<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> MAR-31-1998
<CASH> 193,472
<SECURITIES> 13,041
<RECEIVABLES> 203,998
<ALLOWANCES> 18,287
<INVENTORY> 150,490
<CURRENT-ASSETS> 624,839
<PP&E> 290,705
<DEPRECIATION> 102,065
<TOTAL-ASSETS> 1,475,282
<CURRENT-LIABILITIES> 176,249
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 560,974
<TOTAL-LIABILITY-AND-EQUITY> 1,475,282
<SALES> 187,016
<TOTAL-REVENUES> 347,103
<CGS> 107,766
<TOTAL-COSTS> 181,901
<OTHER-EXPENSES> 66,021
<LOSS-PROVISION> 3,164
<INTEREST-EXPENSE> 17,992
<INCOME-PRETAX> 100,250
<INCOME-TAX> 35,087
<INCOME-CONTINUING> 65,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,163
<EPS-PRIMARY> .57
<EPS-DILUTED> .56
</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, 1998
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, Nevada 89511
(Address of principal executive offices)
(702) 448-7777
(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, 1998
Common Stock 113,316,485
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, 1997. 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 to 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. Limited ("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"); IGT-UK Limited ("IGT-UK");
International Game Technology - Africa (Proprietary) Limited ("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 wide area progressive systems and computer systems which
monitor slot machine play and track player activity. In addition to
gaming product sales and leases, the Company has developed and sells
computerized linked proprietary systems to monitor video 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-Argentina was established in December 1993 and has an office
in Buenos Aires, Argentina to distribute and market gaming products
in Argentina.
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. In March 1998 IGT-Australia
purchased certain of the assets from Olympic Amusement Pty. Limited
which was also a manufacturer and supplier of electronic gaming
machines and gaming systems to the Australian gaming market.
<PAGE>
Item 1. Financial Statements, continued
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-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-UK was incorporated in January 1998 to acquire Barcrest
Limited. The acquisition was completed in March 1998. IGT-UK
designs and manufactures gaming machines, including amusement with
prize ("AWP") machines, and markets its products in the United
Kingdom, Europe and other markets.
IGT-Africa opened an office in September 1994 and subsequently
was incorporated in October 1995 to distribute and market gaming
products in Southern Africa. The office is located in Midrand, South
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) 448-7777.
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,
1998 1997 1998 1997
(Amounts in thousands, except,
per share amounts)
<S> <C> <C> <C> <C>
Revenues
Product sales $ 91,660 $ 98,223 $187,016 $227,557
Gaming operations 90,430 66,148 160,087 126,198
Total revenues 182,090 164,371 347,103 353,755
Costs and Expenses
Cost of product sales 53,049 53,425 107,766 122,126
Cost of gaming operations 39,643 32,862 74,135 66,648
Selling, general and
administrative 22,750 26,074 43,733 49,889
Depreciation and amortization 3,439 2,414 6,806 5,507
Research and development 8,208 7,289 15,482 14,684
Provision for bad debts 1,778 2,284 3,164 5,099
Total costs and expenses 128,867 124,348 251,086 263,953
Income from Operations 53,223 40,023 96,017 89,802
Other Income (Expense)
Interest income 11,161 10,144 22,336 20,373
Interest expense (9,202) (6,876) (17,992) (13,769)
Gain on the sale of assets 39 645 1,081 949
Other (617) (632) (1,192) (1,443)
Other income, net 1,381 3,281 4,233 6,110
Income Before Income Taxes 54,604 43,304 100,250 95,912
Provision for Income Taxes 19,112 15,590 35,087 34,528
Net Income $ 35,492 $ 27,714 $ 65,163 $ 61,384
Basic Earnings Per Share $ 0.31 $ 0.23 $ 0.57 $ 0.49
Diluted Earnings Per Share $ 0.31 $ 0.22 $ 0.56 $ 0.49
Weighted Average Common Shares
Outstanding 113,870 122,710 113,820 124,193
Weighted Average Common and
Common Equivalent Shares
Outstanding 116,129 123,701 116,122 125,399
</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,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 193,472 $ 151,771
