $ -
Net unrealized loss on investment
securities at October 1, 1994 - (649) -
Net unrealized gain (loss) on
investment securities 3,419 1,808 (4,288)
Recognized loss on investment
security - 6,029 -
Balance at end of year $ 6,319 $ 2,900 $ (4,288)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization
International Game Technology (the "Company") was incorporated in
December 1980 to acquire the gaming licensee and operating entity,
IGT, and facilitate the Company's initial public offering. In
addition to its 100% ownership of IGT, each of the following
corporations is a direct or indirect wholly-owned subsidiary of the
Company: I.G.T.-Argentina S.A. ("IGT-Argentina"); I.G.T.-
(Australia), Pty. Ltd. ("IGT-Australia"); IGT do Brasil Ltda. ("IGT-
Brazil"); IGT-Europe b.v. ("IGT-Europe"); IGT-Iceland, Ltd. ("IGT-
Iceland"); IGT-Japan k.k. ("IGT-Japan; International Game Technology-
Africa (Pty.) Ltd. ("IGT-Africa"); and International Game Technology
S.R. Ltda. ("IGT-Peru").
IGT is the largest manufacturer of computerized casino gaming
products and proprietary gaming systems in the world. The Company
believes it manufactures the broadest range of microprocessor-based
gaming machines available. The Company also develops and
manufactures systems which monitor slot machine play and track
player activity, as well as wide area progressive systems. In
addition to gaming product sales and leases, the Company has
developed and sells computerized linked proprietary systems to
monitor lottery video gaming terminals and has developed specialized
lottery video gaming terminals for lotteries and other applications.
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-Australia was established in March 1985 and is located in
Sydney, Australia. IGT-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.
IGT-Europe was established in The Netherlands in February 1992 to
distribute and market gaming products in Eastern and Western Europe
and Northern 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. In April 1993, IGT-Japan was approved to
supply Pachisuro gaming machines to the Japanese market.
IGT-Argentina was established in December 1993 and opened an office
in Buenos Aires, Argentina to distribute and market gaming products
in Argentina and Peru.
IGT-Brazil opened an office Sao Paulo, Brazil in October 1994 and
subsequently was incorporated in March 1995 to distribute and market
gaming products in Brazil.
IGT-Africa opened an office in September 1994 in Johannesburg, South
Africa and subsequently was incorporated in October 1995 to
distribute and market gaming products in Southern Africa.
IGT-Peru was established in July 1996 and opened an office in Lima,
Peru to support proprietary systems and to distribute and market
gaming products in Peru.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
Unless the context indicates otherwise, references to "International
Game Technology", "IGT" or the "Company" include International Game
Technology and its wholly-owned subsidiaries and their subsidiaries.
The principal executive offices of the Company are located at 5270
Neil Road, Reno, Nevada 89502; its telephone number is (702) 448-
1200.
Product Sales
The Company makes product sales for cash, on normal credit terms of
90 days or less, over longer term installments, and through
participation in the net winnings of the machines until the purchase
price is paid. Generally, sales are recorded when the products are
shipped and title passes to the customer.
Gaming Operations
Gaming operations revenues consist of revenues relating to the
operations of the proprietary systems division, a share of the net
gaming winnings from the operation of machines at customer
locations, and the lease and rental of gaming and video lottery
machines. Revenue from systems products installed in New Jersey
casinos is not recognized until receipt is assured.
The Company's linked proprietary systems are operated in Colorado,
Louisiana, Mississippi, Nevada, New Jersey, South Dakota and in
Native American casinos and internationally in Iceland and Macau.
In Atlantic City, each system is operated by an independent trust
managed by representatives from the participating casinos. The
trust records a liability to the Company for annual casino fees as
well as machine rental fees. Payments to jackpot winners are made
by the trust.
In Louisiana, Mississippi, Nevada, South Dakota and the Native
American casinos, the systems are provided by the Company and the
casinos pay a percentage of play to the Company. In Colorado, the
Company provides the systems and charges the casinos a machine
rental and service fee. The Company recognizes the amounts received
from the casinos as revenue. In these jurisdictions, the jackpots
resulting from progressive system play are a legal liability of the
Company under the systems operating agreements. The jackpots are
paid in equal installments without interest over a ten to twenty-
five year period. The Company records the cost of investments to
fund the annual jackpot payments to winners as a part of gaming
operations expense. These costs totaled $113.1 million, $88.8
million, and $66.7 million during the years ended September 30,
1996, 1995, and 1994, respectively.
In Macau and Iceland, the Company receives a percentage of the net
win.
<TABLE>
The following table shows the revenues recorded from gaming
operations.
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Proprietary Systems $234,859 $191,607 $146,800
Lease Operations 16,941 12,755 13,540
Total $251,800 $204,362 $160,340
</TABLE>
Research and Development
Research and development costs are expensed as incurred.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash required for funding current
systems jackpot payments as well as purchasing investments to meet
obligations for making payments to jackpot winners. 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, and are
deemed to be cash equivalents for purposes of the consolidated
statements of cash flows.
Investment Securities
The Company's investment securities have been classified as
"available-for-sale" and stated at market value, with unrealized
gains and losses, net of income tax effects, excluded from income
and reported as a separate component of stockholders' equity.
Market value is determined by the most recently traded price of the
security at the balance sheet date. Net realized gains or losses
are determined on the specific identification cost method.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Depreciation and Amortization
Depreciation and amortization are provided on the straight-line
method over the following useful lives:
Gaming operations equipment 2 to 5 years
Manufacturing machinery and equipment 5 to 6 years
Buildings 40 years
Leasehold improvements Term of Lease
Building under capital lease Term of Lease
Maintenance and repairs are expensed as incurred. The costs of
improvements are capitalized. Gains or losses on the disposition of
assets are included in income.
Investments to Fund Liabilities to Jackpot Winners
These investments represent discounted U.S. Treasury Securities
purchased to meet obligations for making payments to linked
progressive systems jackpot winners. The Company has both the
intent and ability to hold these investments to maturity and,
therefore, has classified 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. There were no gross unrealized losses or
gains at September 30, 1996. Securities in this portfolio have
maturity dates through 2020.
Other Assets
Other assets include deposits, patents, software and certain
investments. Patents are amortized over seven years. Software is
amortized over five years. In fiscal 1995, other assets also
included the Company's investment in Radica Games Limited
("Radica"), a manufacturer of non-gambling casino theme games.
During the fourth quarter of fiscal 1995, the Company deemed the
decline in Radica's stock price to be other than temporary;
accordingly the Company recorded a pretax charge to income of $14.6
million.
Earnings Per Share
Earnings per share is computed based upon the weighted average
number of common and common equivalent shares outstanding.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been
translated into U.S. dollars for consolidated reporting purposes in
accordance with Statement of SFAS No. 52. All asset and liability
accounts have been translated using the current exchange rate at
the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. The
gains and losses resulting from the translation adjustments have
been accumulated as a component of stockholders' equity and netted
against retained earnings due to the immateriality of the amounts.
The effect on the consolidated statements of operations of
translation gains and losses is insignificant for all years presented.
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") issued SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" in March 1995. This statement,
effective for the Company's fiscal year ended September 30, 1997,
requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Management believes that if
SFAS No. 121 had been adopted at September 30, 1996, it would not
have had a significant effect on the financial position or results
of operations of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," which will be effective for the Company's fiscal
year ended September 30, 1997. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees
and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion
No. 25, which recognizes compensation cost based on the intrinsic
value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to
employees and will disclose the required pro forma effect on net
income and earnings per share.
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to be consistent with the
presentation used in fiscal year 1996. Such reclassifications
include the presentation of depreciation expense related to gaming
equipment for proprietary systems and leases as a cost of gaming
operations.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
2. Business Segments
The Company operates principally in two lines of business: the
manufacture of gaming products and gaming operations. The table
below presents information as to the Company's operations in these
business segments.
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Revenues
Manufacture of gaming products $ 481,652 $416,424 $514,121
Gaming operations 251,800 204,362 160,340
Total $ 733,452 $620,786 $674,461
Operating Profit
Manufacture of gaming products $ 126,239 $109,465 $169,541
Gaming operations 70,763 58,137 48,964
Total 197,002 167,602 218,505
Other income (expense), including
interest expense (12,599) (22,838) (3,745)
Income Before Income Taxes $ 184,403 $144,764 $214,760
Capital Expenditures
Manufacture of gaming products $ 39,113 $ 25,351 $ 17,854
Gaming operations 16,511 19,240 29,488
Corporate 27,722 10,944 25,840
Total $ 83,346 $ 55,535 $ 73,182
Depreciation and Amortization
Manufacture of gaming products $ 3,201 $ 2,855 $ 2,610
Gaming operations 15,846 13,963 11,526
Corporate 11,455 11,078 5,938
Total $ 30,502 $ 27,896 $ 20,074
Identifiable Assets
Manufacture of gaming products $ 487,865 $364,161 $364,368
Gaming operations 388,659 260,968 215,746
Corporate 277,663 346,569 287,894
Total $1,154,187 $971,698 $868,008
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
The Company's primary operations are based in the United States,
Australia and Europe. The table below presents information as to
the Company's operations by geographic region.
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Revenues
North America
Unaffiliated customers $ 632,089 $564,849 $608,032
Inter-area transfers 33,774 21,006 13,169
Australia 46,950 33,641 42,270
Europe 27,197 21,592 10,969
Other international 27,216 704 13,190
Eliminations (33,774) (21,006) (13,169)
Total $ 733,452 $620,786 $674,461
Operating Profit (Loss)
North America $ 190,631 $173,509 $226,533
Australia (1,020) (5,873) 1,507
Europe 5,212 4,044 1,573
Other international 2,117 (3,815) (6,935)
Eliminations 62 (263) (4,173)
Total 197,002 167,602 218,505
Other income (expense),
including interest expense (12,599) (22,838) (3,745)
Income Before Income Taxes $ 184,403 $144,764 $214,760
Identifiable Assets
North America $1,047,383 $913,011 $801,453
Australia 60,915 44,165 44,759
Europe 13,413 13,123 10,753
Other international 32,476 1,399 11,043
Total $1,154,187 $971,698 $868,008
</TABLE>
On a consolidated basis the Company does not recognize intersegment
revenues or expenses upon the transfer of gaming products between
segments. Operating profit is revenue and interest income related
to investments to fund jackpot liabilities less cost of sales and
operating expenses, including related operating depreciation and
amortization, provisions for bad debts, and an allocation of a
portion of selling, general and administrative and research and
development expenses. Other income (expense) includes interest
expense, interest income and gain (loss) on sale of assets.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
During the fiscal years ended September 30, 1996, 1995 and 1994, the
Company made net sales of $61.5 million, $41.0 million and $49.9
million respectively, to Sodak, the Company's principal distributor
of gaming products to Native American reservations. These sales
aggregated approximately 13%, 10% and 10% of the Company's total
product sales for the fiscal years 1996, 1995 and 1994,
respectively. The Company believes the loss of this customer would
not have a long-term material adverse effect on product sales as
other means of distribution to this market are available.
The Company had total export sales from the United States of
approximately $24.3 million, $12.4 million and $13.2 million during
the fiscal years ended September 30, 1996, 1995 and 1994,
respectively.
3. Investment Securities
<TABLE>
A summary of investment securities at September 30, 1996 follows:
<CAPTION>
Gross Gross
Net Unrealized Unrealized Market
September 30, 1996 Cost Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
United States Government and
Agency Obligations $ 9,004 $ 24 $ (18) $ 9,010
Corporate Bonds 13,438 614 (85) 13,967
Equity Securities 28,694 9,257 (70) 37,881
Total investment securities $51,136 $9,895 $(173) $60,858
</TABLE>
At September 30, 1996 debt securities had maturity dates ranging
from three months to ten years.
<TABLE>
A summary of investment securities at September 30, 1995 follows:
<CAPTION>
Gross Gross
Net Unrealized Unrealized Market
September 30, 1995 Cost Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
United States Government and
Agency Obligations $ 3,927 $ 49 $ - $ 3,976
Corporate Bonds 17,997 9 (1,169) 16,837
Equity Securities 21,428 6,499 (927) 27,000
Total investment securities $43,352 $6,557 $(2,096) $47,813
</TABLE>
At September 30, 1995, debt securities had maturity dates ranging
from one month to two years.
The proceeds from sales of available-for-sale securities were $23.5
million, $34.4 million and $186.9 million for fiscal 1996, 1995 and
1994, respectively. The gross realized gains were $472,000, $3.0
million and $4.3 million for fiscal 1996, 1995 and 1994, respectively.
The gross realized losses were $205,000, $886,000 and $2.4 million
for fiscal 1996, 1995 and 1994, respectively.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
4. Notes and Contracts Receivable
The Company 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 Company has provided loans, principally for financial
assistance, to several customers. At September 30, 1996 and 1995,
the balance of such loans totaled $3.9 million and $2.7 million,
respectively. There were no allowances for doubtful loans as of
September 30, 1996 and 1995. These loans are generally for terms of
one to five years with interest at prevailing rates.
