<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 167,556
<SECURITIES> 60,629
<RECEIVABLES> 125,665
<ALLOWANCES> 13,617
<INVENTORY> 100,231
<CURRENT-ASSETS> 583,497
<PP&E> 247,441
<DEPRECIATION> 79,777
<TOTAL-ASSETS> 1,086,757
<CURRENT-LIABILITIES> 119,506
<BONDS> 0
<COMMON> 94
0
0
<OTHER-SE> 586,614
<TOTAL-LIABILITY-AND-EQUITY> 1,086,757
<SALES> 333,654
<TOTAL-REVENUES> 513,405
<CGS> 182,138
<TOTAL-COSTS> 272,774
<OTHER-EXPENSES> 119,024
<LOSS-PROVISION> 10,596
<INTEREST-EXPENSE> 17,016
<INCOME-PRETAX> 127,738
<INCOME-TAX> 45,986
<INCOME-CONTINUING> 81,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,752
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-10684
INTERNATIONAL GAME TECHNOLOGY
(Exact name of registrant as specified in charter)
Nevada 88-0173041
(State of Incorporation) (IRS Employer Identification No.)
5270 Neil Road, Reno, Nevada 89502
(Address of principal executive offices)
(702) 686-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 9, 1996
Common Stock, 125,501,472
par value $.000625 per share
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
FORM 10-Q
The accompanying consolidated financial statements have been prepared
by the Company, without audit, and reflect all adjustments which are, in
the opinion of management, necessary for a fair statement of the results
for the interim periods. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (the "SEC"),
but omit certain information and footnote disclosures necessary to present
the statements in accordance with generally accepted accounting principles.
These financial statements should be read in conjunction with the
financial statements, accounting policies and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1995. Management believes that the disclosures are adequate to make
the information presented herein not misleading.
Organization
International Game Technology (the "Company") was incorporated in
December 1980 to acquire the gaming licensee and operating entity, IGT, 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.-Australia, Pty.
Ltd. ("IGT-Australia"); IGT-Europe b.v. ("IGT-Europe"); IGT-Iceland Ltd.
("IGT-Iceland"); IGT-Japan k.k. ("IGT-Japan"); I.G.T.-Argentina S.A. ("IGT-
Argentina"); IGT-do Brazil Ltda. ("IGT-Brazil"); International Game
Technology S.R. Ltda. ("IGT-Peru"); and International Game Technology-
Africa (Pty) Ltd. ("IGT-Africa").
IGT is a world leader in the design and manufacture 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
"SMART" 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 video lottery terminals and has developed
specialized video lottery 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, located in Sydney, Australia, manufactures
microprocessor-based gaming products and proprietary systems, and performs
engineering, manufacturing, sales and marketing and distribution operations
for the Australian markets as well as other gaming jurisdictions in the
Southern Hemisphere and Pacific Rim.
<PAGE>
Item 1. Financial Statements (Continued)
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 1993, IGT-Japan was approved as a foreign
manufacturer to supply Pachisuro gaming machines to the Japanese market.
In November, 1995, IGT Japan became a full member in Nichidenkyo, a
Pachisuro manufacturer's association, allowing IGT Japan to manufacture
products in Japan.
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 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.
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) 686-1200.