Investment securities at market value 13,041 14,944
Accounts receivable, net of allowance
for doubtful accounts of $7,052 and
$5,899 141,326 173,783
Current maturities of long-term notes
and contracts receivable, net of
allowances 62,672 74,686
Inventories, net of allowances for
obsolescence of $14,347 and $14,881:
Raw materials 89,024 50,484
Work-in-process 4,588 3,606
Finished goods 56,878 38,354
Total inventories 150,490 92,444
Investments to fund liabilities to
jackpot winners 38,462 35,088
Deferred income taxes 14,800 18,229
Prepaid expenses and other 10,576 10,601
Total current assets 624,839 571,546
Long-term notes and contracts receivable,
net of allowances and current maturities 35,524 32,524
Property, plant and equipment, at cost
Land 25,407 25,391
Buildings 75,970 74,366
Gaming operations equipment 69,698 66,240
Manufacturing machinery and equipment 110,897 97,564
Leasehold improvements 4,500 5,306
Construction in progress 4,233 1,451
Total 290,705 270,318
Less accumulated depreciation and
amortization (102,065) (91,842)
Property, plant and equipment, net 188,640 178,476
Investments to fund liabilities to
jackpot winners 344,278 313,719
Deferred income taxes 112,314 98,072
Intangible assets 133,290 1,273
Other assets 36,397 19,442
Total Assets $1,475,282 $1,215,052
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Balance Sheets (continued from previous page)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes
payable and capital lease obligations $ 29,154 $ 25,414
Accounts payable 54,957 46,238
Jackpot liabilities 46,767 42,485
Accrued employee benefit plan liabilities 11,422 17,147
Accrued dividends payable 3,404 3,411
Other accrued liabilities 30,545 29,893
Total current liabilities 176,249 164,588
Long-term notes payable and capital lease
obligations, net of current maturities 301,403 140,713
Long-term jackpot liabilities 435,823 389,235
Other liabilities 738 669
Total Liabilities 914,213 695,205
Commitments and contingencies
Stockholders' equity
Common stock, $.000625 par value;
320,000,000 shares authorized;
152,462,309 and 151,882,710 shares
issued 95 95
Additional paid-in capital 250,036 243,950
Retained earnings 743,973 688,597
Treasury stock; 38,990,982 and 38,174,676
shares at cost (433,069) (413,617)
Net unrealized gain on investment
securities 34 822
Total Stockholders' Equity 561,069 519,847
Total Liabilities and Stockholders'
Equity $1,475,282 $ 1,215,052
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 65,163 $ 61,384
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 17,423 16,901
Provision for bad debts 3,164 5,099
Provision for inventory obsolescence 5,149 3,834
Gain on sale of investment securities
and fixed assets (1,081) (949)
Common stock awards 1,204 1,337
Equity in (income) loss of joint ventures (27,502) 108
(Increase) decrease in assets, net of
effects from acquisitions of businesses:
Receivables 58,208 14,344
Inventories (46,763) (35,759)
Prepaid expenses and other 131 1,867
Other assets 53 238
Net deferred income tax asset, net of tax
benefit of employee stock plans (8,495) (22,339)
Increase (decrease) in accounts payable and
accrued liabilities, net of effects from
acquisitions of businesses (8,114) 4,501
Other 81 (289)
Total adjustments (6,542) (11,107)
Net cash provided by operating activities 58,621 50,277
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Statements of Cash Flows (continued from previous page)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Investing Activities
Investment in property, plant and equipment $ (8,543) $ (15,355)
Proceeds from sale of property, plant and
equipment 650 6,495
Purchase of investment securities (341) (26,605)
Proceeds from sale of investment securities 2,142 15,287
Proceeds from investments to fund liabilities
to jackpot winners 18,095 16,708
Purchase of investments to fund liabilities
to jackpot winners (52,028) (50,334)
Investment in joint ventures (697) (3,342)
Return of capital from joint ventures 11,100 -
Acquisition of businesses (180,509) -
Net cash used in investing activities (210,131) (57,146)
Cash Flows from Financing Activities
Proceeds from long-term debt 294,394 2,356
Principal payments on debt (128,865) (1,662)
Payments on jackpot liabilities (18,095) (16,708)
Collections from systems to fund jackpot
