<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 91,476
<SECURITIES> 73,459
<RECEIVABLES> 205,269
<ALLOWANCES> 11,762
<INVENTORY> 114,893
<CURRENT-ASSETS> 552,697
<PP&E> 274,599
<DEPRECIATION> 87,640
<TOTAL-ASSETS> 1,149,249
<CURRENT-LIABILITIES> 141,770
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 573,160
<TOTAL-LIABILITY-AND-EQUITY> 1,149,249
<SALES> 227,557
<TOTAL-REVENUES> 353,755
<CGS> 122,126
<TOTAL-COSTS> 188,774
<OTHER-EXPENSES> 70,080
<LOSS-PROVISION> 5,099
<INTEREST-EXPENSE> 13,769
<INCOME-PRETAX> 95,912
<INCOME-TAX> 34,528
<INCOME-CONTINUING> 61,384
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,384
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
</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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File Number 001-10684
INTERNATIONAL GAME TECHNOLOGY
(Exact name of registrant as specified in charter)
Nevada 88-0173041
(State of Incorporation) (IRS Employer Identification No.)
9295 Prototype Drive, Reno, NV 89511
(Address of principal executive offices)
(702) 448-1200
(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 April 30, 1997
Common Stock 119,090,843
par value $.000625 per share
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
The accompanying condensed 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, 1996. 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.-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 one of the largest manufacturers 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.
<PAGE>
Item 1. Financial Statements, (continued)
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.
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 9295 Prototype Drive, Reno, Nevada 89511; its telephone
number is (702) 448-1200.
The condensed 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>
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
(Amounts in thousands, except, per share amounts)
<S> <C> <C> <C> <C>
Revenues
Product sales $ 98,223 $100,124 $227,557 $199,204
Gaming operations 66,148 60,423 126,198 117,564
Total revenues 164,371 160,547 353,755 316,768
Costs and Expenses
Cost of product sales 53,425 54,481 122,126 109,411
Gaming operations 32,862 34,616 66,648 68,374
Selling, general and administrative 26,074 28,623 49,889 54,135
Depreciation and amortization 2,414 2,941 5,507 6,324
Research and development 7,289 6,369 14,684 12,671
Provision for bad debts 2,284 4,469 5,099 6,134
Total costs and expenses 124,348 131,499 263,953 257,049
Income from Operations 40,023 29,048 89,802 59,719
Other Income (Expense)
Interest income 10,144 9,341 20,373 19,073
Interest expense (6,876) (5,125) (13,769) (10,345)
Gain (loss) on the sale of assets 645 (3,239) 949 (3,253)
Other (632) 248 (1,443) 8,289
Other income, net 3,281 1,225 6,110 13,764
Income Before Income Taxes 43,304 30,273 95,912 73,483
Provision for Income Taxes 15,590 10,903 34,528 26,453
Net Income $ 27,714 $ 19,370 $ 61,384 $ 47,030
Primary Earnings Per Share $ 0.22 $ 0.15 $ 0.49 $ 0.37
Fully Diluted Earnings Per Share $ 0.22 $ 0.15 $ 0.49 $ 0.37
Weighted Average Common and Common
Equivalent Shares Outstanding 123,701 126,090 125,399 127,492
Weighted Average Common Shares
Outstanding Assuming Full
Dilution 123,701 126,176 125,396 127,580
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 91,476 $ 169,900
Investment securities at market value 73,459 60,858
Accounts receivable, net of allowances
for doubtful accounts of $5,421
and $5,681 135,619 148,305
Current maturities of long-term notes
and contracts receivable, net of
allowances 69,650 72,063
Inventories, net of allowances for
obsolescence of $17,307 and $18,165:
Raw materials 61,805 54,600
Work-in-process 3,503 4,316
Finished goods 49,585 41,427
Total inventories 114,893 100,343
Deferred income taxes 21,389 19,354
Investments to fund liabilities to
jackpot winners 30,626 27,343
Prepaid expenses and other 15,585 17,426
Total Current Assets 552,697 615,592
Long-term notes and contracts receivable,
net of allowances and current maturities 41,957 46,473
Property, plant and equipment, at cost
Land 25,956 25,610
Buildings 74,168 58,574
Gaming operations equipment 75,244 73,641
Manufacturing machinery and equipment 92,433 77,025
Leasehold improvements 6,798 9,960
Construction in progress - 16,136
Total 274,599 260,946
Less accumulated depreciation and
amortization (87,640) (83,144)
Property, plant and equipment, net 186,959 177,802