The consolidated financial statements include the accounts of the
Company and all its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands, except THREE MONTHS ENDED NINE MONTHS ENDED
per share amounts) June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES:
Product sales $134,447 $ 97,294 $333,654 $313,223
Gaming operations 62,188 53,481 179,751 146,757
Total revenues 196,635 150,775 513,405 459,980
COSTS AND EXPENSES:
Cost of product sales 72,726 54,097 182,138 177,454
Gaming operations 29,323 26,670 90,636 68,320
Selling, general and
administrative 25,872 19,619 80,006 63,824
Depreciation and amortization 6,945 7,091 20,329 20,212
Research and development 6,018 7,063 18,689 21,358
Provision for bad debts 4,461 1,835 10,596 5,448
Total costs and expenses 145,345 116,375 402,394 356,616
INCOME FROM OPERATIONS 51,290 34,400 111,011 103,364
OTHER INCOME (EXPENSE):
Interest income 9,694 10,190 28,768 28,739
Interest expense (6,669) (4,825) (17,016) (15,221)
Gain (loss) on the sale of assets (642) 292 (3,896) (890)
Other 581 (464) 8,871 (326)
Other income, net 2,964 5,193 16,727 12,302
INCOME BEFORE INCOME TAXES 54,254 39,593 127,738 115,666
PROVISION FOR INCOME TAXES 19,533 14,236 45,986 41,622
NET INCOME $ 34,721 $ 25,357 $ 81,752 $74,044
PRIMARY EARNINGS PER SHARE $ .2 $ 0.20 $ .64 $ 0.56
FULLY DILUTED EARNINGS PER SHARE $ .27 $ 0.20 $ .64 $ 0.56
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 126,744 129,962 127,236 131,703
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ASSUMING FULL
DILUTION 126,867 129,996 127,638 131,703
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
(Dollars in thousands) (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 167,556 $241,613
Investment securities at market value 60,629 47,813
Accounts receivable, net of allowances
for doubtful accounts of $8,032
and $5,182 125,665 113,196
Current maturities of long-term notes
and contracts receivable, net of
allowances 69,741 80,271
Inventories, net of allowances for
obsolescence of $19,154 and $14,902:
Raw materials 59,629 39,526
Work-in-process 5,025 4,836
Finished goods 35,577 29,463
Total inventories 100,231 73,825
Deferred income taxes 26,671 25,336
Investments to fund liabilities to
jackpot winners 24,954 19,465
Prepaid expenses and other 8,050 5,117
Total current assets 583,497 606,636
LONG-TERM NOTES AND CONTRACTS RECEIVABLE,
net of allowances and current maturities 54,405 43,511
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 24,764 13,910
Buildings 52,503 14,270
Gaming operations equipment 71,632 68,096
Manufacturing machinery and equipment 77,185 62,454
Leasehold improvements 11,044 12,362
Construction in progress 10,313 23,999
Total 247,441 195,091
Less accumulated depreciation
and amortization (79,777) (75,793)
Property, plant and equipment, net 167,664 $119,298
INVESTMENTS TO FUND LIABILITIES
TO JACKPOT WINNERS 221,019 167,398
DEFERRED INCOME TAXES 51,173 27,735
OTHER ASSETS 8,999 7,120
Total Assets $1,086,757 $971,698
</TABLE>
(Continued)
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
(Dollars in thousands) (Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term notes
payable and capital lease obligations $ 12,817 $ 7,385
Accounts payable 29,689 28,862
Jackpot liabilities 30,588 25,072
Accrued employee benefit plan liabilities 9,877 11,302
Accrued dividends payable 3,763 3,866
Accrued vacation liability 5,858 5,664
Other accrued liabilities 26,914 15,568
Total current liabilities 119,506 97,719
LONG-TERM NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, net of current maturities 107,203 107,543
LONG-TERM JACKPOT LIABILITIES 270,855 212,341
OTHER LIABILITIES 2,485 5
Total liabilities 500,049 417,608
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.000625 par value;
320,000,000 shares authorized;
150,542,143 and 150,118,534
shares issued 94 94
Additional paid-in capital 235,421 231,338
Retained earnings 534,983 463,039
Treasury stock; 25,111,546 and
21,268,046 shares at cost (188,092) (143,281)
Net unrealized gain on investment
securities 4,302 2,900
Total stockholders' equity 586,708 554,090
Total liabilities and stockholders'
equity $1,086,757 $971,698
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(Dollars in thousands) JUNE 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 81,752 $ 74,044
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 20,329 20,212
Provision for bad debts 10,596 5,448
Provision for inventory obsolescence 14,488 5,564
Loss on sale of assets 3,896 890
Common stock awards 706 -
(Increase) decrease in assets:
Receivables (19,004) 25,988
Inventories (53,003) 22,703
Prepaid expenses and other (3,525) (684)
Other assets (1,206) (229)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 7,080 (3,778)
Accrued and deferred income taxes payable,
net of tax benefit of stock option and
purchase plans (21,435) (24,837)
Other 715 (102)
Total adjustments (40,363) 51,175
Net cash provided by operating activities 41,389 125,219
</TABLE>
(Continued)
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from previous page)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(Dollars in thousands) JUNE 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant
and equipment $ (59,310) $(35,671)
Proceeds from sale of property,
plant and equipment 3,608 4,964
Purchase of investment securities (46,037) (213,516)
Proceeds from sale of investment
securities 35,279 232,646
Proceeds from investments to fund
liabilities to jackpot winners 20,233 15,000
Purchase of investments to fund
liabilities to jackpot winners (79,343) (43,069)
Net cash used in investing activities (125,570) (39,646)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (3,444) (348)
Proceeds of long-term debt 7,917 825
Payments on liabilities to jackpot winners (20,233) (15,000)
Collections from systems to fund
liabilities to jackpot winners 84,263 63,379
Proceeds from stock options exercised 1,721 1,084
Payments of cash dividends (11,446) (11,756)
Payments to purchase treasury stock (44,810) (50,571)
Proceeds from employee stock
purchase plan 1,047 958
Net cash provided by (used in)
financing activities 15,015 (11,429)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4,891) (170)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (74,057) 73,974
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 241,613 142,730
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 167,556 $216,704
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were netted
against current and long-term maturities:
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Current $ 5,585 $ 3,465
Long-term 14,690 10,149
$20,275 $13,614
</TABLE>
2. 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 915,000
square foot office, manufacturing and warehousing facility. The
manufacturing and warehousing facility was completed in early calendar
1996. The Company anticipates that the office facility will be completed
in late calendar 1996, absent unexpected delays at a total cost, including
the site, of $82.4 million. To date, $64.8 million has been incurred for
the project.