liabilities 68,965 56,732
Proceeds from employee stock plans 3,088 2,193
Payments of cash dividends (6,827) (7,488)
Payments to purchase treasury stock (19,451) (106,283)
Net cash provided by (used in) financing
activities 193,209 (70,860)
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 2 (695)
Net Increase (Decrease) in Cash and Cash
Equivalents 41,701 (78,424)
Cash and Cash Equivalents at:
Beginning of Period 151,771 169,900
End of Period $ 193,472 $ 91,476
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Acquisitions
In late March 1998, the Company completed the purchase of
Barcrest Limited ("Barcrest"), a Manchester, England-based
manufacturer and supplier of electronic gaming devices and the
purchase of certain of the assets of Olympic Amusements Pty. Limited
("Olympic"), a leading manufacturer and supplier of electronic gaming
machines, gaming systems and other gaming equipment and services to
the Australian gaming market. The purchase method of accounting for
business combinations was applied to the Barcrest and Olympic
acquisitions. Accordingly, the aggregate purchase price of $180.5
million was allocated to the net assets of $88.6 million based on
estimated fair values of the tangible assets, intangible assets and
liabilities at the dates of acquisition. The excess of the purchase
price over the net assets acquired, totaling $91.9 million, was based
on preliminary estimates and may be revised at a later date. These
acquisitions were funded primarily with additional borrowings on the
Company's line of credit, as well as long-term borrowing by the
Company's Australian subsidiary. Due to the timing of these
acquisitions, the earnings from the two entities were insignificant to
the current periods and are therefore excluded from the Company's
quarter and year-to-date income.
2. Construction of New Cabinet Manufacturing Facility
The Company completed the construction of an 85,000 square foot
cabinet manufacturing facility adjacent to the corporate headquarters,
manufacturing and warehousing facility in Reno, Nevada in April 1998.
The total cost was approximately $4.6 million.
3. 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,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Current $11,235 $ 8,605
Long-term 8,450 9,624
$19,685 $18,229
</TABLE>
4. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Intellectual property $ 41,866 $ 1,550
Excess of cost over net
assets acquired 91,861 -
133,727 1,550
Less accumulated
amortization (437) (277)
$133,290 $ 1,273
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
5. 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.
6. 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.
Accounts, contracts, and notes receivable by region as a
percentage of total receivables are as follows:
<TABLE>
<CAPTION>
March 31, 1998
<S> <C>
Nevada 29%
Riverboats (greater Mississippi River area) 13%
Atlantic City (distributor and other) 11%
Europe 11%
South America 11%
Native American casinos (distributor) 7%
Canada 6%
Colorado 5%
Other regions (individually less than 2%) 7%
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, 1998, had an aggregate balance of $14.5 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.
7. Earnings Per Share
Effective October 1, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
Weighted average shares for the three and six month periods ended
March 31, 1997 have been restated in accordance with SFAS No. 128. The
following tables show the reconciliation of basic earnings per share
("EPS") to diluted EPS available to common stockholders:
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
(Amounts in thousands,
except per share amounts)
Weighted Weighted
Net Average Net Average
Income Shares EPS Income Shares EPS
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $35,492 113,870 $0.31 $27,714 122,710 $0.23
Effect of Dilutive
Securities
Stock options
outstanding - 2,259 - - 991 (0.01)
Diluted EPS $35,492 116,129 $0.31 $27,714 123,701 $0.22
</TABLE>
Options to purchase 54,000 shares of common stock at March 31, 1998
and 143,000 shares of common stock at March 31, 1997 were not included
in the computation of diluted EPS for the respective quarter because
the options' exercise price was greater than the average market price
of the common shares.