<TABLE>
The following table represents the estimated future collections of
notes and contracts receivable (net of allowances) at September 30,
1996:
<CAPTION>
Years Ended September 30, Estimated Receipts
(Dollars in thousands)
<S> <C>
1997 $ 72,063
1998 25,758
1999 13,468
2000 1,423
2001 669
2002 and after 5,155
$118,536
</TABLE>
<TABLE>
At September 30, 1996 and 1995, the following allowances for
doubtful notes and contracts were netted against current and long-
term maturities:
<CAPTION>
September 30,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Current $ 4,538 $ 3,465
Long-term 15,237 10,149
$19,775 $13,614
</TABLE>
5. Lines of Credit
As of September 30, 1996, the Company had a $50.0 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 funding
operations and to facilitate standby letters of credit. 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
September 30, 1996, $48.0 million was available under this line of
credit.
IGT-Australia had a $2.5 million (Australian) bank line of credit
available as of September 30, 1996. Interest is paid at published
reference rates plus a margin of 1% or less. This line is supported
by a comfort letter and guarantee from the Company and has a
provision for review and renewal annually in January. At September
30, 1996, $1.5 million (Australian) was available under this line.
The Company is required to comply, and is in compliance, with
certain covenants contained in these line of credit agreements and
its Senior Notes which, among other things, limit financial
commitments the Company may make without the written consent of the
lenders and require the maintenance of certain financial ratios,
minimum working capital and net worth of the Company.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
6. Notes Payable and Capital Lease Obligations
<TABLE>
Notes payable and capital lease obligations consist of the
following as of:
<CAPTION>
September 30,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Senior notes (see Note 13) $100,000 $100,000
Australian cash advance facility
(see Note 13) 15,037 13,600
Capital lease obligations (see Note 10) 144 320
Other notes payable 93 1,008
Total 115,274 114,928
Less current maturities 8,119 7,385
Long-term notes payable and capital
lease obligations, net of current
maturities $107,155 $107,543
</TABLE>
<TABLE>
The following table represents the future fiscal year principal
payments of these notes and capital lease obligations at September
30, 1996:
<CAPTION>
Years Ended September 30, Principal Payments
(Dollars in thousands)
<S> <C>
1997 $ 8,119
1998 19,071
1999 16,684
2000 14,300
2001 14,300
2002 and after 42,800
$115,274
</TABLE>
7. Liabilities to Jackpot Winners
From the Colorado, Louisiana, Mississippi, Native American, Nevada
and South Dakota systems, the Company receives a percentage of the
amount played or machine rental and service fee from the linked
progressive systems to fund the related jackpot payments. The
jackpots are paid in equal annual installments without interest over
a ten to twenty-five year period. The following schedule sets forth
the future fiscal year payments for the jackpot winners under these
systems at September 30, 1996:
<TABLE>
<CAPTION>
Years Ended September 30, Payments
(Dollars in thousands)
<S> <C>
1997 $ 27,229
1998 26,549
1999 26,549
2000 26,549
2001 26,549
2002 and after 318,972
$452,397
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
Jackpot liabilities in the amount of the present value of the
jackpots are recorded concurrently with the recognition of the
related revenue. Jackpot liabilities include jackpots won and
amounts accrued for jackpots not yet won that are contractual
obligations of the Company. At September 30, 1996 and 1995, the
Company had accrued, net of unamortized discounts, approximately
$326.4 million and $237.4 million respectively, for outstanding
progressive jackpot liabilities. At September 30, 1996 and 1995,
the unamortized discount on such liabilities totaled $178.7 million
and $137.7 million, respectively. The Company amortizes the
discounts on the liabilities, recognizing it as interest expense,
and records commensurate interest income on the investments
purchased to fund the payments to the jackpot winners. During
fiscal 1996, 1995 and 1994, the Company recorded interest expense on
jackpot liabilities of $16.0 million, $12.1 million and $8.4
million, respectively. The Company is required to maintain cash and
investments relating to systems liabilities in separate accounts.
8. Income Taxes
SFAS No. 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The
Company determines the net current deferred tax asset or liability
and the net noncurrent asset or liability separately for federal,
state, and foreign jurisdictions.
<TABLE>
The effective income tax rates differ from the statutory United
States federal income tax rates as follows:
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Taxes at federal statutory
rate $64,545 35.0% $50,667 35.0% $75,166 35.0%
Foreign subsidiaries tax 3,855 2.1 15 0.0 342 0.2
State income tax, net 2,834 1.5 1,431 1.0 2,096 1.0
Foreign sales corporation (1,567) (.8) (577) (0.4) (1,171) (0.5)
Other, net (3,281) (1.8) 580 0.4 (2,120) (1.1)
Provision for income taxes $66,386 36.0% $52,116 36.0% $74,313 34.6%
</TABLE>
<TABLE>
Components of the provision for income taxes were as follows:
<CAPTION>
Years Ended September 30,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Current
Federal $ 90,992 $ 93,919 $ 86,112
State 3,898 3,778 4,143
Foreign 4,076 (3,780) 1,115
Total current 98,966 93,917 91,370
Deferred
Federal (28,493) (39,494) (15,797)
State (1,225) (2,119) (918)
Foreign (2,862) (188) (342)
Total deferred (32,580) (41,801) (17,057)
Provision for income taxes $ 66,386 $ 52,116 $ 74,313
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
Pre-tax income subject to United States taxation totaled $178.0 million, $
140.6 million and $209.2 million for fiscal 1996, 1995 and 1994,
respectively. Pre-tax income subject to foreign taxation totaled
$6.4 million, $4.1 million and $5.6 million for fiscal 1996, 1995
and 1994, respectively.
<TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<CAPTION>
September 30,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities
Difference between book and tax
basis of property $ (1,128) $ -
Unrealized gain on investment
securities (3,076) -
Other (1,334) (1,488)
(5,538) (1,488)
Deferred tax assets
Receivable reserve 8,020 6,258
Reserves not currently deductible 5,936 4,839
Reserve differential for gaming
activities 59,028 27,332
Difference between book and tax
basis of property - 682
Foreign subsidiaries 9,562 4,793
Unrealized loss on investment
securities - 4,087
State income taxes 1,492 4,100
Other 6,048 2,468
90,086 54,559
Net deferred tax asset $84,548 $53,071
Reflected in the consolidated balance sheets as:
Current deferred asset $19,354 $25,336
Noncurrent deferred asset 65,194 27,735
Net deferred tax asset $84,548 $53,071
</TABLE>
9. Employee Benefit Plans
Employee Incentive Plans
Under a discretionary program effective January 1, 1986 and
reviewable annually by the Company's Board of Directors, the Company
contributed 11% of consolidated operating profits before incentives
(excluding IGT-Australia) equally to three employee incentive plans;
profit sharing and 401K plan, cash sharing, and management bonus.
The total annual contributions under all three plans were $21.8
million, $17.5 million, and $20.7 million in fiscal 1996, 1995 and
1994, respectively.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
The profit sharing plan was originally adopted in 1980 for the
Company's employees working in the United States. Benefits vest over
a seven year period of employment. Effective January 1, 1993, the
Company began distributing a portion of the profit sharing plan
contribution under a 401(k) retirement plan matching program. Per
the plan agreement, the Company matches 100% of employee
contributions up to $500 and an additional 50% of the next $500
contributed by the employee. This allows for maximum annual Company
contributions of $750 to each employee's 401(k) account. These
contributions vest immediately. In fiscal 1996, 1995, and 1994, the
Company match portion of the total profit sharing contribution was
$913,000, $938,000, and $824,000, respectively. The Company's
foreign subsidiaries have similar retirement plans.
The cash sharing plan calls for semi-annual distributions to all non
IGT-Australia employees. IGT-Australia has a similar plan designed as
a superannuation program. The management bonuses are paid out
annually to key employees throughout the Company.
Employee Stock Purchase Plan
Effective February 26, 1987, the Company adopted a Qualified
Employee Stock Purchase Plan. Under this Plan, each eligible
employee may be granted an option to purchase a specific number of
shares of the Company's common stock. The term of each option is 12
months, and the exercise date is the last day of the option period.
Only those employees who have completed 12 months of continuous
service with the Company are eligible. Employees who are officers,
5% or more shareholders, employees receiving more than $66,000 in
annual compensation and employees of certain subsidiaries are
excluded.
An aggregate of 2,400,000 shares may be made available under this
plan. Employees may participate in this plan only through payroll
deductions up to a maximum of 10% of their base pay. The option
price is equal to the lesser of 85% of the fair market value of the
common stock on the date of grant or on the date of exercise.
886,750 shares were available under this plan at September 30, 1996.
Stock Option Plans
In 1981, the Company adopted a Stock Option Plan under which
nonqualified and incentive stock options to purchase up to
27,104,000 shares may be granted. In 1993, the Company adopted an
additional Stock Option Plan under which nonqualified and incentive
stock options to purchase up to 3,000,000 shares may be granted to
employees and up to 250,000 nonqualified stock options may be
granted to non-employee directors of the Company.
Options have been granted at fair market value on the date of grant
and, except for non-employee director options, typically become
exercisable in five annual installments although a shorter period
may be provided. At September 30, 1996, options to purchase
1,358,145 shares were available for grant under the plans.
In May, 1995, the Company offered to reprice outstanding options to
$12.75 per share. Pursuant to such agreement, options to purchase
approximately 1,299,000 shares were exchanged. The newly granted
options become exercisable over a five-year period.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
<S> <C> <C>
Outstanding at September 30, 1993 3,392,472 $ .51 - $38.63
Granted 974,076 $18.50 - $40.50
Canceled (106,847) $22.25 - $34.75
Exercised (739,946) $ .51 - $25.44
Outstanding at September 30, 1994 3,519,755 $ .51 - $40.50
Granted 2,269,120 $12.75 - $20.75
Canceled (1,736,426) $ 5.98 - $40.50
Exercised (572,047) $ .51 - $11.44
Outstanding at September 30, 1995 3,480,402 $ .51 - $28.50
Granted 2,581,189 $10.75 - $19.88
Canceled (1,327,561) $ 5.98 - $28.38
Exercised (482,995) $ .51 - $15.56
Outstanding at September 30, 1996 4,251,035 $ .51 - $28.50
Options exercisable at
September 30,
1996 764,285 $ .51 - $28.50
1995 1,052,016 $ .51 - $20.50
1994 1,419,938 $ .51 - $38.63
</TABLE>
10. Commitments
The Company leases certain of its facilities and equipment under
various agreements for periods through the year 2002. The following
table shows the future minimum rental payments required under these
operating and capital leases which have initial or remaining non-
cancelable lease terms in excess of one year as of September 30,
1996.
<TABLE>
<CAPTION>
Operating Capital
Years Ended September 30, Leases Leases Total
(Dollars in thousands)
<S> <C> <C> <C>
1997 $ 6,236 $ 116 $ 6,352
1998 4,213 22 4,235
1999 2,523 11 2,534
2000 1,386 1,386
2001 1,036 1,036
2002 and after 117 117
Total minimum payments $15,511 149 $15,660
Amount representing
interest (5)
Capital lease obligations 144
Less current portion (112)
Long-term capital lease
obligations $ 32
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
The cost and related accumulated depreciation of equipment under
capital leases as of September 30, 1996 was $446,000 and $336,000
respectively, and at September 30, 1995, was $694,000 and $313,000,
respectively.
Certain of the leases provide that the Company pay utilities,
maintenance, property taxes, and certain other operating expenses
applicable to the leased property, including liability and property
damage insurance. The lease term for the Company's recently vacated
manufacturing facility in Reno, Nevada extends through 2001 and the
related payments are included in the schedule above. However, a
charge of $4.5 million has been included in fiscal 1996 income
related to this future commitment. The lease provides for periodic
rental increases.
The total rental expense for the fiscal years ended September 30,
1996, 1995 and 1994 was approximately $6.4 million, $6.8 million,
and $5.6 million, respectively.
11. Contingencies
The Company has been named in and has brought lawsuits in the normal
course of business. Management does not expect the outcome of these
suits, including the lawsuit described below, to have a material
adverse effect on the Company's financial position or results of
future operations.
The Company is a defendant in three class action lawsuits, one filed
in the United States District Court of Nevada, Southern Division,
entitled Larry Schreier v. Caesar's World, Inc., et al., and two
filed in the United States District Court of Florida, Orlando
Division, entitled Poulos v. Caesar's World, Inc., et al. and Ahern
v. Caesar's World, Inc., et al., which have been consolidated in a
single action. Also named as defendants in these actions are many,
if not most, of the largest gaming companies in the United States,
and certain other gaming equipment manufacturers. Each complaint is
identical in its material allegations. 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 actually an opportunity to win on a
given play. The complaints allege that the defendants' acts
constitute violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), and also give rise to claims for common
law fraud and unjust enrichment, and seeks compensatory, special
consequential, incidental and punitive damages of several billion
dollars.