Investments to fund liabilities to jackpot
winners 274,683 244,340
Deferred income taxes 85,449 65,194
Other assets 7,504 4,786
Total Assets $1,149,249 $1,154,187
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Balance Sheets (continued from previous page)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes
payable and capital lease obligations $ 13,490 $ 8,119
Accounts payable 45,282 33,145
Jackpot liabilities 37,237 33,489
Accrued employee benefit plan
liabilities 10,102 16,175
Accrued dividends payable 3,620 3,767
Accrued income taxes 2,318 -
Other accrued liabilities 29,721 32,747
Total Current Liabilities 141,770 127,442
Long-term notes payable and capital
lease obligations, net of current
maturities 102,375 107,155
Long-term jackpot liabilities 329,140 292,864
Other liabilities 2,709 3,526
Total Liabilities 575,994 530,987
Commitments and contingencies
Stockholders' equity
Common stock, $.000625 par value;
320,000,000 shares authorized;
151,538,936 and 150,690,308 shares
issued 95 94
Additional paid-in capital 241,106 237,365
Retained earnings 620,001 567,565
Treasury stock; 31,084,576 and
25,114,476 shares at cost (294,426) (188,143)
Net unrealized gain on investment
securities 6,479 6,319
Total Stockholders' Equity 573,255 623,200
Total Liabilities and Stockholders'
Equity $1,149,249 $1,154,187
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $61,384 $47,030
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 16,901 13,384
Provision for bad debts 5,099 6,134
Provision for inventory obsolescence 3,834 8,596
(Gain) loss on investments and sale of
assets (949) 3,253
Common stock awards 1,337 176
(Increase) decrease in assets:
Receivables 14,344 (480)
Inventories (35,759) (37,751)
Prepaid expenses and other 1,867 (2,078)
Other assets (2,996) (6,270)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 4,501 975
Accrued and deferred income taxes payable,
net of tax benefit of stock option and
purchase plans (22,339) (26,591)
Other (289) 1,276
Total adjustments (14,449) (39,376)
Net cash provided by operating activities 46,935 7,654
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Statements of Cash Flows (continued from
previous page)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Investing Activities
Investment in property, plant and equipment ($15,355) ($ 44,700)
Proceeds from sale of property, plant and
equipment 6,495 582
Purchase of investment securities (26,605) (34,133)
Proceeds from sale of investment securities 15,287 31,342
Proceeds from investments to fund liabilities
to jackpot winners 16,762 13,930
Purchase of investments to fund liabilities
to jackpot winners (50,388) (60,018)
Net cash used in investing activities (53,804) (92,997)
Cash Flows from Financing Activities
Principal payments on debt (1,662) (3,329)
Payments on jackpot liabilities (16,762) (13,930)
Collections from systems to fund liabilities
to jackpot winners 56,786 57,594
Proceeds from stock options exercised 1,081 1,062
Proceeds from employee stock purchase plan 1,112 1,047
Payments for purchase of treasury stock (106,283) (44,215)
Payments of cash dividends (7,488) (7,721)
Proceeds from long-term debt 2,356 3,912
Net cash used in financing activities (70,860) (5,580)
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (695) 2,810
Net Decrease in Cash and Cash Equivalents (78,424) (88,113)
Cash and Cash Equivalents at Beginning of
Period 169,900 241,613
Cash and Cash Equivalents at End of Period $ 91,476 $153,500
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were
netted against current and long-term maturities:
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
<S> <C> <C>
(Dollars in thousands)
Current $ 6,341 $ 4,538
Long-term 13,318 15,237
$19,659 $19,775
</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 1.0 million square foot corporate headquarters,
manufacturing and warehousing facility and cabinet manufacturing
facility (the "South Meadows" facility). The manufacturing and
warehousing facility was completed in January 1996, and the corporate
offices were completed in March 1997. Substantially all employees in
Reno, Nevada now work at the facilities. The total cost of these
facilities, including the site, was $88.3 million. The Company has
begun design of an 85,000 square foot cabinet manufacturing facility
adjacent to the South Meadows facility to be completed in the spring
of 1998 at an estimated cost of $5.5 million.