<TABLE>
<CAPTION>
Six Months Ended March 31,
1998 1997
(Amounts in thousands,
except per share amounts)
Weighted Weighted
Net Average Net Average
Income Shares EPS Income Shares EPS
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $65,163 113,820 $0.57 $61,384 124,193 $0.49
Effect of Dilutive
Securities
Stock options
outstanding - 2,302 (0.01) - 1,206 -
Diluted EPS $65,163 116,122 $0.56 $61,384 125,399 $0.49
</TABLE>
Options to purchase 50,000 shares of common stock at March 31, 1998
and 127,000 shares of common stock at March 31, 1997 were not included
in the computation of year-to-date diluted EPS because the options'
exercise price was greater than the average market price of the common
shares. There were no transactions in the period April 1, 1998 to May
8, 1998 which would have materially changed the number of common
shares or potential common shares outstanding.
8. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not
reflected in the condensed consolidated statements of cash flows.
The Company manufactures gaming machines which are used on its
proprietary systems and are leased to customers under operating
leases. The net result of transfers between inventory and property,
plant and equipment totaled $7.5 million and $17.2 million in the six
month periods ended March 31, 1998 and 1997, respectively.
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
The tax benefit of stock options totaled $1.6 million and
$212,000 for the six month periods ended March 31, 1998 and 1997,
respectively.
Payments of interest for the six month periods ended March 31,
1998 and 1997 were $18.0 million and $14.4 million, respectively.
Payments for income taxes were $39.4 million and $55.3 million for
the six month periods ended March 31, 1998 and 1997, respectively.
The fair value of assets acquired and liabilities assumed in
conjunction with acquisitions of business during the quarter (see
Note 1) totaled $99.9 million and $11.3 million, respectively.
9. 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 into 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 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 grounds it exceeded the court's explicit directions
and also a renewed Motion to Dismiss for the same reasons that a
similar motion had been granted previously. On November 3, 1997, Judge
Ezra heard oral argument on all pending motions filed by the
defendants.
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
In December 1997, Judge Ezra denied the motions that would have
dismissed the Consolidated Amended Complaint or that would have stayed
the action pending Nevada gaming regulatory action. He granted
significant parts of the Motion to Strike and directed the plaintiffs
to file a Second Amended Consolidated Complaint to which the
defendants would be required to answer. It was timely filed and the
defendants filed their consolidated answer to the Second Amended
Consolidated Complaint on February 11, 1998. Thereafter, defendants
have filed motions to delay merits discovery pending a determination
of class certification issues, which motions were granted by the
Magistrate. At this time, the defendants have served on the
plaintiffs' discovery requests dealing with class certification, with
responses due on or about May 6, 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended March 31, 1998 Compared to the Three Months Ended
March 31, 1997
Net income for the quarter was $35.5 million or $.31 per diluted
share versus $27.7 million or $.22 per diluted share in the comparable
prior year period. The 28% increase in net income was the result of
growth in gaming operations revenue and declines in operating
expenses, offset by declines in product sales.
Revenues and Gross Profit Margins
Revenues for the second quarter of fiscal 1998 totaled $182.1
million representing an increase of $17.7 million over the prior year
second quarter. This improvement resulted from a 37% increase in
gaming operations revenue partially offset by a decline in product
sales. Revenues from gaming operations in the second quarter increased
to $90.4 million compared to $66.1 million for the same period last
year. This increase is due primarily to a 35% increase in the number
of machines installed on the Company's MegaJackpotsT systems. The
installed base of machines operating on these systems grew to 13,100
at the end of the current quarter compared to 9,700 one year earlier.
This increase is primarily attributable to the ongoing popularity of
the Wheel of Fortuner game. Strong play on Nevada Megabucks, where
the jackpot was more than $15 million at the end of the current
quarter, also contributed to the improvement in gaming operations
revenues relative to the prior year. The introduction of
MegaJackpotsT in Missouri, along with Super Megabucks and Jeopardyr in
Nevada, also contributed to the overall increase.
Product sales totaled $91.7 million and $98.2 million for the
quarters ended March 31, 1998 and 1997, respectively. During the
current quarter, the Company sold a total of 12,600 gaming machines
compared to 16,300 in the second quarter of fiscal 1997.
Domestically, 9,100 units were sold during the current quarter
compared to 12,900 units sold in the second quarter of fiscal 1997.