In response to the complaints, all of the defendants, including the
Company, granted the defendants' motion to transfer venue of the
action to Las Vegas. The Court also filed motions challenging the
pleadings for failure to state a claim, seeking to dismiss the
complaints for lack of personal jurisdiction and venue, and seeking
to transfer venue of the actions to Las Vegas. The Court also
granted the defendants' motions to dismiss, with leave to amend the
pleadings. The plaintiffs filed amended pleadings and the defendants
again filed motions to dismiss. The Court has not indicated when it
will rule on these motions
12. Related Party Transactions
<TABLE>
Related party transactions included in the consolidated financial
statements are as follows:
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Years Ended September 30,
Total revenues $11,843 $21,864 $31,712
September 30,
Accounts receivable $ 1,151 $ 663
Current maturities of
long-term notes and
contracts receivable 2,911 8,744
Long-term notes and
contracts receivable 2,474 2,801
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
A member of the Company's Board of Directors is an officer of, and
has an equity interest in, a Nevada gaming business from which the
Company recognized revenues of $536,000, $1.8 million and $1.5
million during the fiscal years ended September 30, 1996, 1995 and
1994, respectively. The Company had contracts and accounts
receivable balances from this customer of $357,000 and $1.1 million
at September 30, 1996 and 1995, respectively. He is also a director
and officer of a parent to ten additional gaming businesses, from
which the Company recognized revenues of $11.3 million, $19.9
million, and $30.2 million during the fiscal years ended September
30, 1996, 1995 and 1994, respectively. The Company had contracts
and accounts receivable balances from these businesses of $3.7
million and $8.5 million at September 30, 1996 and 1995,
respectively.
Effective October 1, 1993, the Company entered into an Agreement
with National Holdings, Inc. ("NHI") to form IGT-NHI Joint Venture
Company ("IGT-NHI") to engage in the business of supplying and
operating bingo halls and electronic gaming devices in the Peoples
Republic of China. The Company has a 33% ownership interest in IGT-
NHI. At September 30, 1996 and 1995, IGT-NHI owed the Company
$386,000 and $422,000, respectively on a line of credit and $2.0
million and $1.8 million, respectively on an equipment loan. The
Company has reserved substantially all of these balances.
The Company entered into a joint venture agreement with a wholly-
owned subsidiary of Ladbroke Group PLC to form Ladbroke Gaming
Argentina ("LGA") on January 27, 1995. LGA, 50% of which is owned
by the Company, was formed to install gaming machines and conduct
gaming operations within authorized gaming establishments in
Argentina. In May, 1996, the Company sold its investment in LGA,
recognizing a loss of $912,000. No revenues from this joint venture
were recognized in fiscal 1996. At September 30, 1996, LGA owed the
Company $1.6 million, with repayment terms of $100,000 per month,
for the sale of this investment. During fiscal 1995, the Company
recognized $173,000 from sales to LGA and at September 30, 1995 had
accounts and notes receivable of $337,000.
13. Debt Offerings
Senior Notes
In September 1994, the Company completed a $100 million private
placement of 7.84% Senior Notes (the "Senior Notes"). The Senior
Notes require annual principal payments of $14.3 million commencing
in September 1998 through 2003 and a final principal payment of
$14.2 million in September 2004. Interest is paid quarterly. The
Senior Notes contain covenants which limit the financial commitments
the Company may make and require the maintenance of a minimum level
of consolidated net worth. The net proceeds from the Senior Notes
of $99.6 million is being used to finance the construction of a new
manufacturing and headquarters facility and for general corporate
purposes.
Convertible Subordinated Notes
In May 1991, the Company completed a $115 million 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
represented a yield of 8.5% per annum. Net proceeds from the issue
and sale of the Notes were $89.4 million.
The Company, as permitted under the terms of the Notes, called all
the outstanding Notes for redemption on June 1, 1994. The
redemption price was 84.414% of the principal amount due at maturity
together with accrued and unpaid interest to the date of redemption.
At the option of the holder, the Notes were convertible into common
stock of the Company at a conversion rate of 129.384 shares per each
$1,000 principal amount until May 31, 1994. All the outstanding
notes were converted prior to the redemption date. During fiscal
1994, notes with a face amount of $72.2 million were converted into
9,339,000 shares of the Company's common stock.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
Australian Cash Advance Facility
In August 1994, the Company was advanced $18 million (Australian),
from an Australian bank under a cash advance facility. $9 million
(Australian) has been repaid in accordance with the agreement.
Principal payments (Australian) of $6 million and $3 million are due
September 30, 1997 and June 30, 1998, respectively. Interest is
paid quarterly. The proceeds of the loan were used to acquire
manufacturing and administrative facilities in Sydney, Australia.
14. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not reflected
in the consolidated statements of cash flows. The Company issued
notes or incurred capital lease obligations to obtain property,
plant and equipment in the years ended September 30, 1996 and 1995
of $143,000 and $1.1 million, respectively.
The Company manufactured gaming machines which are leased to
customers under capital leases. Accordingly, transfers from
inventory to property, plant and equipment totaling $10.7 million,
$11.2 million and $15.6 million were made in fiscal 1996, 1995, and
1994, respectively.
During fiscal 1994, Notes with a face amount of $72.2 million were
converted into 9,338,877 shares of the Company's common stock.
The Company had dividends declared, but not yet paid at September
30, 1996, 1995 and 1994, totaling $3.8 million, $3.9 million and
$4.0 million, respectively.
During fiscal 1996, 1995, and 1994, common stock with a cost of
$51,000, $38,000 and $2.5 million was acquired in connection with
stock option exercises for the same amounts. The stock option
exercise price on employee stock options may be paid to the Company
by the employee by submitting previously held common stock of the
Company.
During the year ended September 30, 1994, the Company purchased a
portion of Radica for cash of $5.8 million and 374,436 shares of the
Company's common stock valued upon issuance at $10.3 million.
The tax benefit of stock options totaled $905,000, $1.7 million and
$5.1 million for the years ended September 30, 1996, 1995, and 1994,
respectively.
Payments of interest for the years ended September 30, 1996, 1995
and 1994 were $26.3 million, $21.3 million and $12.3 million
respectively. Payments for income taxes for the years ended
September 30, 1996, 1995 and 1994 were $102.1 million, $91.2 million
and $101.9 million, respectively.
15. Construction of New Corporate Headquarters and Manufacturing
Facility
In May 1994, the Company purchased a 78 acre site in Reno, Nevada
for approximately $6.0 million for the construction of an
approximately 1.1 million square foot corporate headquarters and
manufacturing and warehousing facility. The manufacturing and
warehousing facility was completed in January 1996, and now houses
substantially all operations and related personnel. The Company
anticipates the corporate office facility will be completed in
January 1997, absent unexpected delays. The total cost including the
site is estimated at $82.4 million. To date, $68.5 million has been
incurred for the project.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
16. Fair Value of Financial Instruments
<TABLE>
The following table presents the carrying amount and estimated fair
value of the Company's financial instruments in accordance with SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments."
<CAPTION>
Carrying Estimated
September 30, 1996 Amount Fair Value
(Dollars in thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents $169,900 $169,900
Investment securities 60,858 60,858
Investments to fund liabilities
to jackpot winners 271,683 273,445
Notes and contracts receivable 118,536 125,227
Liabilities:
Jackpot liabilities 326,353 328,154
Notes payable and capital lease
obligations 115,274 118,073
</TABLE>
<TABLE>
<CAPTION>
Carrying Estimated
September 30, 1995 Amount Fair Value
(Dollars in thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents $241,613 $241,613
Investment securities 47,813 47,813
Investments to fund liabilities
to jackpot winners 186,863 200,031
Notes and contracts receivable 123,782 155,025
Liabilities:
Jackpot liabilities 237,413 250,581
Notes payable and capital lease
obligations 114,928 119,774
</TABLE>
The carrying value of cash and cash equivalents approximates fair
value because of the short term maturity of those instruments. The
estimated fair value of investment securities and investments to
fund liabilities to jackpot winners are based on quoted market
prices. The estimated fair value of jackpot liabilities is based on
quoted market prices of investments which upon maturity will be used
to fund these liabilities. The estimated fair value of the Senior
Notes, included in notes payable and capital lease obligations at
September 30, 1996 and 1995, was based on the yield required at
September 30, 1996 and 1995, respectively of a private placement of
similar terms and credit valuation.
The fair value of the Company's notes and contracts receivable is
estimated by discounting the future cash flows using interest rates
determined by management to reflect the credit risk and remaining
maturities of the related notes and contracts.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
In the normal course of business, the Company is a party to
financial instruments with off-balance-sheet risk such as
performance bonds and other guarantees, which are not reflected in
the accompanying balance sheets. At September 30, 1996 and 1995, the
Company had performance bonds outstanding totaling $3.4 million each
year, relating to the Company's operation of two lottery systems and
a gaming machine route. The Company is liable to reimburse the bond
issuer in the event the bond is exercised as a result of the
Company's non-performance. The Company is a guarantor on certain
indebtedness of CMS International which had an aggregate outstanding
balance of $15.6 million at September 30, 1996. At September 30,
1996 and 1995, the Company had outstanding letters of credit, issued
under the Company's Line of Credit (see Note 5), totaling $2.0
million and $2.1 million, respectively, which were issued to insure
payment by the Company to certain vendors and governmental agencies.
Management does not expect any material losses to result from these
off-balance-sheet instruments.
17. 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. At
September 30, 1996, the Company had bank deposits in excess of
insured limits of approximately $23.8 million.
Product sales and the resulting receivables are concentrated in
specific legalized gaming regions. The Company also distributes a
significant portion of its products through third party distributors
resulting in significant distributor receivables. Accounts,
contracts, and notes receivable by region as a percentage of total
receivables are as follows:
<TABLE>
<CAPTION>
September 30, 1996
<S> <C>
Region
Nevada 27.2%
Riverboats (greater Mississippi
River area) 19.1%
Native American casinos
(distributor) 17.5%
Australia 6.1%
Colorado 4.6%
South America 3.3%
Europe 2.6%
Other regions (individually less
than 3%) 19.6%
Total 100.0%
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
18. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1996 First Qtr Second Qtr Third Qtr Fourth Qtr
(Dollars in thousands, except
per share amounts and stock
prices)
<S> <C> <C> <C> <C>
Total revenues $156,223 $160,547 $196,635 $220,047
Income from operations 30,674 29,048 51,290 58,821
Net income 27,663 19,370 34,721 36,263
Primary earnings per share $ .21 $ .15 $ .27 $ .30
Stock price
High $ 13 3/4 $ 15 1/8 $ 18 1/4 $ 21 3/8
Low $ 10 3/4 $ 10 3/4 $ 14 1/8 $ 15 1/2
</TABLE>
<TABLE>
<CAPTION>
1995 First Qtr Second Qtr Third Qtr Fourth Qtr
(Dollars in thousands, except
per share amounts and stock
prices)
<S> <C> <C> <C> <C>
Total revenues $159,180 $150,025 $150,775 $160,806
Income from operations 36,736 32,228 34,400 35,977
Net income 25,626 23,062 25,357 18,603
Primary earnings per share $ .19 $ .18 $ .20 $ .14
Stock price
High $ 20 7/8 $ 15 3/4 $ 17 $ 15 7/8
Low $ 14 7/8 $ 12 1/2 $ 12 3/8 $ 13
</TABLE>
<TABLE>
<CAPTION>
1994 First Qtr Second Qtr Third Qtr Fourth Qtr
(Dollars in thousands, except
per share amounts and stock
prices)
<S> <C> <C> <C> <C>
Total revenues $149,767 $164,537 $187,682 $172,475
Income from operations 45,525 45,183 61,658 45,541
Net income 30,392 31,414 39,905 38,736
Primary earnings per share $ .23 $ .24 $ .30 $ .29
Stock price
High $ 41 1/4 $ 33 1/2 $ 28 1/4 $ 24 3/4
Low $ 28 1/4 $ 26 1/8 $ 17 1/4 $ 18 1/2
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
The information required by Items 10, 11, 12 and 13 is incorporated
by reference from the 1996 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.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(a)(1) Consolidated Financial Statements:
Reference is made to the Index to Financial
Statements and Related Information under Item 8 in Part II
hereof where these documents are listed.
(a)(2) Consolidated Financial Statement Schedule: Page
VIII Valuation and Qualifying Accounts 66
Other financial statement schedules are either not
required or the required information is included in the
Consolidated Financial Statements or Notes thereto.
Parent Company Financial Statements - Financial Statements
of the Registrant only are omitted under Rule 3-05 as modified by
ASR 302.
(a)(3) Exhibits:
3.1 Articles of Incorporation of International Game
Technology, as amended (incorporated by reference to Exhibit
3.1 to Registrants Report on Form 10-K for the year ended
September 30, 1995).
3.2 Second Restated Code of Bylaws of International Game
Technology, dated November 11, 1987 (incorporated by reference
to Exhibit 3.2 to Registrants Report on Form 10-K for the year
ended September 30, 1995).
4.1 Note Agreement for the 7.84% Senior Notes due September 1,
2004 (incorporated by reference to Exhibit 4.1 to Registrants
Report on Form 10-K for the year ended September 30, 1995).
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 International Game Technology 1993 Stock Option Plan
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8, File No. 33-69400 filed by the
Registrant).