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.
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.
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
Accounts, contracts, and notes receivable by region as a
percentage of total receivables are as follows:
<TABLE>
<CAPTION>
March 31, 1997
<S> <C>
Nevada 35.7 %
Riverboats (greater Mississippi River area) 18.2 %
South America 9.4 %
Australia 5.8 %
Colorado 5.5 %
New Jersey (distributor) 5.5 %
Europe 2.9 %
Native American Casinos (distributor) 2.7 %
Other Regions (individually less than 2%) 14.3 %
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, at March 31, 1997, had an aggregate balance of $15.2 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 it is unlikely that the Company will
incur losses relating to these guarantees.
5. 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 totaling $12,000 in the six months ended March 31,
1997. The Company did not issue notes or incur capital lease
obligations for purchases of property, plant and equipment for the six
months ended March 31, 1996.
The Company manufactures gaming machines which are leased to
customers under operating leases. Accordingly, transfers between
inventory and property, plant and equipment totaling $17.2 million and
$13.7 million were made in the six month periods ended March 31, 1997
and 1996, respectively.
The tax benefit of stock options exercised and awards granted
totaled $212,000 and $506,000 for the six months ended March 31, 1997
and 1996, respectively.
Unrealized gains on investments, net of taxes, totaling $160,000
and $1.5 million were recorded as Unrealized Gains on Investments in
stockholder's equity for the six months ended March 31, 1997 and 1996,
respectively.
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
On February 18, 1997, the Board of Directors declared a quarterly
cash dividend of $0.03 per share, payable on June 2, 1997 to
shareholders of record at the close of business on May 1, 1997. At
March 31, 1997, the Company had accrued $3.6 million for the payment
of this dividend.
Payments of interest for the six months ended March 31, 1997 and
1996 were $14.4 and $11.9 million, respectively. Payments for income
taxes for the first six months of fiscal 1997 and 1996 were $55.3
million and $46.5 million, respectively.
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.,
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, 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 Poulos and Ahern complaints, all of the
defendants, including the Company, filed motions to transfer venue.
The Court granted the defendants' motion to transfer venue of the
action to Las Vegas. The defendants also filed motions to dismiss the
actions challenging the pleadings for failure to state a claim and
seeking to dismiss the complaints for lack of personal jurisdiction
and venue. The Court 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.
Thereafter, at a status conference in Las Vegas on December 13,
1996, United States District Court Judge David A. Ezra, a visiting
judge who has now been assigned all three pending cases identified
above, ordered that the plaintiffs in all three cases file a new
consolidated complaint incorporating in one document all claims
against all defendants. All then pending motions from all parties
were ordered deemed as withdrawn without prejudice. The new
consolidated complaint was filed in February 1997. Thereafter, the
defendants timely filed both a Motion to Strike Plaintiff's
Consolidated Amended Complaint based on it exceeding the court's
explicit directions and also a renewed Motion to Dismiss for the same
reasons that a similar motion had been granted previously. At this
date the parties are waiting rulings from the court on these motions.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended March 31, 1997 Compared to the Three Months Ended
March 31, 1996
Revenues for the second quarter of fiscal 1997 totaled $164.4
million compared to $160.5 million in the second quarter of fiscal
1996. Net income for the quarter was $27.7 million or $.22 per
fully diluted share for the current quarter compared to $19.4
million or $.15 per fully diluted share for the comparable prior
year period.
Revenues and Gross Profit Margins
Total revenues increased over the prior year due primarily to
growth in the gaming operations segment with offsetting declines in
product sales. Product sales revenues totaled $98.2 million in the
second quarter of fiscal 1997 compared to $100.1 million in the second
quarter of fiscal 1996. The Company sold 16,300 and 16,900 machines
in the second quarter of fiscal 1997 and 1996, respectively.
Domestically, lower sales in the Nevada and Native American markets
were offset by growth in the Riverboat, Atlantic City and Puerto Rico
markets. International sales declined by 600 units compared to the
prior year quarter, attributable primarily to decreased sales in
Europe and South America, where large individual sales were made in
the prior year.
Revenues from gaming operations in the second quarter grew to
$66.1 million, a 9% increase over the second quarter of fiscal 1996.
Growth in the installed machine base and the overall level of play in
Atlantic City, as well as the Louisiana and Native American markets,
contributed to the increase in progressive systems revenue.