The decrease in sales domestically was most pronounced in the Nevada,
New Jersey and riverboat markets as a result of fewer casino openings
and expansions. Internationally, machine sales totaled 3,500 units
during the current quarter versus 3,400 during the prior year quarter.
Growth in international sales resulted from slight increases in
Europe, Japan and Latin America, partially offset by fewer units sold
in the Australia market.
Gross profit on total revenues for the second quarter of fiscal
1998 was $89.4 million compared to $78.1 million for the second
quarter of fiscal 1997. The gross margin on gaming operations was
$50.8 million or 56% versus $33.3 million or 50% for the second
quarters of fiscal 1998 and 1997, respectively. This increase in
gross profit margin is primarily due to joint venture activities which
are reported net of expenses. Joint venture revenues, net of
expenses, totaled $15.7 million during the current quarter and were
negligible in the prior year quarter. This improvement was offset by
declining interest rates which increased the costs of interest
sensitive assets the Company purchases to fund jackpot payments. The
gross margin on product sales decreased to 42% in the current quarter
from 46% in the prior year quarter as a result of lower domestic
volumes and a larger mix of international sales which carry lower
margins. Additionally, the higher mix of new products such as Game
King and VisionT series products, which generally have lower margin
percentages yet higher gross margin dollars, also effected the gross
margin percentage.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Expenses
Selling, general and administrative expenses decreased 13% to
$22.8 million in the second quarter of fiscal 1998 in comparison to
the same prior year period. This fluctuation resulted from cost
reductions both domestically and internationally. Depreciation and
amortization expense totaled $3.4 million and $2.4 million for the
quarters ended March 31, 1998 and 1997, respectively. This increase
is due to depreciation expense on the new administrative facility as
well as depreciation expense resulting from a higher level of assets
in the current period.
Research and development expenses totaled $8.2 million for the
current quarter compared to $7.3 million for the second quarter of
fiscal 1997 due primarily to an increase in the number of engineers
employed by the Company. The provision for bad debts in the second
quarter decreased to $1.8 million from the $2.3 million recorded in
the prior year period. This decline is due primarily to lower product
sales volume.
Other Income and Expense
Other income and expense decreased $1.9 million from the
comparable prior year quarter. $1.5 million of this decline resulted
from lower interest income on investment securities and gains on sales
of assets compared to the prior year. Investment securities were sold
during the last year to fund purchases of treasury stock, resulting in
a decline in interest and dividend income.
Operation of the Company's MegaJackpotsT systems results in
interest income from both the investment of systems cash and from
investments purchased to fund jackpot payments. Interest expense on
the jackpot liability is accrued at the rate earned on the investments
purchased to fund the liability. Therefore, interest income and
expense relating to funding jackpot winners are equal and increase at
the same rate based on the growth in total jackpot winners. Interest
income from investment of systems cash increased $600,000 over the
comparable prior year period as a result of growth in proprietary
systems.
Interest expense on the corporate line of credit increased $1.0
million compared to the prior year quarter as a result of higher
average balances on the line of credit. In the prior year period, a
larger portion of interest expense associated with construction of the
Company's manufacturing facility was capitalized, resulting in an
increase in interest expense related to long-term debt in the current
period.
Six Months Ended March 31, 1998 Compared to the Six Months Ended March
31, 1997
Net income for the first six months of fiscal 1998 was $65.2
million or $.56 per diluted share compared to $61.4 million or $.49
per diluted share in the prior year. Growth in gaming operations
revenues, offset by declines in product sales, and declines in
operating expenses contributed to this improvement.
Revenues and Gross Profit Margins
Revenues for the six months ended March 31, 1998 totaled $347.1
million as compared to $353.8 million in the first half of fiscal
1997. This fluctuation resulted from a 27% increase in gaming
operations revenue offset by a decline in product sales. Gaming
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
operations revenue totaled $160.1 million and $126.2 million for the
six months ended March 31, 1998 and 1997, respectively. Growth in
the number of machines installed on the Company's MegaJackpotsT
systems and the overall level of play on Nevada Megabucks, contributed
significantly to the improvement in gaming operations revenues
relative to the prior year. The introduction of MegaJackpotsT in
Missouri and Super Megabucks in Nevada, also contributed to the
overall increase.