10.3 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 28.1 to Registration Statement on Form S-8, File No. 33-
20308 filed by the Registrant).
10.4 Share Purchase Agreement among certain sellers, Radica
Holdings Limited and International Game Technology dated
January 12, 1994 (incorporated by reference to Exhibit 10.4 to
Registrants Report on Form 10-K for the year ended September
30, 1995).
10.5 Amendment to Share Purchase Agreement among certain
sellers, Radica Holdings Limited and International Game
Technology of January 12, 1994 dated February 16, 1994
(incorporated by reference to Exhibit 10.5 to Registrants
Report on Form 10-K for the year ended September 30, 1995).
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K (continued)
10.6 Shareholders Agreement Radica Holdings Limited and the
shareholders parties hereto dated January 12, 1994
(incorporated by reference to Exhibit 10.6 to Registrants
Report on Form 10-K for the year ended September 30, 1994).
10.7 Amendment to Shareholders Agreement among Radica Holdings
Limited and the shareholders parties hereto of January 12, 1994
dated February 16, 1994 (incorporated by reference to Exhibit
10.7 to Registrants Report on Form 10-K for the year ended
September 30, 1994).
10.8 Employment Agreement with David P. Hanlon, former Chief
Executive Officer, President, Chief Operating Officer, Chief
Financial Officer and Treasurer dated December 1, 1994 and
amendment dated January 1, 1995.
10.9 Employment Agreement with Robert A. Bittman, Executive
Vice President, Product Development dated March 12, 1996.
10.10 Form of officers and directors indemnification agreement.
11 Computation of Earnings Per Share
21 Subsidiaries
23 Independent Auditors' Consent
24 Power of Attorney (See page 67 hereof)
27 Financial data schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the three-month period
ended September 30, 1996.
<PAGE>
Power of Attorney
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 23th day of December, 1996.
International Game Technology
By:/s/ G. Thomas Baker
G. Thomas Baker
President, Chief Operating Officer, and
Chief Financial Officer
Each person whose signature appears below hereby authorizes Maureen
Imus and Brian McKay, or either of them, as attorneys-in-fact to
sign on his behalf, individually, and in each capacity stated below,
and to file all amendments and/or supplements to this Annual Report
on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Charles N. Mathewson Chairman of the Board of December 23, 1996
Charles N. Mathewson Directors and Chief Executive
Officer
/s/ G. Thomas Baker President, Chief Operating December 23, 1996
G. Thomas Baker Officer, and Chief Financial
Officer
/s/ Maureen T. Imus Vice President, Finance December 23, 1996
Maureen T. Imus (Principal Accounting Officer)
/s/ Albert J. Crosson Director and Vice Chairman of December 23, 1996
Albert J. Crosson the Board of Directors
/s/ John J. Russell Director December 23, 1996
John J. Russell
/s/ Warren L. Nelson Director December 23, 1996
Warren L. Nelson
/s/ Wilbur K. Keating Director December 23, 1996
Wilbur K. Keating
/s/ Frederick B. Rentschler Director December 23, 1996
Frederick B. Rentschler
/s/ Claudine B. Williams Director December 23, 1996
Claudine B. Williams
/s/Rockwell A. Schnabel Director December 23, 1996
Rockwell A. Schnabel
<PAGE>
SCHEDULE VIII - Consolidated Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Balance
Beginning Unrealized at End
of Period Provisions Gains (Losses) of Period
(Dollars in thousands)
<S> <C> <C> <C> <C>
Valuation Allowance on
Investment Securities:
Year ended 9/30/94 $ - $ 998 $ - $ 998
Year ended 9/30/95 $ 998 $ 998 $4,461 $4,461
Year ended 9/30/96 $4,461 $ - $5,261 $9,722
</TABLE>
<TABLE>
<CAPTION>
Balance at Accounts Balance
Beginning Written at End
of Period Provisions Recoveries Off of Period
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts:
Year ended 9/30/94 $ 6,974 $1,861 $ 138 $5,017 $ 3,956
Year ended 9/30/95 $ 3,956 $2,193 $ 9 $ 976 $ 5,182
Year ended 9/30/96 $ 5,182 $3,968 $ 139 $3,608 $ 5,681
Allowance for
Doubtful Notes and
Contracts Receivable:
Year ended 9/30/94 $ 8,135 $5,338 $ 26 $ 63 $13,436
Year ended 9/30/95 $13,436 $3,684 $ 100 $3,606 $13,614
Year ended 9/30/96 $13,614 $7,655 $ 46 $1,540 $19,775
</TABLE>
<PAGE>
SCHEDULE VIII - Consolidated Valuation and Qualifying Accounts,
(continued)
<TABLE>
<CAPTION>
Balance at Balance
Beginning Income Income at End
of Period Deferred Recognized of Period
(Dollars in thousands)
<S> <C> <C> <C> <C>
Income Deferred
under the Installment
Method:
Year ended 9/30/94 $ 21 $ 591 $ 25 $587
Year ended 9/30/95 $ 587 $2,398 $2,955 $ 30
Year ended 9/30/96 $ 30 $ - $ 30 $ -
</TABLE>
<TABLE>
<CAPTION>
Balance at Disposed Balance
Beginning of and at End
of Period Provisions Written Off of Period
(Dollars in thousands)
<S> <C> <C> <C> <C>
Obsolete Inventory Reserve:
Year ended 9/30/94 $ 7,116 $ 8,668 $1,920 $13,864
Year ended 9/30/95 $13,864 $ 9,159 $8,121 $14,902
Year ended 9/30/96 $14,902 $12,064 $8,801 $18,165
Obsolete Fixed Assets
Reserve:
Year ended 9/30/94 $ 267 $ 540 $ 482 $ 325
Year ended 9/30/95 $ 325 $ 1,381 $ 1,247 $ 459
Year ended 9/30/96 $ 459 $ (132) $ 327 $ -
</TABLE>
6
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 1st day of December, 1994,
between International Game Technology, a Nevada corporation,
having its principal place of business located at 5270 Neil
Road, Reno, Nevada 89502 (hereinafter "IGT"), and David P.
Hanlon, an individual (hereinafter "Hanlon").
A. Term of Employment. IGT hereby employs Hanlon and
Hanlon hereby accepts the employment with IGT for a period
of three (3) years, commencing December 1, 1994. This
Agreement may be terminated earlier or renewed as
hereinafter provided.
B. Duties of Employee.
1. General Duties. Commencing January 1, 1995,
Hanlon shall be appointed President and Chief Operating
Officer ("COO") of International Game Technology. Hanlon
shall carefully and accurately perform all the duties and
tasks of the President/COO and perform all duties commonly
discharged by President/COO's.
2. Specific Duties. Hanlon is specifically
hired and employed by IGT as President and COO to manage the
day-to-day operations of IGT, and to oversee the operations
of all subsidiaries, divisions, and affiliated companies of
IGT.
3. Change of Duties. The duties of Hanlon may be
changed from time to time by mutual consent of IGT and
Hanlon. Notwithstanding any such change, the employment of
Hanlon shall be construed as continuing under this
Agreement.
4. Place of Performance. At the commencement of
his employment, Hanlon shall perform his duties at the
office of IGT located at 5270 Neil Road, Reno, Nevada
89502.
5. Hours of Employment. Hanlon shall work those
hours necessary to accomplish the functions of his
employment at IGT. It is understood and agreed that
Hanlon's position at IGT is that of management capacity, and
as such shall not be held to a minimum or maximum hourly
time frame.
6. Outside Activities. Anything herein to the
contrary notwithstanding, nothing shall preclude Hanlon from
engaging in any of the following, provided that none of the
activities shall materially interfere with the proper
performance of his duties and responsibilities which fall
within the scope of his employment at IGT.
a. Serving on the Board of Directors of any
outside corporation;
<PAGE>
b. Engaging in charitable community and
business affairs outside of the scope of his employment with
IGT; or
c. Managing any and all personal
investments and affairs of a personal nature.
C. Compensation.
1. Basic Compensation. As compensation for
services rendered under this Agreement, Hanlon shall be
entitled to receive from IGT a salary of Four Hundred Fifty
Thousand Dollars ($450,000.00) per year (hereinafter "Basic
Compensation"), payable in bi-weekly installments during the
period of employment, prorated for any partial employment
period.
2. Additional Compensation. In addition to the
Basic Compensation, Hanlon shall be entitled to receive the
following as additional compensation during the term of this
Agreement.
a. Annual Incentive Bonus. An annual bonus
in an amount equal to three percent (3%) of the Basic
Compensation for each one percent (1%) of increase in the
total aggregate amount of gross profits realized by IGT over
the prior year, before deductions for taxes, Cash Sharing
distributions, Profit-Sharing distributions and Management
Bonus distributions. In no event shall the bonus described
in this paragraph be less than Five Hundred Fifty Thousand
Dollars ($550,000.00) per year, and shall be payable in bi-
weekly installments, in advance. The installments shall be
calculated with the minimum guaranteed value of $550,000 and
divided by the number of pay periods which shall occur in
that calendar year. Any additional amounts to Hanlon due to
higher than expected distributions of the plans described in
this paragraph, shall be paid in a lump sum not later than
December 31st of each year, until expiration or other
termination of this Agreement. Hanlon understands and
agrees that the Annual Incentive Bonus afforded to Hanlon
pursuant to this paragraph 2.a. is granted in lieu of
Hanlon's participation in the annual IGT Management Bonus
Program, and no Management Bonus distribution will be
granted to Hanlon during the term of this Agreement.
b. Cash Sharing. Participation in IGT's
semi-annual Cash Sharing plan.
c. Profit Sharing. Participation in IGT's
Profit Sharing plan.
d. Stock Options.
(i) Initial Grant. Five Hundred
Thousand (500,000) stock options in International Game
Technology, effective as of December 1, 1994, at an option
price equal to the closing price of International Game
Technology stock on December 1, 1994. The options shall
vest at the rate of twenty percent (20%) per year, and will
<PAGE>
be one hundred percent (100%) vested at the end of five
years from the grant date. In the event the Board of
Directors elects not to continue the employment of Hanlon at
the end of the three year term of this Agreement, then for
purposes of the Stock Option Agreement and for no other
purpose, the date of termination of Hanlon's employment
shall be the date of one hundred percent (100%) vesting of
the stock options described in this paragraph.
(ii) Subsequent Grants. Hanlon shall be
granted additional stock options in International Game
Technology on December 31 of each year during the term of
this Agreement at the rate of one (1) share for each One
Hundred Dollars ($100.00) of his Basic Compensation. The
price of the options described in this paragraph (ii) shall
be the price of the stock of IGT as of the close of business
on the December 31st of the then closing calendar year. The
options shall vest at the rate of twenty percent (20%) per
year, and will be one hundred percent (100%) vested at the
end of five years from the grant date. In the event that
Hanlon's employment at IGT shall have terminated for any
reason prior to full vesting of the stock options described
in this paragraph, Hanlon shall be entitled to exercise
those stock options which shall have vested as of the
termination date, in accordance with the IGT Key Man Stock
Option Plan.
e. Travel and Other Expense Reimbursement.
Hanlon shall be reimbursed for ordinary and customary travel
and other expenses incurred by Hanlon in furtherance of his
duties as President/COO of IGT.
f. Relocation Expenses. Hanlon shall be
reimbursed for expenses related to relocation of his family
and personal property to Reno, Nevada.
3. Additional Benefits. Hanlon shall, during the
term of this Agreement or any extension thereto, be entitled
to participate in any qualified profit-sharing, 401(k),
cafeteria, medical and/or dental reimbursement plan, group
term life insurance plan, and any other employee benefit
plan that may be established by IGT. Such participation by
Hanlon shall be in accordance with the terms and conditions
of the applicable plan.
4. Discretionary Time Off. Hanlon shall be
entitled to discretionary time of as such is established in
IGT's relevant policies and procedures governing
discretionary time off to its employees.
5. Annual Physical Examination. IGT agrees to
pay all costs associated with an annual physical examination
by a medical doctor qualified and licensed to perform such
examination for Hanlon, including any and all medical
screening or other tests ordered by such doctor.
<PAGE>
D. Property Rights.
1. Inventions and Patents. Hanlon agrees that
he will promptly, from time to time, fully inform and
disclose to IGT all inventions, designs, improvements, and
discoveries that he now has or may hereinafter have during
the term of this Agreement that pertain or relate to the
business of IGT or to any experimental work carried on by
Hanlon, whether conceived by Hanlon alone or with others and
whether or not conceived during regular working hours. All
such inventions, designs, improvements and discoveries shall
be the exclusive property of IGT. Hanlon shall assist IGT
in obtaining patents on all such inventions, designs,
improvements, and discoveries deemed patentable by IGT and
shall execute all documents and do all things necessary to
obtain letters patent, vest IGT with full and exclusive
title thereto, and protect the same against infringement by
others.