Additionally, second quarter gaming operations revenues benefited from
growth in lease revenues from Delaware racetracks where gaming was
introduced during the prior year.
Gross profit on total revenues for the quarters ended March 31,
1997 and 1996 was $78.1 million and $71.5 million, respectively. The
gross margin on product sales was 46% in both the current and prior
periods. The gross margin on gaming operations was 50% in the current
quarter, increasing from 43% in the comparable prior year period.
This improvement related primarily to the impact of interest-sensitive
assets the Company purchases to fund jackpot payments.
Expenses
Selling, general and administrative expenses decreased $2.5
million due to costs associated with management changes in the prior
year quarter as well as cost reduction efforts both domestically and
internationally in the current period. Depreciation and amortization
expenses were $2.4 million and $2.9 million for the quarters ended
March 31, 1997 and 1996, respectively. The decline in depreciation
expense is due to discontinuance of depreciation on leasehold
improvements on the recently vacated leased facilities in Reno, Nevada
offset by depreciation expense associated with the Company's new
manufacturing and office facility.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (continued)
Research and development expenses totaled $7.3 million and $6.4
million in the second quarters of fiscal 1997 and 1996, respectively.
Higher product compliance costs in Australia and salary related costs
domestically contributed to this fluctuation. The provision for bad
debts decreased to $2.2 million for the second quarter of fiscal 1997
from $4.5 million in the prior year quarter, primarily due to
reserves related to certain international developing markets in the
prior year period.
Other Income and Expense
Interest income increased $800,000 from the second quarter of
fiscal 1996. Higher market interest rates resulted in increased
income from notes and contracts receivable, along with interest from
increased investments to fund future jackpot payments. Interest
income growth was partially offset by holding a larger portion of
equity securities, which are not currently paying dividends, in the
investment portfolio. Purchases of treasury stock have decreased cash
and cash equivalents, resulting in a decline in interest income. Interest
expense totaled $6.9 million and $5.1 million for the quarters ended
March 31, 1997 and 1996, respectively. Interest expense increased in
relation to the growth in jackpot liabilities. The prior year
was also positively impacted by the capitalization of interest
associated with the construction of the Company's new facilities.
During the second quarter of fiscal 1997, the Company recognized
a gain of $645,000 on the sale of assets, compared to a loss of $3.2
million in the comparable prior year period. In the current period,
the gain resulted from the sale of investment securities, while the
prior year loss resulted primarily from reserves established for the
Company's investment in China and other developing international
markets as well as a charge for the Company's remaining investment in
Radica Games, Limited.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (continued)
Six Months Ended March 31, 1997 Compared to the Six Months Ended March
31, 1996
Net income for the six months ended March 31, 1997 was $61.4
million compared to $47.0 million for the comparable prior year
period. Earnings per share increased to $.49 per fully diluted share
from $.37 per fully diluted share in the prior year period.
Revenues and Gross Profit Margins
Total revenues were $353.8 million and $316.8 million for the
first six months of fiscal 1997 and 1996, respectively. This increase
is the result of growth in both product sales and gaming operations
revenues.
Product sales revenues totaled $227.6 million and $199.2 million
for the first half of fiscal 1997 and 1996, respectively. The
improvement in product sales revenues resulted from increases in unit
volume. Machine shipments totaled 40,000 in the current period
compared to 32,800 in the prior year period. Domestic machine
shipments gained 5,700 units over the prior year period due primarily
to new casino openings in the Nevada and Canada markets.
International unit sales increased 1,500 units compared to the prior
year period, as a result of sales of 3,900 Pachisuro units in Japan
offset by decreased unit volume in Argentina, Australia and Europe,
where large individual sales were made in the prior year.
Gaming operations revenue increased to $126.2 million in the
current period from $117.6 million in the first half of fiscal 1996.
The Company's lease operations at Delaware pari-mutuel facilities
began in December 1996 and have positively impacted total revenues in
this segment. New systems, higher play levels, and an increased
machine base resulted in improving progressive system revenue in the
Atlantic City, Louisiana, Native American, and Mississippi markets.
Nevada wide area progressive system revenues reached record levels in
the prior period due, in part, to two consecutive world record
jackpots on the Company's Megabucks system.