Product sales revenues were $187.0 million on shipments of 27,200
machines for the current period compared to $227.6 million on
shipments of 40,000 machines in the prior year period. Domestically,
17,700 units were sold in the current period compared to 29,800 units
in the first half of fiscal 1997. Fewer new casino openings and
expansions in North America resulted in the decline in shipments to
domestic markets with the decline in the Nevada market being the most
pronounced. Internationally, machine sales totaled 9,500 units during
the current period versus 10,200 units sold in the first six months of
fiscal 1997.
Gross profit on total revenues was $165.2 million and $165.0
million for the six months ended March 31, 1998 and 1997,
respectively. The gross margin on gaming operations was $86.0 million
or 54% versus $59.6 million or 47% for the current and prior year
periods, respectively. This improvement in gross profit margin is
primarily due to joint venture activities which are reported net of
expenses. Joint venture revenues, net of expenses, totaled $27.5
million during the current year to date period and were negligible in
the prior year. This improvement was offset by declining interest
rates which increase the cost of interest sensitive assets the Company
purchases to fund jackpot payments. The gross margin on product sales
decreased to 42% in the current period from 46% in the prior year as a
result of lower domestic volumes and a larger mix of international
sales and new products such as Game King and VisionT series products
which carry lower margins, yet higher gross margin dollars.
Expenses
Selling, general and administrative expenses were $43.7 million
for the six months ended March 31, 1998, a decline of 12% resulting
from cost reductions both domestically and internationally.
Depreciation and amortization expense increased $1.3 million compared
to the prior year period due to depreciation expense on the new
administrative facility and an increase in depreciation expense
resulting from a higher level of assets in the current period.
Research and development expenses for the six months ended March
31, 1998 increased $800,000 compared to the prior year period
reflecting the costs associated with higher staffing levels resulting
from the Company's increasing focus on new product development. The
provision for bad debts declined $1.9 million to $3.2 million compared
to the prior year due primarily to lower product sales volume.
Other Income and Expense
Other income and expense for the six month period ended March 31,
1998 declined $1.9 million as a result of a $1.5 million decrease in
interest income from investment securities partially offset by a $1.0
million increase in interest income from investment of proprietary
systems cash. Also contributing to the decline in other income and
expense was a $1.7 million increase in interest expense on the
corporate line of credit compared to the prior year. In the prior
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
year period, a larger portion of interest expense associated with
construction of the Company's manufacturing facility was capitalized,
resulting in an increase in interest expense related to long-term debt
in the current period.
Liquidity and Capital Resources
Working Capital
Working capital increased $41.6 million to $448.6 million during
the six months ended March 31, 1998. Changes in current assets
contributing to the overall fluctuation in working capital include
decreases in accounts receivable and current maturities of long-term
notes and contracts receivable related to lower sales volume and an
increase in inventory domestically. Accrued income taxes increased
due to the timing of estimated tax payments, partially offset by a
$5.7 million decrease in accrued employee benefit plan liabilities,
resulting from payments during the current period. Working capital
increased $18.7 million as a result of the acquisitions of businesses
(See Note 1 of the Notes to Condensed Consolidated Financial
Statements).
Cash Flow
The Company's cash and cash equivalents totaled $193.5 million at
March 31, 1998, a $41.7 million increase from the prior year end.
Cash provided by operating activities for the six months ended March
31, 1998 and 1997 totaled $58.6 million and $50.3 million,
respectively. During these periods, fluctuations in receivables and
inventories were influenced by sales volumes and timing and resulted
in the most significant changes in cash flow from operating
activities.
The Company's proprietary systems provide cash through
collections from systems to fund jackpot liabilities and use cash to
purchase investments to fund liabilities to jackpot winners. The net
cash provided by these activities was $16.9 million and $6.4 million
for the periods ended March 31, 1998 and 1997, respectively.
Proceeds from additional borrowings of $165.5 million, net of
principal repayments, were used to acquire businesses during the
period (See Note 1 of the Notes to Condensed Consolidated Financial
Statements). Purchases of treasury stock of $106.3 million were the
primary use of financing cash in the comparable prior year period.