2. Trade Secrets. Hanlon during the term of
employment under this Agreement will have access to and
become familiar with various trade secrets, consisting of
software formulas, programs, patterns, devices, secret
inventions, processes, and compilations of information,
records, and specification, of IGT and other records of
corporations owned by or associated with IGT. Hanlon shall
not disclose any trade secrets of IGT, directly or
indirectly, nor use them in any way, either during the term
of this Agreement or at any time thereafter, except as
required in the course of his employment. All programs,
formulas, files, records, documents, drawings,
specifications, equipment, and similar items relating to the
business of IGT or others, whether prepared by Hanlon or
otherwise coming into his possession, shall remain the
exclusive property of IGT and shall not be removed from the
premises of IGT or the premises of any subsidiary or
affiliate of IGT, under any circumstances whatsoever without
the prior written consent of IGT.
E. Early Termination.
1. By IGT For Cause. The parties hereto agree
that they will enter into an amendment to this Agreement not
later than January 1, 1995, the subject of which shall be
the terms and conditions which will govern the rights and
obligations of each party with regard to termination for
cause provisions.
2. By Hanlon. This Agreement may be terminated
by Hanlon by giving thirty (30) days written notice of
termination to IGT.
3. Remedies. Termination by either party shall
not prejudice any remedy that the terminating party may have
either at law, in equity or under this Agreement.
4. Effect of Termination on Compensation. In
the event of the termination of this Agreement prior to the
completion of the term of employment specified herein,
Hanlon shall be entitled to the Basic Compensation earned by
<PAGE>
him prior to the date of termination as provided for in this
Agreement, computed pro rata up to and including that date,
and said compensation shall be paid by IGT within thirty
(30) days of the termination date. Hanlon shall be entitled
to no further compensation as of the date of termination.
F. Miscellaneous
1. Notices. Any notices to either party
required hereunder may be given by personal delivery in
writing or by mail, registered or certified, postage prepaid
with return receipt requested. Mailed notices shall be
addressed to the parties at the addresses delineated in the
introductory paragraph to this Agreement. Either party may
change his address by giving written notice in accordance
with this paragraph. Notices delivered personally shall be
deemed communicated as of the time of actual deliver; mailed
notices shall be deemed communicated as of five (5) days
after mailing.
2. Entire Agreement. This Agreement supersedes
any and all other agreements, either oral or in writing,
between the parties hereto with respect to the employment of
Hanlon by IGT and contains all of the representations,
covenants, and agreements between the parties with respect
to such employment in any manner whatsoever.
3. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of Nevada.
4. Attorneys' Fees and Costs. If any action at
law or in equity is brought to enforce or interpret the
terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs, and necessary
disbursements in addition to any other relief to which he
may be entitled.
5. Partial Invalidity. In the event that any
term or provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable,
the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than
those as to which it is held invalid, void or unenforceable
shall not be affected thereby and every term and provision
of this Agreement shall be valid and enforced to the fullest
extent permitted by law.
INTERNATIONAL GAME
TECHNOLOGY HANLON
By /s/John J. Russell /s/David P. Hanlon
John J. Russell, Chief Executive Officer David P. Hanlon
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT is made this 1st
day of January, 1995 between International Game Technology,
a Nevada corporation having its principal place of business
at 5270 Neil Road, Reno, Nevada 89502 (hereinafter "IGT")
and David P. Hanlon, an individual (hereinafter "Hanlon").
WHEREAS, the parties entered into that certain
Employment Agreement dated as of December 1, 1994; and
WHEREAS, the parties now wish to amend the Employment
Agreement.
NOW, THEREFORE, the parties agree as follows:
A. Paragraph E.1. of the Employment Agreement is
hereby amended in its entirety to read as follows:
1. By IGT for Cause. IGT shall have the
right, in its sole discretion, to terminate Hanlon at
any time for cause. "Cause" shall mean (a) conviction
of any felony; (b) repeated intoxication by alcohol or
drugs during the performance of Hanlon's duties; (c)
material misuse or diversion of IGT's funds or assets,
embezzlement or willful and material misrepresentations
or concealments in any report submitted to IGT or to
any regulatory agency or body; (d) material breach of
this Agreement or material failure to perform or follow
the reasonable and lawful directives of the Board of
Directors of IGT or the written policies of IGT; (5)
the revocation of any of Hanlon's gaming licenses or
refusal of a governmental agency to issue a license or
make a finding of qualification or suitability to
engage in a gaming related activity; (6) any personal
conduct by Hanlon which causes any of IGT's gaming
licenses to be revoked or suspended or subjects IGT to
a substantial fine or causes an application by IGT for
a gaming license or finding of suitability or any
existing qualification of IGT for a gaming activity to
be placed in jeopardy or denied. In the event of
termination for cause as described herein, Hanlon shall
not be entitled to severance compensation.
B. In all other respects, the terms and conditions of
the Employment Agreement shall remain in full force and
effect, and are hereby ratified and affirmed.
INTERNATIONAL GAME
TECHNOLOGY HANLON
By /s/John J. Russell By /s/David P. Hanlon
John J. Russell, Chief Executive Officer David P. Hanlon
AGREEMENT
This Agreement is made by and between IGT, a Nevada
corporation, (the "Company") and Robert A. Bittman, (the "Employee").
In consideration of the mutual covenants recited herein, the parties
agree as follows:
1. EMPLOYMENT: The Company employs the employee and the
Employee accepts employment upon the terms and conditions of this
Agreement. Employee shall serve as Executive Vice President, Product
Development during the term hereof; or in such other capacity as shall
be designated from time to time by the President and Chief Operating
Officer of the Company. Employee shall perform such duties and have
such responsibilities of an executive or managerial nature as shall be
assigned him from time to time by the President and Chief Operating
Officer of the Company. During the period of his employment
hereunder, Employee shall devote his full business time, attention,
energy, and skill as may be commercially reasonable to the promotion
of the business and affairs of the Company and shall perform
faithfully and to the fullest extent of his ability all duties which
relate to his position of employment by the Company. Nothing
contained herein shall be construed to prohibit or restrict Employee's
right to devote any time, attention or effort with respect to any
other activities so long as such activities are not competitive with
the Company's business of designing, manufacturing and/or distributing
coin operated gaming devices and do not require the devotion of time,
attention or effort which would materially interfere with Employee's
duties and responsibilities pursuant to this Agreement.
2. INITIAL TERM AND EXTENDED TERM: Employee's employment
term hereunder shall commence on March 18, 1996.
The Company, on or before the expiration of the Initial
Term, shall extend the term of this Agreement for a period of not less
than 51 months (but not more than 60 months).
Following the completion of the Extended Initial Term or
Extended Term hereof, the employment shall continue at will, provided
that either party shall be obligated to give the other at least thirty
(30) days' written notice of termination. The Company may, at its
option, waive such notice and if so waived the Employee's resignation
shall be immediately effective.
3. STANDARDS OF PERFORMANCE: Employee will perform all of
his duties in a fully professional manner pursuant to the standouts of
skill, competence and efficiency expected of his position, and subject
to the direction and control of the Board of Directors or appropriate
officers of the Company. Employee will devote his full business time,
energy and attention as may be commercially reasonable to the
furtherance and best interests of the Company, and to the performance
of his duties hereunder. Notwithstanding anything herein to the
contrary, Company acknowledges and agrees that the Employee may hold
stock in CDS.
4. COMPENSATION, BENEFITS, AND PERSONNEL POLICIES:
(a) As compensation for all services rendered pursuant
to this Agreement, Employee shall be entitled to a base salary in a
<PAGE>
gross amount equivalent to $250,000 calculated on an annualized
basis, and payable pursuant to the Company's regular payroll
practices. The salary is subject to periodic review and upward
adjustment as recommended and approved by the Company in its sole
discretion. Employee shall also receive a one-time, cash payment in
the amount of $150,000 payable ten (10) days from the commencement of
the Initial Term. Employee agrees to return the entire sum of
$150,000 to the Company should Employee voluntarily terminate his
employment prior to December 8, 1996 without good reason. Employee is
also eligible to be considered for cash sharing and for payment of a
management bonus, based on criteria reasonably established and
consistently applied by the Board of Directors, payable at the
discretion of the Board of Directors and/or appropriate officers and
based on overall company performance in meeting business plan goals as
well as any additional specific criteria mutually agreed upon between
Employee and the Company. Such bonus, if granted, shall take the form
of cash. The Company shall still be obligated to compensate Employee
as though Employee was continuously employed by Company during any
interim pause in employment between the Initial Term and the Extended
Term arising out of the failure of the Continued Employment Conditions
including any injunction or legal impediment brought by CDS against
the Company. In the event that said injunction or legal impediment
prohibits the Company from compensating the Employee during this
pause, Company agrees to make a one time lump sum payment equal to the
compensation that otherwise would have been paid, once the injunction
or legal impediment expires; provided however that Employee does not
receive other compensation for work performed for anybody other than
Company during any interruption of employment term unless the Employee
obtains Company's written consent to work in the interim.
(b) As additional compensation to the Employee, for
services provided under this Agreement, the Company will promptly
following the date hereof issue or transfer and deliver, or cause to
be transferred or delivered, to Employee at a price of $.01 per share,
share certificates representing 225,000 shares of restricted, fully
paid and non-assessable Common Stock of the Company. The certificates
representing such shares shall be held by the Company, and the shares
are subject to repurchase by the Company at $.01 per share if
Employee's employment with the Company terminates for any reason
except as provided in Sections 5 (b), (d), (e) and (g) and 13, and
provided further that: (a) at the end of two (2) years of actual
service with the Company after the date of execution of this
Agreement, the repurchase option shall expire with respect to a total
of 75,000 shares; (b) at the end of three (3) years of actual service
with the Company after the date of execution of this Agreement, the
repurchase option shall expire with respect to an additional 75,000
shares; and (c) at the end of five (5) years of actual service with
the Company after the date of execution of this Agreement, the
repurchase option shall expire with respect to a total of 75,000
shares. The aggregate amount of share grants under this Agreement
shall not exceed 225,000 shares.
In the event that Employee's employment is suspended or
interrupted for any reason, including without limitation, Employee is
enjoined from employment or otherwise, Employee's restricted shares
will continue to fully vest and be exercisable on each of the two,
three and five year anniversary dates as though the Employee was
continually employed on and after the date of execution; provided,
however, such vesting shall apply with respect to only fifty percent
(50%) of the restricted shares exercisable on said anniversary dates.
For example, if the Employee is enjoined from working for the Company
for a period of one (1) year, only fifty percent (50%) of the
restricted shares will be subject to the Company's repurchase option
two (2) years after the date of execution. With respect to the
remaining fifty percent (50%) of the restricted shares, they shall
<PAGE>
vest and no longer be subject to the Company's repurchase option on
and as of the date the Employee actually worked for the Company for a
period of two (2) years. Employee's receipt of any shares of
restricted stock that vest during his absence shall be conditioned on
his resumption of employment with the Company immediately following
the earliest to occur of the Extended Term Conditions. Employee
agrees to return the fifty percent (50%) restricted shares received
should he fail to resume employment in the Extended Term except as
otherwise provided in Section 5.
(c) Employee is also covered by and/or entitled to
participate in the Company's policies and/or plans regarding benefits
of employment, including the Company's health benefit plan and Profit
Sharing/401K plan, as are customarily available to and on the same
terms as executives at Employee's level. Employee's Profit Sharing
Plan benefits fully vest December 7, 1996 for the entire 1996 fiscal
year and each fiscal year thereafter even though the Employee's
employment term may be interrupted in the interim. In addition,
Employee's employment is subject to the Company's personnel and
financial policies as they may be developed and modified from time to
time.
(d) The Company will reimburse Employee for reasonable
out-of-pocket expenses incurred in connection with the performance of
his duties, including but not limited to travel expenses, food and
lodging while away from home, and reasonable entertainment expenses,
consistent with such policies as the Company may establish from time
to time.
(e) Employee shall be entitled to paid
discretionary time off in accordance with the plans, policies,
programs and practices as in effect generally with respect to other
peer executives of the Company. For purposes of paid discretionary
time off, Employee's seniority shall revert to the seniority attained
prior to Employee's resignation from the Company dated December 7,
1995.
5. TERMINATION OF EMPLOYMENT:
This Agreement and all obligations hereunder shall terminate
upon the earliest to occur of any of the events specified below except
that the obligations contained in Sections 4 and 6 through 21
inclusive shall survive any termination hereunder:
(a) Employee's employment term shall terminate upon
expiration of the Initial Term or, if applicable, the Extended Initial
Term or Extended Term of the Agreement. The expiration of the Initial
Term shall not terminate the obligations of the Company and Employee
under Section 2 including without limitation the Extended Initial Term
and/or Extended Term of the Agreement that commences on the earlier of
the occurrence of one or more of the Continued Employment Conditions
and/or the Extended Term Conditions, respectively and Section 4
including without limitation continued compensation and vesting of
stock.
(b) Without cause: The Company may terminate
Employee's employment at any time, without cause and for any reason
other than cause, disability, death or Employee resignation, effective
upon thirty (30) days' written notice to Employee. In the event
Company terminates Employee without cause, Employee shall be entitled
to the following: (i) lump sum payment equal to the base salary for
the remaining years or term of this Agreement; (ii) any bonus which
<PAGE>
accrued (pro rata) prior to termination; (iii) any and all shares of
stock of the Company issued to and owned by or beneficially held by
Employee, including the restricted shares, all of which shall
immediately vest and be transferred to Employee and no longer be
subject to any repurchase option; (iv) any and all stock options
granted to Employee which options shall be governed by their terms or
the Plan pertaining to such options; and (v) any and all other
Employee benefits which accrued prior to Termination.