3. Income Taxes
The provision for income taxes is computed on pre-tax income reported
in the financial statements. The provision differs from income taxes
currently payable because certain items of income and expense are
recognized in different periods for financial statement and tax return
purposes.
4. Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts, contracts, and notes receivable. The Company
maintains cash and cash equivalents with various financial institutions in
amounts, which at times, may be in excess of the FDIC insurance limits.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Concentrations of Credit Risk (Continued)
Product sales and the resulting receivables are concentrated in
specific legalized gaming regions. The Company also distributes a portion
of its products through third party distributors resulting in significant
distributor receivables. At June 30, 1996 accounts, contracts, and notes
receivable by region as a percentage of total receivables are as follows:
<TABLE>
<S> <C>
Nevada 27.9%
Riverboats (greater Mississippi River area) 26.9%
Native American Casinos (distributor) 6.1%
Colorado 5.9%
South America 3.9%
Australia 3.7%
Europe 3.5%
Other regions (individually less than 3%) 22.1%
Total 100.0%
</TABLE>
Effective September 30, 1993, the Company sold its equity ownership
interest in CMS-International ("CMS") to Summit Casinos-Nevada, Inc.
("Summit"), whose owners include senior management of CMS. The Company
remains as guarantor on certain indebtedness of CMS, which had at June 30,
1996 an aggregate balance of $16.0 million. The notes that have been
guaranteed are also collateralized by the respective casino properties.
Summit has agreed to indemnify and hold the Company harmless against any
liability arising under these guarantees. Management believes the
likelihood of losses relating to these guarantees is remote.
5. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not reflected
in the consolidated statements of cash flows.
The tax benefit of stock options exercised totaled $609,000 and $1.6
million for the nine months ended June 30, 1996 and 1995, respectively.
Unrealized gains on investment securities, net of taxes, of $1.4
million were recorded as "Net unrealized gains on investment securities" in
stockholders equity for the nine months ended June 30, 1996 compared to net
unrealized losses of $1.7 million for the nine months ended June 30, 1995.
Payments of interest for the nine months ended June 30, 1996 and 1995
were $19.5 million and $15.3 million, respectively. Payments for income
taxes for the first nine months of fiscal 1996 and 1995 were $61.5 million
and $66.5 million, respectively.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Supplemental Statement of Cash Flows Information (Continued)
On May 19, 1996, the Board of Directors declared a quarterly cash
dividend of $.03 per share, payable on September 3, 1996 to shareholders of
record at the close of business August 1, 1996. At June 30, 1996, the
Company had accrued $3.8 million for the payment of this dividend.
6. 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., ("Schreier") and two filed
in the United States District Court of Florida, Orlando Division, entitled
Poulos v. Caesar's World, Inc., et al. ("Poulos") and Ahern v. Caesar's
World, Inc., et al. ("Ahern"), which have been consolidated in a single
action. Also named as defendants in these actions were 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 it seeks compensatory, special
consequential, incidental and punitive damages of several billion dollars.
The appropriate Courts granted defendants' motion to transfer venue of all
three matters to the U.S. District Court in Las Vegas, Nevada. On April
17, 1996, the U.S. District Court Judge hearing the matter in Nevada issued
an order based on several motions to dismiss filed by the various
defendants in the Poulos and Ahern matters. The order granted the
defendants' motions to dismiss, allowing the plaintiffs until May 31, 1996
to amend the complaints to correct any pleading deficiencies. Both
plaintiffs' amended complaints are pending before the Court. Motions to
dismiss are similarly pending before the Court in the Schrier matter,
awaiting a decision.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1995
Net income for the three months ended June 30, 1996 was $34.7 million
or $.27 per fully diluted share versus $25.4 million or $.20 per fully
diluted share for the three months ended June 30, 1995.