Reclassifications
Certain amounts in the prior period financial statements have
been reclassified to be consistent with the presentation used in the
current period.
Lines of Credit
As of March 31, 1998, the Company had a $250.0 million unsecured
bank line of credit with various interest rate options available to
the Company. 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, 1998, $112.6 million was available
under this line of credit.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
In March 1998, IGT-Australia entered into a facility agreement
which includes a $80.7 million note requiring quarterly principal
payments commencing in March 1999 through December 2003. The
agreement also includes a $20.2 million line of credit. Both the
note and line of credit bear interest at various rates. At March 31,
1998, $5.3 million was available under the line of credit.
IGT-Japan had a $5.3 million line of credit available as of
March 31, 1998. The line is supported by a guarantee from the
Company and bears interest at 1.7%. Amounts owed under this line
were repaid prior to March 31, 1998.
The Company is required to comply, and is in compliance, with
certain covenants contained in these agreements 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.
Stock Repurchase Plan
A stock repurchase plan was originally authorized by the Board
of Directors in October 1990. As of April 30, 1998, the Company was
authorized to purchase a remaining 14.0 million shares under the
Board authorization. During the period September 1, 1997 to April
30, 1998, the Company reacquired 901,000 shares for an aggregate
purchase price of $21.8 million.
Recently Issued Accounting Standards
On June 30, 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." This
statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of a statement of financial position, and is effective for the
Company's fiscal year ending September 30, 1999. Management intends
to comply with the disclosure requirements of this statement.
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." This statement
establishes additional standards for segment reporting in financial
statements and is effective for the Company's fiscal year ending
September 30, 1999. Management intends to comply with the disclosure
requirements of this statement and does not anticipate a material
impact on the results of operations for each segment.
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 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: the
statement that the Company believes it is unlikely that it will incur
any losses relating to its guarantee of
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
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,"
"plans" 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 and existing
markets; delays of scheduled openings of newly constructed casinos;
the effect of economic conditions; a decline in the market
acceptability of gaming; unfavorable public referendums or anti-
gaming legislation; delays or lack of funding from regulatory
agencies for racetrack operations; political and economic instability
in developing international markets; a decline in the demand for
replacement machines; 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; 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
The information set forth in Note 9 to the Condensed
Consolidated Financial Statements is incorporated herein by
reference.
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 17, 1998, 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>
Motion Votes Cast For Votes Withheld
<S> <C> <C>
Albert J. Crosson 98,634,874 472,460
Wilbur K. Keating 98,632,732 474,602
Charles N. Mathewson 98,634,478 472,856
Warren L. Nelson 97,664,180 1,443,154
Frederick B. Rentschler 98,138,553 968,781
John J. Russell 98,632,138 475,196
Rockwell A. Schnabel 98,638,438 468,896
Claudine B. Williams 98,592,007 515,327
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.9 Facility agreement between I.G.T. (Australia) Pty.
Limited and National Australia Bank Limited, dated
March 18, 1998; Guarantee from International Game
Technology to National Australia Bank Limited, dated
March 18, 1998.
(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, 1998
INTERNATIONAL GAME TECHNOLOGY
By:/s/ Maureen Imus
Maureen Imus
Vice President, Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 235,602
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<BONDS> 0
0
0
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<CHANGES> 0
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<EPS-PRIMARY> .22
<EPS-DILUTED> .21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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
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0
0
<COMMON> 94
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<TOTAL-COSTS> 272,774
<OTHER-EXPENSES> 119,024
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<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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
0
0
<COMMON> 94
<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
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<EPS-DILUTED> .93
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's condensed consolidated statements of income and consolidated balance
sheets and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<RESTATED>
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
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<PERIOD-TYPE> 9-MOS
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<PERIOD-START> OCT-1-1996
<PERIOD-END> JUN-30-1997
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0
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</TABLE>
<TABLE> <S> <C>
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<RESTATED>
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
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0
0
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<EPS-DILUTED> 1.13
</TABLE>