(c) With cause: The Company may also terminate
Employee's employment, at any time and without any prior notice,
written or otherwise, for cause which, for purposes of this Agreement
is defined only the following events as determined by the Company,
upon reasonable investigation, in its judgment and discretion, as the
case may be: (i) a substantial act which is dishonest and fraudulent
against the Company; (ii) a conviction of a felony or conviction of a
gross misdemeanor involving moral turpitude or criminal conduct
against the Company; or (iii) a substantial act or omission which
constitutes willful misconduct in the performance of the Employee's
services, including refusal to perform material duties of his position
or any material breach of a material term of this Agreement which is
not remedied within thirty days after written notice describing the
particulars of the breach from the Company to the Employee. In the
event the Company terminates Employee for cause, Employee shall be
entitled only to the following: (i) the accrued base salary up to and
including the date of termination; (ii) any bonus which has accrued
and is payable prior to termination; (iii) only those shares of stock
of Company issued to and owned by or beneficially held by Employee
which have actually vested and are therefore no longer subject to any
repurchase option prior to the date of termination; (iv) any and all
stock options granted to Employee which options shall be governed by
their terms or the plan pertaining to such options; and (v) any and
all Employee benefits which have accrued prior to the date of
termination; provided, however, that the Employee's right to indemnity
shall apply for a period of one (1) year after the effective date of
termination in accordance with Section 10(d). All other unvested
grants of options and unvested restrictive shares shall be forfeited
as of the date of termination. In addition, Employee recognizes and
acknowledges that the Company reserves the right to seek appropriate
relief for whatever damage may have been caused by that cause or
misconduct.
(d) Disability: The employment of Employee may be
terminated by the partial or total disability of Employee through
illness or otherwise which renders him unable to substantially perform
his services hereunder. For purposes hereof, the term "disability" is
hereby defined to mean any substantial mental or physical disability
which renders the Employee unable to perform his services and such
failure or inability continues for ninety consecutive days or for a
total of one hundred eighty days during any twelve month period. In
the event Company terminates Employee on account of disability,
Employee shall be entitled to the following on the effective date of
such termination: (i) the base salary accrued up to and including the
effective date of termination; (ii) any bonus which has accrued (pro
rata) prior to termination; (iii) any and all shares of stock the
Company issued to and owned by or beneficially held by Employee,
including restricted shares all of which shall automatically vest and
are therefore no longer subject to any repurchase option; (iv) any and
all stock options granted to Employee which options shall be governed
by their terms or the plan pertaining to such options; and (v) any and
all other Employee benefits which accrued prior to the effective date
of termination. All unvested grants of options and unvested
restricted shares shall be forfeited as of the date of termination.
<PAGE>
(e) Death: The employment of Employee shall
immediately terminate upon the death of Employee, in which event the
Company shall not thereafter be obligated to make any further payments
hereunder except amounts payable to Employee under insurance policies
on the life of the Employee maintained by the Company, and Employee
shall be entitled to the following: (i) the base salary accrued up to
an including the date of termination; (ii) any bonus which accrued
(pro rata) prior to the termination; (iii) any and all shares of stock
that the Company issued to and owned by or beneficially held by
Employee, including the restricted shares all of which shall
automatically vest and are therefore no longer subject to any
repurchase option up to and including the date of termination; (iv)
any and all stock options granted to Employee which options shall be
given by the terms or the plan pertaining to such options; and (v) any
and all benefits which have accrued prior to the termination. All
unvested grants of options and unvested restricted shares shall be
forfeited as of the date of termination.
(f) Employee Resignation: The employment of Employee
may be terminated by resignation by Employee at any time; provided,
however, Employee shall provide thirty (30) days' prior written notice
to Company. Company may, at its option, waive such notice and the
Employee's resignation shall be immediately effective. In the event
Employee resigns his employment after two (2) years of actual service
with the Company, Employee shall be entitled only to the following:
(i) base salary accrued up to and including the effective date of
termination; (ii) any bonus which is accrued and payable prior to the
effective date of termination; (iii) any and all shares of stock of
the Company issued to and owned by or beneficially held by Employee,
including the restricted shares, which have vested and are therefore
no longer subject to any repurchase option; provided, however,
Employee agrees to return any restricted shares in accordance with
Section 4(b) which have vested during his absence; (iv) any and all
stock options granted to and have vested in Employee up to and
including the effective date of termination; and (v) any and all other
benefits which have accrued prior to the effective date of
termination; provided further, however, that Employee shall not be
entitled to indemnification by the Company in accordance with Section
10(d) if Employee resigns his employment any time prior to the
expiration of two (2) years' of actual service with the Company.
6. NON-COMPETITION AND NON-SOLICITATION:
(a) In consideration of the rights and benefits
granted under this Agreement, Employee agrees that for a period of one
(1) year after termination of employment for any reason, he/she shall
not, directly or indirectly, own, manage, control or associate with as
an agent, officer, employee, investor, lender, or otherwise with any
business entity which competes anywhere in the world with the business
of the Company or any of its affiliates in the design, manufacture
and/or distribution of coin-operated gaming or amusement devices
and/or lottery devices, systems or tickets.
Nothing in this subsection (a) shall be construed,
however, to prevent Employee from owning securities of any publicly-
owned corporation engaged in any such business, provided that the
total amount of securities of each class owned by Employee in such
publicly-owned corporation does not exceed one percent (1%) of the
outstanding securities of such class.
(b) During Employee's employment and for one year
thereafter, Employee will not, on Employee's own behalf or on behalf
of anyone else engaged in a similar line of business, directly or
<PAGE>
indirectly solicit business from any customers sold or serviced by
Employee during his employment with the Company.
(c) During Employee's employment and for one year
thereafter, except as required by Employee's duties for the Company,
he will not, directly or indirectly, or in concert with others,
influence or otherwise cause any employee of the Company or any of its
affiliates to leave their employment with the Company,
7. CONFIDENTIALITY, TRADE SECRETS AND ASSIGNMENT OF
INVENTIONS:
(a) Employee acknowledges that he will, in the course
of, or incident to, his employment hereunder, obtain from the Company
trade secrets and other proprietary confidential business information
of the Company, its corporate parent and other affiliates (the
"Restricted Information") which term shall include all proprietary
information that is not known by, or generally available to, the
industry at large and that concerns the business or affairs of the
Company and such other affiliated entities (including, without
limitation, customer lists, marketing plans, pricing information and
formulas, business plans and methods and employee lists, salaries and
benefits). Employee acknowledges that his obtaining the Restricted
Information is intended to, and necessary to, enable him successfully
to solicit, obtain and/or service customers of the Company, as the
duties of his employment may demand, and that the confidentiality of
such Restricted Information is necessary to the Company's ability to
compete with its competitors. Employee agrees that:
(i) during the term of his employment hereunder, and
at all times thereafter, he will hold all and each portion of the
Restricted Information in the strictest confidence, and not
disclose, communicate or divulge the same to, or use the same for
the direct or indirect benefit of any person or entity (which
terms, as used in this Agreement, shall include, without
limitation, any firm, corporation, association or group) except
as required in the performance of his duties hereunder until such
information becomes known by or generally available to the
industry at large; and
(ii) upon termination of his employment hereunder for
any reason whatever, he will immediately return to the Company
all documents or other tangible records, and any and all copies
thereof, within his possession, custody or control, containing or
reflecting any information concerning the Restricted Information
or any portion thereof.
(b) Any and all writings, inventions, improvements,
processes, systems, procedures and/or techniques which Employee may
make, conceive, discover or develop, either solely or jointly with any
other person or persons, at any time during the term of this Agreement
and any renewal hereof, whether during working hours or at any other
time whether at the request or upon the suggestion of the Company or
otherwise, which relate to or are useful in connection with the
business now or hereafter carried on or contemplated by the Company,
its parent or affiliates, including developments or expansions of its
present fields of operations, shall be and hereby are the sole and
exclusive property of the Company. Employee shall make full
disclosure to the Company of all such writings, inventions,
improvements, processes, systems, procedures and techniques and shall
<PAGE>
do all such acts and execute, acknowledge and deliver all such
instruments in writing as may be necessary to vest in the Company the
absolute title thereto. Employee further covenants and agrees to
write and prepare all specifications and procedures and to aid and
assist the Company in all other ways in order that the Company or its
nominee properly can prepare and present all applications for
copyright or Letters Patent thereof, can secure such copyright or
Letters Patent wherever possible, as well as reissues, renewals, and
extensions thereof, and can obtain the record title to such copyright
or patents so that the Company or its nominee shall be the sole and
absolute owner thereof in all countries in which it may desire to have
copyright or patent protection. It is understood and agreed that
Employee shall not be entitled to any additional or special
compensation or reimbursement in regard to any and all such writings,
inventions, improvements, processes, systems, procedures and
techniques.
8. EMPLOYEE ACKNOWLEDGMENT; EMPLOYER'S REMEDY:
(a) Employee acknowledges that the Company and its
affiliates are engaged in a highly competitive business and that the
Restricted Information as well as their business techniques and
programs are of great significance in enabling them to compete and
participate in the various markets in which they are or seek to be
active. Employee, therefore, agrees that the restrictions contained
in Sections 6 and 7 above are reasonable and necessary in order to
protect the legitimate interests of the Company, its corporate parent
and their respective affiliates and that any violation thereof would
result in irreparable injury to the Company or such other entities.
Employee, therefore, acknowledges and agrees that, in the event of any
violation thereof the Company and/or its corporate parent shall be
authorized and entitled to obtain, from any court of competent
jurisdiction, preliminary and permanent injunctive relief as well as
an equitable accounting of all profits and benefits arising out of
such violation, which rights and remedies shall be cumulative and in
addition to any other rights or remedies to which the Company and/or
its parent and affiliates may be entitled. In the event that any
provision of Sections 6 or 7 above is held to be in any respect an
unreasonable restriction upon Employee, then the court so holding may
reduce the territory to which it pertains and/or the period of time in
which it operates, or effect any other change to the extent necessary
to render such sections enforceable.
(b) As used in this Agreement, the term "affiliate,"
when referring to any person or entity shall mean and include any
person or entity controlling, controlled by or under common control
with the person or entity referred to.
9. CERTAIN REPRESENTATIONS: EMPLOYEE REPRESENTS AND
WARRANTS THAT THE KNOWLEDGE, SKILLS AND ABILITIES HE POSSESSES AT THE
TIME OF COMMENCEMENT OF EMPLOYMENT HEREUNDER ARE SUFFICIENT TO PERMIT
HIM, IN THE EVENT OF TERMINATION OF HIS EMPLOYMENT HEREUNDER FOR ANY
REASON EXCEPT TERMINATION WITHOUT CAUSE, TO EARN, FOR A PERIOD OF ONE
YEAR FROM SUCH TERMINATION, A LIVELIHOOD SATISFACTORY TO HIMSELF
WITHOUT VIOLATING ANY PROVISION OF SECTIONS 6 AND 7 HEREOF, FOR
EXAMPLE, BY USING SUCH KNOWLEDGE, SKILLS AND ABILITIES, OR SOME OF
THEM IN THE SERVICE OF A NON-COMPETITOR OF THE COMPANY- EMPLOYEE
ACKNOWLEDGES THAT HIS COVENANTS CONTAINED IN SECTIONS 6 AND 7 ARE
GIVEN IN CONSIDERATION OF HIS EMPLOYMENT HEREUNDER.
<PAGE>
10. INDEMNIFICATION:
(a) The Company shall defend, indemnify and hold
harmless Employee, Employee's family, agents, successors and assigns
against any and all claims, damages, losses, judgments, fines, amounts
paid in settlement, liability and expenses whether in contract or in
tort, including reasonable attorney's fees (collectively "Damages"),
including without limitation, Damages incurred in connection with any
threatened, pending or completed action, suit, proceeding (including
actions by or in the right of the Company) or arising out of or
resulting from any action taken by any person, including CDS or any of
its subsidiaries or affiliates, its directors, offices, employees and
assigns which may concern Employee's termination of employment with
CDS or discussions, execution and/or performance of this Agreement and
irrespective of whether such Damages arose before or after the date
hereof.
(b) Employee agrees promptly to notify the Company in
writing upon being served with any summons, citation, subpoena,
complaint, information or other document relating to any proceeding or
matter which may be subject to indemnification covered hereunder.
(c) Employee agrees to indemnify the Company for any
and all direct damages that it actually incurs as a direct result of
any material and willful breach of this Agreement by Employee
requiring Employee to be terminated for Cause under Section 5(c)
provided, however, that such indemnity will exclude consequential
damages.