Revenues and Gross Profit Margins
Total revenues for the third quarter of fiscal 1996 were $196.6
million, a 30% increase over the $150.8 million reported for the comparable
prior year quarter. This increase resulted from improvements in both
product sales and gaming operations revenues.
Product sales totaled $134.4 million and $97.3 million for the
quarters ended June 30, 1996 and 1995, respectively. Product sales
revenues were positively impacted by an increase in unit volume. Domestic
machine shipments rose 29% to 19,785 machines in the current quarter from
15,384 in the third quarter of fiscal 1995. This increase was driven by
new casino openings and expansions in Nevada and the Mississippi and
Indiana riverboat markets.
Revenue from gaming operations was $62.2 million for the current
quarter compared to $53.5 million for the quarter ended June 30, 1995.
This 16% increase was due primarily to the installation of two new systems
in Nevada and four in Native American markets. Additionally, machine
installations increased in Louisiana and on most existing systems. The
Company operates over 9,000 machines on 41 systems in nine jurisdictions.
The gross margin on product sales revenue was 46% during the third
quarter versus 44% in the same period last year. Lower material costs and
overall operating efficiencies at the Company's primary manufacturing plant
in Reno, Nevada led to this improvement. Gross profit on gaming operations
revenue was 53% and 50% for the quarters ended June 30, 1996 and 1995,
respectively, due to the lower cost of interest sensitive assets which the
Company purchases to fund jackpot payments.
Expenses
Selling, general and administrative expenses were $25.9 million and
$19.6 million for the quarters ended June 30, 1996 and 1995, respectively.
This increase was primarily attributable to increased advertising,
marketing and customer service expenses as well as costs associated with
increased volume. Depreciation and amortization expense was $6.9 million
and $7.1 million for the third quarter of fiscal 1996 and 1995,
respectively. Depreciation in the prior year was higher due to the
acceleration of amortization of the Company's leasehold improvements in the
buildings that were vacated in early calendar 1996. The decrease in
leasehold depreciation was partially offset by an increase in depreciation
expense related to the larger number of units installed on the Company's
linked progressive systems.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Expenses (Continued)
Research and development expense decreased to $6.0 million for the
quarter ended June 30, 1996 from $7.1 million in the prior year quarter due
primarily to an increase in customer requested product engineering. This
custom engineering is charged to customers and, therefore, included in cost
of sales. The increase in bad debt expense to $4.5 million in the current
quarter compared to $1.8 million in the prior year quarter was due to
increased reserves associated with certain developing international markets
and uncollectible receivables in Australia.
Other income and expense
The decrease in interest income of $496,000 from the prior year period
was primarily attributable to a decrease in interest income from notes and
contracts receivable due primarily to lower interest rates charged to
customers. Interest income from the Company's investment securities, which
have been invested in lower-yielding, tax preferred instruments relative to
the prior year, also decreased. An increase in interest income from
investments to fund future jackpot payments offset these decreases.
Interest expense was $6.7 million and $4.8 million for the quarters ended
June 30, 1996 and 1995, respectively, reflecting an increase in the number
of jackpot winners on the Company's linked progressive systems. As the
number of jackpots grows, the related interest expense also increases.
The net loss on sale of assets of $642,000 in the current quarter
relative to the gain on sale of assets in the prior year quarter was due
primarily to the reserves recorded on investments in certain developing
international markets.
RESULTS OF OPERATIONS - NINE MONTHS ENDED JUNE 30, 1996
COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1995
Net income for the nine months ended June 30, 1996 was $81.8 million
or $.64 per fully diluted share compared to $74.0 million or $.56 per fully
diluted share for the nine months ended June 30, 1995.
Revenues and Gross Profit Margins
Total revenues were $513.4 million compared to $460 million for the
first nine months of fiscal 1996 and 1995, respectively, reflecting growth
in both product sales and gaming operations revenues.
Product sales revenues grew to $333.7 million for the current period
compared to $313.2 million in the comparable prior year period as a result
of increases in machine unit volume in international markets. Machine
sales to international markets increased by 4,700 units or 60% for the
current nine month period relative to the prior year period. The largest
increases in international markets came from Turkey and Argentina.