The gross profit margin on total revenues was $165.0 million and
$140.0 million for the six months ended March 31, 1997 and 1996,
respectively. The gross margin on product sales improved to 46% in
the current six month period as compared to 45% in the prior year
period, impacted primarily by overall higher volumes. The gross
margin on gaming operations of 47% also improved in comparison to the
prior year period margin of 42%. This fluctuation related primarily
to the impact of interest-sensitive assets that the Company purchases
to fund jackpot payments.
Expenses
Selling, general and administrative expenses decreased to $49.9
million for the first half of fiscal 1997 from $54.1 million in the
same prior year period. This decline is primarily due to costs
associated with relocation to the Company's new manufacturing facility
and to management changes in the prior year period. Cost reduction
efforts, internationally and domestically, also resulted in expense
improvement. Depreciation and amortization decreased by $817,000 from
the prior year period, due to the discontinuance of depreciation on
leasehold improvements on the vacated leased facilities in Reno,
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (continued)
Nevada offset by depreciation expense associated with the Company's
new manufacturing and office facility.
Research and development expenses totaled $14.7 million and $12.7
million for the first half of fiscal 1997 and 1996, respectively. This
increase is due primarily to compliance testing costs for new products
in Australia and salary related expenses domestically. The provision
for bad debts decreased $1.0 million from the prior year period due to
reserves established for sales to certain international developing
markets in the prior year, offset by increases related to higher volume
in the current period.
Other Income and Expense
Interest income increased $1.3 million to $20.4 million in the
six-month period ended March 31, 1997 compared to March 31, 1996.
Higher balances of investments to fund jackpots due to the overall
growth in the Company's linked progressive systems resulted in
increased interest income. Interest income from investment securities
declined due to holding a larger portion of the portfolio in equity
securities, which currently are not paying dividends, rather than
interest bearing bonds. Purchases of treasury stock have decreased
cash and equivalents, resulting in a decline in interest income.
Interest expense for the current six month period totaled $13.8
million compared to $10.3 million in the prior six month period. The
majority of this increase related to a growth in the number of jackpot
winners in comparison to the prior year period. The remaining
increase is primarily attributable to the capitalization of interest
expense in the prior year period. The construction of the Company's
new manufacturing and office facility is now substantially complete
and, accordingly, interest is no longer being capitalized.
During the six months ended March 31, 1997, the Company
recognized a gain of $949,000 on the sale of assets, compared to a
loss of $3.3 million in the comparable prior year period. In the
current period, the gain results from the sale of investment
securities, while the prior year period loss resulted primarily from
reserves established for the Company's investment in China and other
developing international markets as well as a charge for the Company's
remaining investment in Radica Games, Limited.
Liquidity and Capital Resources
Working Capital
Working capital decreased $77.2 million to $410.9 million during
the six months ended March 31, 1997. The primary fluctuation in
current assets contributing to the decline in working capital was a
decrease in cash and cash equivalents of $78.4 million primarily
attributable to purchases of treasury stock. Other factors include
decreases in accounts receivable and increases in accounts payable.
Investment securities and inventories increased, offsetting these
declines in working capital.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (continued)
Cash Flow
During the six months ended March 31, 1997, the Company generated
cash from operating activities of $42.7 million. Uses of cash
resulted primarily from increases in inventories and decreases in
accrued and deferred income taxes.
The cash provided by operating activities was offset by cash used
to purchase investments in systems annuity assets and purchases of
investment securities. The majority of cash used for financing
activities was for the purchase of $106.3 million of the Company's
common stock under the stock repurchase program.
Lines of Credit
As of March 31, 1997, 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 March 31, 1997, $47.8
million was available under this line of credit. At April 30, 1997,
$17.8 million was available under this line of credit.
IGT-Australia had a $20.0 million (Australian) bank line of
credit available as of March 31, 1997. The line of credit bears
interest at the lender's reference rate plus 1%. The line is secured
by a comfort letter and guarantee from the Company, and has a
provision for review and renewal annually in January. At March 31,
1997, no funds were available under this line. Principal payments on
the cash advance facility of $6.0 million and $3.0 million
(Australian) are due September 30, 1997 and June 30, 1998,
respectively. Interest is paid quarterly.