If any claim or demand is asserted against any person
(individually or collectively the "Indemnified Person") in respect of
which the indemnified person may be entitled to indemnification under
the provisions of this Agreement, written notice of such claim or
demand shall promptly be given to the person (individually or
collectively the "Indemnifying Party") from whom indemnification may
be sought. The Indemnifying Party shall have the right, by notifying
the Indemnified Person within ten days after receipt of such notice of
claim or demand to assume the entire control of the action, defense,
compromise or settlement of the matter, including at the Company's
expense, employment of counsel to represent the Indemnified Person.
The Employee shall also have the right to employ counsel in such
matter, provided, however, that the fees and expenses of such counsel
shall be at the expense of the Company and subject to the Company's
prior written consent. The Indemnifying Party shall not indemnify the
Indemnified Party for any amounts paid in the action, defense,
compromise or settlement of any matter affected without the
Indemnifying Party's written consent.
Any Damages to the Employee caused by failure of the
Company to act, defend, compromise or settle any claim or demand in a
reasonably expeditious manner, after the Company is given notice it
will assume control of the action, defense, compromise or settlement
of the matter, shall be included in the Damages for which the Company
shall be obligated to indemnify the Employee.
With respect to an Indemnified Person's legal fees and
costs which the Company is required to indemnify Employee, the Company
shall reimburse Employee within 30 days of Employee's written request
and sufficient documentation for payment.
<PAGE>
(d) The provisions of Section 10 apply immediately and
retroactively and shall survive the termination of this Agreement for
any reason, including any renewal periods, and irrespective of whether
the Indemnified Person discovered or learned of the facts justifying a
claim of indemnity unless Employee voluntarily resigns his employment
any time prior to the expiration of two (2) years of actual service
with the Company, or is terminated for cause, in which case the
provisions of Section 10 shall apply for a period of one (1) year
after the termination date.
11. GOVERNING LAW: This Agreement will be governed by and
construed according to the laws of the State of Nevada without regard
to conflicts of laws principle.
12. RESOLUTION OF DISPUTES: Any dispute, controversy or
claim between the Company and Employee arising out of or in respect to
this Agreement (or its validity, interpretation or enforcement), the
employment relationship or the subject matter hereof shall at the
request of either party be submitted to and settled by arbitration
conducted before a panel of three arbitrators in Washoe County, Nevada
in accordance with the Arbitration Rules of the American Arbitration
Association. The arbitration of such issues, including the
determination of any amount of damages suffered, shall be final and
binding upon the parties to the maximum extent permitted by law. The
arbitrators in such action shall not be authorized to change or modify
any provision of this Agreement. Judgment upon the award rendered by
the arbitrators may be entered by any court having jurisdiction
thereof. The arbitrator shall award reasonable expenses (including
reimbursement of the assigned arbitration costs) to the prevailing
party upon application therefor.
13. CHANGE OF CONTROL: Notwithstanding anything herein to
the contrary, in the event that a Change-in-Control occurs on or after
the date hereof and Employee terminates for any reason; (i) Employee
shall receive a lump sum payment equal to the base salary for the
remaining term of this Agreement; (ii) a pro rata share of any bonus
then earned); (iii) all stock options and restricted shares then held
by Employee shall immediately vest in full and the restricted shares
shall no longer be subject to forfeiture under any circumstances,
including Employee ceasing to be employed by the Company for any
reason, and the options shall be execrable in accordance with their
terms or the applicable stock option plan; and (iv) any and all other
Employee benefits which have accrued prior to the effective date of
termination. For purposes of this section, the term "Change-in-
Control" shall be defined as (a) a sale of fifty-one percent 51% or
more of the Company's assets whether by value of assets or by number
of assets; or (b) the merger, consolidation, division or other
reorganization of the company in which its shareholders cease to own
beneficially and/or record more than fifty percent (50%) of the issued
and outstanding shares of the surviving or new company. Change-in-
Control shall also include the Company ceasing to conduct its
business, dissolving, liquidating, filing a voluntary bankruptcy
petition or becoming the subject of an involuntary bankruptcy petition
or becoming the subject of any state or federal insolvency proceeding
of any kind. In no event shall amounts payable as a result of a Change-
in-Control exceed the limits specified in Section 280G of the Internal
Revenue Code.
14. BOARD RATIFICATION: The Board of Directors of
International Game Technology will ratify this Agreement at the next
regularly scheduled meeting of the Board of Directors, if not earlier.
<PAGE>
15. ENTIRE AGREEMENT: This Agreement sets forth the entire
agreement and understanding between the parties relating to the
subject matter of it, and supersedes and merges all prior discussions
between the parties about such subject matter.
16. SEVERABILITY: In the event that one or more of the
provisions contained in this Agreement are held to be invalid, illegal
or unenforceable in any respect by a court of competent jurisdiction,
such holdings shall not impair the validity, legality or
enforceability of the remaining provisions herein.
17. SUCCESSORS AND ASSIGNS: This Agreement is binding on
Employee's heirs, executors, administrators, and other legal
representatives and will be for the benefit of the Company, its
successors and assigns.
18. NOTICES: Any notice or other communication required or
given hereunder shall be in writing and delivered personally or sent
by telecopier, certified, registered, or express mail, postage
prepaid, and shall be deemed given when so delivered personally or by
telecopier, or if mailed, two days after the date of mailing, as
follows:
If to the Company addressed to it at:
IGT
5270 Neil Road
Reno, Nevada 89502
with a copy to:
Brian McKay
Vice President and General Counsel
IGT
5270 Neil Road
Reno, Nevada 89502
If to Employee, addressed at:
____________________________
Employee
_____________________________
_____________________________
or at such other address as either party may from time to time specify
by giving notice as provided herein.
19. SECTION HEADINGS: The section headings contained in
this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
<PAGE>
20. INTERPRETATION: All defined terms herein include the
plural as well as the singular. All references in this Agreement to
designated "Sections" or "Paragraphs" and other subdivisions are to
the designated Sections and Paragraphs and other subdivisions of this
Agreement. All references in this Agreement to any party shall
include all permitted transferees of such party. This Agreement shall
not be construed for or against either party by reason of the
authorship or alleged authorship of any provisions hereof or by reason
of the status of the respective parties. This Agreement shall be
construed reasonably to carry out its intent without presumption
against or in favor of either party.
21. AMENDMENTS AND WAIVERS: This Agreement may not
be amended, modified, superseded, canceled, renewed, extended or any
terms waived, except by written instrument signed by both parties or
in the case of waiver, by the party to be charged.
Agreed to and accepted this 12th day of March, 1996.
IGT EMPLOYEE
By: /s/Brian McKay /s/Robert A. Bittman
Brian McKay Robert A. Bittman
Its: V.P. General Counsel
EXHIBIT 21
INTERNATIONAL GAME TECHNOLOGY SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
International Game Technology Nevada
IGT Nevada
IGT-Colorado Corporation Colorado
IGT-Montana, Inc. Montana
Fortune Advertising and Marketing Nevada
IGT-China Management Nevada
IGT-China Nevada
IGT-NHI Joint Venture Company Nevada
Megasports, Inc. Nevada
IGT-(Australia) Pty. Ltd. New South Wales, Australia
Megabucks (Australia) Pty. Limited New South Wales, Australia
FSC, Ltd. Ireland
IGT-(New Zealand) Pty., Ltd. New Zealand
IGT-Iceland, Ltd. Iceland
I.G.T-Argentina, S.A. Argentina
IGT-Europe, b.v. The Netherlands
IGT-Japan, k.k. Japan
IGT PNG Pty., Ltd. New Guinea
IGT (Asia) Company Limited Hong Kong
IGT do Brasil Ltda. Brazil
International Game Technology -
Africa (Pty) Ltd. Johannesburg, South Africa
IGT Foreign Sales Corporation Barbados
International Game Technology Political
Action Committee, Inc. Nevada
IGT-Burgcon (Panama) Corporation Panama
Network One Pty., Ltd. New South Wales, Australia
I.G.T. (Manufacutirng) Pty., Ltd. New South Wales, Australia
Exhibit 24
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements Nos. 2-75843, 2-91475, 33-20308, 33-27657, 33-69400
and 33-63608 on Form S-8 of our report dated November 7, 1996
appearing in this Annual Report on Form 10-K of International
Game Technology for the year ended September 30, 1996.
Reno, Nevada
December 23, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 169,900
<SECURITIES> 60,858
<RECEIVABLES> 148,305
<ALLOWANCES> 12,570
<INVENTORY> 100,343
<CURRENT-ASSETS> 615,592
<PP&E> 260,946
<DEPRECIATION> 83,144
<TOTAL-ASSETS> 1,154,187
<CURRENT-LIABILITIES> 127,442
<BONDS> 0
<COMMON> 94
0
0
<OTHER-SE> 623,106
<TOTAL-LIABILITY-AND-EQUITY> 1,154,187
<SALES> 481,652
<TOTAL-REVENUES> 733,452
<CGS> 265,550
<TOTAL-COSTS> 405,256
<OTHER-EXPENSES> 146,740
<LOSS-PROVISION> 11,623
<INTEREST-EXPENSE> 23,535
<INCOME-PRETAX> 184,403
<INCOME-TAX> 66,386
<INCOME-CONTINUING> 118,017
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118,017
<EPS-PRIMARY> .93
<EPS-DILUTED> .92
</TABLE>
OFFICERS AND DIRECTORS INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is
made as of ______________________, by and between
International Game Technology, a Nevada corporation (the
"Corporation"), and _____________________ (the
"Indemnitee"), an officer and/or director of the
Corporation.
RECITALS
A. The Indemnitee is currently serving or has agreed
to serve as an officer and/or director of the Corporation
and in such capacity as rendered or will render valuable
services to the Corporation.
B. The Corporation has investigated the availability
and sufficiency of liability insurance and Nevada statutory
indemnification provisions to provide its directors and
officers with adequate protection against various legal
risks and potential liabilities to which such individuals
are subject due to their position with the Corporation and
has concluded that such insurance and statutory provisions
may provide inadequate and unacceptable protection to
certain individuals requested to serve as its directors and
officers.
C. In order to induce and encourage highly
experienced and capable persons such as the Indemnitee to
continue to serve as an officer and/or director of the
Corporation, the Board of Directors has determined, after
due consideration and investigations of the terms and
provisions of this Agreement and the various other options
available to the Corporation and the Indemnitee in lieu
hereof, that this Agreement is reasonable and prudent and in
the best interests of the Corporation and its stockholders.
AGREEMENT
NOW, THEREFORE, in consideration of the continued
services of the Indemnitee and in order to induce the
Indemnitee to continue to serve as an officer and/or
director, the Corporation and the Indemnitee do hereby agree
as follows:
1. Definitions. As used in this Agreement:
(a) The term "Proceeding" shall include any
threatened, pending or completed action, suit or proceeding,
whether brought in the name of the Corporation or otherwise
and whether of a civil, criminal or administrative or
investigative nature, by reason of the fact that the
Indemnitee is or was an officer and/or director of the
Corporation, or is or was serving at the request of the
Corporation as an officer and/or director, employee or agent
of another enterprise, whether or not he or she is serving
in such capacity at the time and liability or expense is
incurred for which indemnification or reimbursement is to
be provided under this Agreement.
<PAGE>
(b) The term "Expense" includes, without
limitation, attorneys' fees, disbursements and retainers,
accounting and witness fees, travel and deposition costs,
expenses of investigations, judicial or administrative
proceedings or appeals, amounts paid in settlement by or on
behalf of the Indemnitee, and any expenses of establishing a
right to indemnification pursuant to this Agreement or
otherwise including reasonable compensation for time spent
by the Indemnitee in connection with the investigation,
defense or appeal of a Proceeding or action for
indemnification for which he is not otherwise compensated by
the Corporation or any third party. The term "Expenses"
does not include the amount of judgments, fines, penalties
or ERISA excise taxes actually levied against the
Indemnitee.
2. Agreement to Serve. The Indemnitee agrees to
continue to serve as an officer and/or director of the
Corporation at the will of the Corporation for so long as
the Indemnitee is duly elected or appointed or until such
time as the Indemnitee tenders his or her resignation in
writing.
3. Indemnification in Third Party Actions. The
Corporation shall indemnify the Indemnitee in accordance
with the provisions of this section if the Indemnitee is a
party to or threatened to be made a party to or otherwise
involved in any Proceeding (other than a Proceeding by or in
the name of the Corporation to procure a judgment in its
favor), by reason of the fact that the Indemnitee is or was
an officer and/or director of the Corporation, or is or was
serving at the request of the Corporation as an officer
and/or director, employee or agent of another enterprise
against all expenses, judgments, fines, penalties and ERISA
excise taxes actually and reasonably incurred by the
Indemnitee in connection with the defense or settlement of
such Proceeding, to the fullest extent permitted by Nevada
law; provided that any settlement be approved in writing by
the Corporation.
4. Indemnification in Proceedings or by in the name
of the Corporation. The Corporation shall indemnify the
Indemnitee in accordance with the provisions of this section
if the Indemnitee is a party to or threatened to be made a
party to or otherwise involved in any Proceeding by or in
the name of the Corporation to procure a judgment in its
favor by reason of the fact that the Indemnitee was or is in
officer and/or director of the Corporation, or is or was
serving at the request of the Corporation as an officer
and/or director, employee or agent of another enterprise,
against all Expenses actually and reasonably incurred by the
Indemnitee in connection with the defense or settlement of
such Proceeding, to the fullest extent permitted by Nevada
law.