Domestically, machine sales decreased from 47,800 in the prior year period
to 44,000 in the current period, primarily due to declines in the Nevada,
Colorado and riverboat markets.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Revenues and Gross Profit Margins (Continued)
Revenues from gaming operations were $179.8 million and $146.8 million
for the nine months ended June 30, 1996 and 1995, respectively. This 22%
increase was due to additional linked progressive systems in Nevada and
Native American markets, as well as increased play on existing systems,
particularly in Louisiana.
The gross margin on product sales was 45% and 43% for the current nine
month period and prior year period, respectively. The improvement in gross
margin was due to lower material costs and improved production efficiencies
domestically. The gross margin on gaming operations revenue improved to
53% for the nine months ended June 30, 1996 compared to 50% for the
comparable 1995 period. The gross profit percentage is primarily a
function of the fluctuating cost of interest-sensitive assets the Company
purchases to fund jackpot payments.
Expenses
Selling, general and administrative expenses totaled $80.0 million and
$63.8 million for the nine months ended June 30, 1996 and 1995,
respectively. The increase was due to costs associated with relocation to
the Company's new manufacturing facility of $3.2 million in the first
quarter, expenses related to management changes in the second quarter of
$2.7 million, increased marketing expenses of $3.3 million and costs
associated with greater volume. The lack of significant fluctuation in
depreciation and amortization was the net result of increased depreciation
associated with the greater number of machines on the Company's linked
progressive systems offset by a decrease in amortization of leasehold
improvements.
Research and development expenses for the nine months ended June 30,
1996 decreased by $2.7 million versus the comparable prior year period due
to custom engineering charged to cost of sales. The provision for bad debt
in the current period exceeds the prior year period by $5.1 million due to
reserves associated with certain developing international markets,
including Asia, South America and certain uncollectible receivables in
Australia.
Other income and expense
Interest income was unchanged for the current nine month period
relative to the comparable prior year period as the net result of three
factors. Lower interest was realized on investment securities due to
investing a larger percentage of the portfolio in lower-yielding, tax
preferred instruments decreased interest income. Lower interest rates
charged on notes and contracts receivable also decreased interest income.
Growth in progressive systems play resulted in increased income-producing
investments to fund future jackpot payments, which offset the decreases
discussed above. Interest expense increased by $1.8 million due to growth
in progressive systems play.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
During the nine months ended June 30, 1996, working capital decreased
$44.9 million to $464 million. This decrease in working capital was
partially due to a decrease in cash and cash equivalents of $74.1 million
which was primarily attributable to the construction of the Company's new
manufacturing facility (see Note 2 to the Consolidated Financial
Statements). Additionally, significant uses of cash include purchases of
investment securities and purchases of assets to fund payments to jackpot
winners. Inventory increased $26.4 million to meet seasonal demand for the
Company's products.
Cash Flow
During the nine months ended June 30, 1996, the Company generated cash
from operating activities of $41.4 million. Increases in inventories and
receivables reduced cash from operating activities. Increases in accrued
and deferred income taxes during the current period reduced cash from
operating activities due to the timing of deductibility of payments to
systems winners.
The increase in cash provided by operating activities was offset by
cash used in investing activities of $125.6 million due to the purchase of
investment securities, purchase of investments to fund payments to jackpot
winners and costs associated with the construction of the Company's new
manufacturing and administrative facility (see Note 2 to the Consolidated
Financial Statements). $15 million in cash was provided by financing
activities including collections from the Company's linked progressive
systems of $84.3 million offset by $44.8 million in cash used to purchase
treasury stock, $20.2 million for payments to systems winners and $11.5
million for dividends.
Lines Of Credit
As of June 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 available for 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 June 30, 1996, $48.0 million was available under this line of
credit.
IGT-Australia had a $25.5 million (Australian) bank line of credit
available as of June 30, 1996. Interest is paid at the lender's reference
rate plus 1%. This line is secured by equitable mortgages, and has a
provision for review and renewal annually in May. At June 30, 1996 $500,000
was available under this line of credit.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Stock Repurchase
A stock repurchase program was originally authorized by the Board of
Directors in October 1990. This repurchase program currently allows for
the purchase of up to 50.0 million shares. During the nine months ended
June 30, 1996, the Company purchased 3.8 million shares of its own
outstanding stock for a total of $44.8 million in cash. Under this
repurchase program, the Company is authorized to purchase an additional
27.9 million shares.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("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 June 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.
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 may 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. Statements containing
expressions such as "believes," "anticipates" or "expects" used in the
Company's press releases and 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; 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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (Continued)
casinos; 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>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: August 14, 1996
INTERNATIONAL GAME TECHNOLOGY
By: /s/ Maureen Imus
Maureen Imus
Vice President, Finance