The Company is required to comply, and is in compliance, with
certain covenants contained in these line of credit agreements which,
among other things, limit financial commitments the Company may make
without written consent of the lender and require the maintenance of
certain financial ratios, minimum working capital and net worth of the
Company.
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 of the Company's
common stock. Fiscal 1997 to date, the Company purchased 6.0 million
shares of its own outstanding stock for a total of $106.3 million in
cash. From April 1, 1997 through April 30, 1997, the Company has
purchased an additional 1.4 million shares for $21.4 million in cash.
As of April 30, 1997, the Company remains authorized to purchase 20.6
million shares.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (continued)
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" in March 1996. This statement, which the
Company adopted on October 1, 1996, 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.
The adoption of this statement did not have 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 the Company adopted on October 1,
1996. 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 in the Company's
Annual Report on Form 10-K for the year ending September 30, 1997.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share." This statement establishes standards for computing and
presenting earnings per share and is effective for the Company's
fiscal 1998 first quarter ending December 31, 1997. Earlier
application of this statement is not permitted and upon adoption
requires restatement of all prior-period earnings per share data
presented. Due to the recent adoption of this statement, management
has not yet determined the effect of this statement on earnings per
share as presented.
Reclassifications
Certain amounts in the 1996 condensed consolidated financial
statements have been reclassified to be consistent with the
presentation used in fiscal year 1997. Such reclassifications include
the presentation of depreciation expenses related to gaming equipment
for proprietary systems and leases as a cost of gaming operations.
<PAGE>
Item 2. 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-Q, contains 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 estimated total cost of the
Company's new cabinet manufacturing facility; the statement that the
Company believes it is unlikely that it will incur any losses
relating to its guarantee of certain indebtedness of CMS; and the
statement that the outcome of pending legal actions will not have a
material adverse effect on the Company's financial position or
results of operations. 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 foreign exchange rates, tariffs and other barriers
and with respect to legal actions, the discovery of facts not
presently known to the Company or determinations by judges, juries or
other finders of fact which do not accord with the Company's
evaluation of the possible liability or outcome of existing
litigation.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On February 18, 1997, the Company held its annual meeting of
stockholders.
(b) The following directors were re-elected to serve until the next
annual meeting: Albert J. Crosson, Wilbur K. Keating, Charles N.
Mathewson, Warren L. Nelson, Frederick B. Rentschler, John J. Russell,
Rockwell A. Schnabel and Claudine B. Williams. These directors
constitute all of the directors of the Company.
Voting at the meeting was as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Votes Cast Votes
Motion For Withheld
Albert J. Crosson 112,150,555 814,065
Wilbur K. Keating 112,299,532 665,088
Charles N. Mathewson 112,154,525 810,095
Warren L. Nelson 112,114,535 850,085
Frederick B. Rentschler 112,242,242 722,378
John J. Russell 112,169,492 795,128
Rockwell A. Schnabel 111,753,711 1,210,909
Claudine B. Williams 112,268,073 696,547
</TABLE>
(c) Stockholders approved amendments to the Company's
Employee Stock Purchase Plan (the "ESPP") to (i) modify the
class of employees who are eligible to participate in the
ESPP; (ii) clarify composition of the Board committee which
administers the plan to specify the members as "Non-Employee
Directors;" (iii) include a provision that permits options
and shares issued upon exercise under the ESPP to be subject
to the conditions and restrictions required by SEC Rule 16b-
3 in order to qualify for the maximum exemption from Section
16 of the Securities and Exchange Act of 1934 which
prohibits profits derived by affiliates from "short swing"
trading; and (iv) extend the term of the ESPP. The ESPP was
originally adopted by the Board of Directors on February 26,
1987 and was approved by the Company's stockholders on
February 16, 1988. Votes in favor
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders (continued)
of the amendments totaled 108.9 million with 3.6 million
votes against the amendments and 416,000 abstaining.
(d) Stockholders approved the amendments to the Company's
1993 Stock Option Plan (the "Plan"), to (i) modify share
limits; (ii) clarify transfer restrictions; (iii) modify the
number of options granted to non-employee directors; (iv)
permit the grant of stock appreciation rights; (v) permit
the grant of restricted stock awards; and (vi) permit the
grant of performance share awards and stock bonuses.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: May 15, 1997
INTERNATIONAL GAME TECHNOLOGY
By:/s/Maureen Imus
Maureen Imus
Vice President, Finance