5. Conclusive Presumption Regarding Standard of
Conduct. The Indemnitee shall be conclusively presumed to
have met the relevant standards of conduct as defined by
Nevada law for indemnification pursuant to this Agreement,
unless a determination is made that the Indemnitee has not
met such standards by (i) the Board of Directors of the
Corporation by a majority vote of a quorum thereof
consisting of directors who were not parties to the
Proceeding which gives rise to claim made under this
Agreement, (ii) by the stockholders of the Corporation by
majority vote of a quorum thereof consisting of stockholders
who are not parties to the Proceeding which gives rise to
claim made under this Agreement, or (iii) in a written
opinion by independent legal counsel, selection of whom has
been approved by Indemnitee in writing.
<PAGE>
6. Indemnification of Expenses of Successful Party.
Notwithstanding any other provisions of this Agreement, to
the extent that the Indemnitee has been successful in
defense of any Proceeding or in defense of any claim, issue
or matter therein, on the merits or otherwise, including the
dismissal of a Proceeding without prejudice, the Indemnitee
shall be indemnified against all Expenses incurred in
connection therewith to the fullest extent permitted by
Nevada law.
7. Advances of Expenses. The Expenses incurred by
the Indemnitee in any Proceeding shall be paid promptly by
the Corporation in advance of the final disposition of the
Proceeding at the written request of the Indemnitee to the
fullest extent permitted by Nevada law; provided that as
long as Nevada law requires such an undertaking, the
Indemnitee shall undertake in writing to repay such amount
to the extent that it is ultimately determined that the
Indemnitee is not entitled to indemnification.
Notwithstanding the foregoing or any other provision of this
Agreement, no advance shall be made by the Corporation if a
determination is reasonably and promptly made by the Board
of Directors by a majority vote of a quorum thereof
consisting of directors who are not parties tot he
Proceeding, based upon the facts known to the Board at the
time such determination is made, that the Indemnitee acted
in bad faith or deliberately breached his duty to the
Corporation and the stockholders, and as a result of such
action by the Indemnitee, it is more likely than not it will
ultimately be determined that the Indemnitee is not entitled
to indemnification under the terms of this Agreement.
8. Partial Indemnification. If the Indemnitee is
entitled under any provision of this Agreement to
indemnification by the Corporation for some or a portion of
the Expenses, judgments, fines, penalties or ERISA excise
taxes actually and reasonably incurred by him in the
investigation, defense, appeal or settlement of any
Proceeding but not, however, for the total amount thereof,
the Corporation shall nevertheless indemnify the Indemnitee
for the portion of such Expenses, judgment, fines, penalties
or ERISA excise taxes to which the Indemnitee is entitled.
9. Indemnification Procedure; Determination of Right
to Indemnification.
(a) Promptly after receipt by the Indemnitee of
notice of the commencement of any Proceeding, the Indemnitee
will, if a claim in respect thereof is to be made against
the Corporation under this Agreement, notify the Corporation
of the commencement thereof. The omission so to notify the
Corporation will not relieve it from any liability which it
may have to the Indemnitee otherwise than under this
Agreement.
<PAGE>
(b) If a claim under this Agreement is not paid
by the Corporation within thirty (30) days of receipt of
written notice, the right to indemnification as provided by
this Agreement shall be enforceable by the Indemnitee in any
court of competent jurisdiction. The burden of proving by
clear and convincing evidence that indemnification or
advances are not appropriate shall be on the Corporation.
Neither the failure of the directors or stockholders of the
Corporation or its independent legal counsel to have made a
determination prior to the commencement of such action that
indemnification or advances are proper in the circumstances
because the Indemnitee has met the applicable standard of
conduct, nor an actual determination by the directors or
stockholders of the Corporation or it independent legal
counsel that the Indemnitee has not met such applicable
standard of conduct, shall be a defense to the action or
create a presumption that the Indemnitee has not met the
applicable standard of conduct.
(c) The Indemnitee's Expenses incurred in
connection with any Proceeding concerning his or her right
to indemnification or advances in whole or in part pursuant
to this Agreement shall also be indemnified by the
Corporation regardless of the outcome of such Proceeding,
unless a court of competent jurisdiction determines that
each of the material assertions made by the Indemnitee in
such Proceeding was not made in good faith or was frivolous.
(d) With respect to any Proceeding for which
indemnification is requested, the Corporation will be
entitled to participate therein at its own expense and,
except as otherwise provided below, to the extent that it
may wish, the Corporation may assume the defense thereof,
with counsel satisfactory to the Indemnitee. After notice
from the Corporation to the Indemnitee of its election to
assume the defense of a Proceeding, the Corporation will not
be liable to the Indemnitee under this Agreement for any
legal or other expenses subsequently incurred by the
Indemnitee in connection with the defense thereof, other
than reasonable costs of investigation or as otherwise
provided below. The Corporation shall not settle any
Proceeding in any manner which would impose any penalty or
limitation on the Indemnitee without the Indemnitee's
written consent. The Indemnitee shall have the right to
employ his own counsel in any Proceeding but the fees and
expenses of such counsel incurred after notice from the
Corporation of its assumption of the defense thereof shall
be at the expense of the Indemnitee, unless (i) the
employment of counsel by the Indemnitee has been authorized
by the Corporation, (ii) the Indemnitee shall have
reasonably concluded that there may be a conflict of
interest between the Corporation and the Indemnitee in the
conduct of the defense of a Proceeding; or (iii) the
Corporation shall not in fact have employed counsel to
assume the defense of a Proceeding, in each of which cases
the fees and expenses of the Indemnitee's counsel shall be
at the expense of the Corporation. The Corporation shall
not be entitled to assume the defense of any Proceeding
brought by or on behalf of the Corporation or as to which
the Indemnitee has made the conclusion that there may be a
conflict of interest between the Corporation and the
Indemnitee.
10. Limitations on Indemnification. No payments
pursuant to this Agreement shall be made by the Corporation:
<PAGE>
(a) To indemnify or advance Expenses to the
Indemnitee with respect to Proceedings initiated or brought
voluntarily by the Indemnitee and not by way of defense,
except with respect to Proceedings brought to establish or
enforce a right to indemnification under this Agreement or
any other statute or law or otherwise as required under
Nevada law, but such indemnification or advancement of
Expenses may be provided by the Corporation in specific
cases if the Board of Directors finds it to be appropriate;
(b) To indemnify the Indemnitee for any Expenses,
judgments, fines, penalties or ERISA excise taxes for which
payment is actually made to the Indemnitee under a valid and
collectible insurance policy, except in respect of any
excess beyond the amount of payment under such policy;
(c) To indemnify the Indemnitee for any Expenses,
judgments, fines or penalties sustained in any Proceeding
for an accounting of profits made from the purchase or sale
by the Indemnitee of securities of the Corporation pursuant
to the provisions of Section 16(b) of the Securities
Exchange Act of 1934, the rules and regulations promulgated
thereunder and amendments thereto or similar provisions of
any federal, state or local statutory law;
(d) To indemnify the Indemnitee for any Expenses,
judgments, fines, penalties or ERISA excise taxes resulting
from the Indemnitee's conduct which is finally adjudged to
have been willful misconduct, knowingly fraudulent or
deliberately dishonest; or
(e) If a court of competent jurisdiction shall
finally determine that any indemnification hereunder is
lawful.
11. Maintenance of Liability Insurance.
(a) The Corporation hereby covenants and agrees
that, as long as the Indemnitee shall continue to serve as
an officer and or director of the Corporation and thereafter
so long as the Indemnitee shall be subject to any possible
Proceeding, the Corporation, subject to subsection (c),
shall promptly obtain and maintain in full force and effect
directors' and officers' liability insurance ("D&O
Insurance") in reasonable amounts from established and
reputable insurers.
(b) In all D&O Insurance policies, the Indemnitee
shall be named as an insured in such a manner as to provide
the Indemnitee the same rights and benefits as are accorded
any other director or officer of the Corporation.
(c) Notwithstanding the foregoing, the
Corporation shall have no obligation to obtain or maintain
D&O Insurance if the Corporation determines in good faith
that such insurance is not reasonably available, the premium
costs for such insurance
<PAGE>
are, in the opinion of the
Corporation, disproportionate to the amount of coverage
provided, the coverage provided by such insurance is so
limited by exclusions that it provides an insufficient
benefit, or the Indemnitee is covered by similar insurance
maintained by a subsidiary of the Corporation.
12. Indemnification Hereunder Not Exclusive. The
indemnification provided by this Agreement shall not be
deemed exclusive of any other rights to which the Indemnitee
may be entitled under the Articles of Incorporation, the
Bylaws, any other agreement, any vote of stockholders or
disinterested directors, Nevada law, or otherwise, both as
to action in his official capacity and as to action in
another capacity on behalf of the Corporation while holding
such office.
13. Successors and Assigns. This Agreement shall be
binding upon and shall enure to the benefit of the
Indemnitee and his heirs, personal representatives and
assigns, and the Corporation and its successors and assigns.
14. Separability. Each provision of this Agreement is
a separate and distinct agreement and independent of the
others, so that if any provision hereof shall be held to be
invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect the validity or
enforceability of any other provision hereof. To the extent
required, any provision of this Agreement may be modified by
a court of competent jurisdiction to preserve its validity
and to provide the Indemnitee with the broadest possible
indemnification permitted under Nevada law.
15. Savings Clause. If this Agreement or any portion
hereof shall be invalidated on any ground by any court of
competent jurisdiction, the Corporation shall nevertheless
indemnify the Indemnitee as to Expenses, judgments, fines,
penalties or ERISA excise taxes with respect to any
Proceeding to the full extent permitted by any applicable
portion of this Agreement that shall not have been
invalidated or by any applicable provision of Nevada law.
16. Interpretation; Governing Law. This Agreement
shall be construed as a whole and in accordance with its
fair meaning. Headings are for convenience only and shall
not be used in interpreting the provisions hereunder. This
Agreement shall be governed by and interpreted in accordance
with the laws of the State of Nevada.
17. Amendments. No amendment, waiver, modification,
termination or cancellation of this Agreement shall be
effective unless in writing signed by the party against whom
enforcement is sought. The indemnification rights afforded
to the Indemnitee hereby are contract rights and may not be
diminished, eliminated or otherwise affected by amendments
to the Corporation's Articles of Incorporation, Bylaws or
other agreements, including D&O Insurance policies.
18. Counterparts. This Agreement may be executed in
one or more counterparts, all of which shall be considered
<PAGE>
one and the same agreement and shall become effective when
one or more counterparts have been signed by each party and
delivered to the other.
19. Notices. Any notice required to be given under
this Agreement shall be directed to International Game
Technology, 5270 Neil Road, Reno, NV 89502, Attention:
President, and to Indemnitee
at:__________________________________________ or to such
other address as either shall designate in writing.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first written above.
INTERNATIONAL GAME TECHNOLOGY INDEMNITEE
By:_________________________ _____________________________
Its:________________________
EXHIBIT 11
<TABLE>
INTERNATIONAL GAME TECHNOLOGY COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Primary Shares Outstanding:
Common Stock Outstanding at
Beginning of Period 150,118,534 149,465,774 138,938,605
Shares Issued Under Stock Option
Plans 571,774 652,760 800,523
Percentage of Time Outstanding 48.3% 37.7% 65.4%
Weighted Average Shares Outstanding 276,130 245,993 523,887
Shares Issued to Radica Common
Stock 0 0 374,436
Percentage of Time Outstanding -- -- 61.9%
Weighted Average Shares Outstanding 0 0 231,842
Shares Issued From the Conversion of
Convertible Subordinated Notes 0 0 9,338,877
Percentage of Time Outstanding -- -- 52.1%
Weighted Average Shares Outstanding 0 0 4,861,607
Shares Issued Under Gifts 0 0 13,333
Percentage of Time Outstanding -- -- 62.5%
Weighted Average Shares Outstanding 0 0 8,329
Shares Purchased and Held in
Treasury (25,114,476) (21,268,046) (17,098,646)
Percentage of Time Outstanding 96.1% 91.7% 87.3%
Weighted Average Shares
Outstanding (24,134,721) (19,513,289) (14,932,659)
Common Stock Equivalent of Options
Outstanding 1,152,379 895,093 1,748,625
Weighted Average Number of Primary
Common and Common Equivalent
Shares Outstanding 127,412,322 131,093,571 131,380,236
Fully Diluted Shares Outstanding:
Additional Dilutive Effect of
Stock Options 748,139 0 0
Assumed Conversion of Convertible
Notes 0 0 4,477,270
Weighted Average Number of Fully
Diluted Common and Common
Equivalent Shares Outstanding 128,160,461 131,093,571 135,857,506
Net Income 118,017 92,648 140,447
Primary Earnings Per Share:
Net Income 0.93 0.71 1.07
Fully Diluted Earnings Per Share:
Net Income 0.92 0.71 1.03
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