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 ended: July 3, 1999
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)
(775) 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 July 31, 1999
Common Stock 90,106,667
par value $.000625 per share
<PAGE>
International Game Technology
Table of Contents
Part I - Financial Information
PAGE
Item 1.Financial Statements:
Condensed Consolidated Statements of Income -
Three and Nine Months Ended July 3, 1999 and June 30, 1998.....4
Condensed Consolidated Balance Sheets -
July 3, 1999 and September 30, 1998............................5
Condensed Consolidated Statements of Cash Flows -
Nine months ended July 3, 1999 and June 30, 1998...............7
Notes to Condensed Consolidated Financial Statements.............9
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................14
Part II - Other Information
Item 1.Legal Proceedings...............................................24
Item 2.Changes in Securities...........................................24
Item 3.Defaults Upon Senior Securities.................................24
Item 4.Submission of Matters to a Vote of Security Holders.............24
Item 5.Other Information...............................................24
Item 6.Exhibits and Reports on Form 8-K................................24
Signature..............................................................25
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
The following condensed consolidated financial statements were prepared by
International Game Technology (referred throughout this document, together with
its consolidated subsidiaries where appropriate, as "IGT," "Company," "we,"
"our," and "us"), without audit, and include all normal adjustments considered
necessary to present fairly the financial position for the interim periods.
These adjustments are of a normal recurring nature. These financial statements
and notes are presented as permitted by the instructions to Form 10-Q and
therefore do not contain certain information included in IGT's audited
consolidated financial statements and notes for the year ended September 30,
1998. Operating results for the quarter or year to date periods do not indicate
the results that may be expected for the fiscal year ending October 2, 1999.
You should read these financial statements along with the financial
statements, accounting policies and notes included in our Annual Report on Form
10-K for the fiscal year ended September 30, 1998. We believe that the
disclosures in this document are adequate to make the information presented not
misleading. Certain amounts in the 1998 consolidated financial statements have
been reclassified to be consistent with the presentation used in the three and
nine months ended July 3, 1999.
The following trademarks are owned by IGT and are registered with the U.S.
Patent and Trademark Office: International Game Technology; IGT; the IGT logo
with spade design; Double Diamond; Megabucks; Player's Edge-Plus; and Red, White
& Blue. IGT also owns the trademark rights to the following: Game King; iGame
with Design (interactive gaming); IGS; IGT Gaming systems; MegaJackpots; Nickels
Deluxe; Slot Line; S-Plus Limited Series; Super Megabucks; Totem Pole; Vision
Series; and Vision Slot. Elvis is a registered trademark of Elvis Presley
Enterprises. Wheel of Fortune is a registered trademark of Califon Productions,
Inc. Jeopardy! is a registered trademark of Jeopardy Productions, Inc. Five-Deck
Frenzy is a trademark of Shufflemaster.
<PAGE>
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 3, June 30, July 3, June 30,
1999 1998 1999 1998
(Amounts in thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Revenues
Product sales $ 167,573 $ 130,843 $ 443,793 $ 317,859
Gaming operations 91,286 92,139 257,643 252,225
--------- --------- --------- ---------
Total revenues 258,859 222,982 701,436 570,084
--------- --------- --------- ---------
Costs and Expenses
Cost of product sales 106,339 75,586 281,635 183,351
Cost of gaming operations 33,759 40,442 103,498 114,578
Selling, general and administrative 34,552 29,021 96,265 72,755
Depreciation and amortization 6,468 5,861 18,841 12,667
Research and development 11,167 11,366 32,279 26,848
Provision for bad debts 3,240 496 6,761 3,660
--------- --------- --------- ---------
Total costs and expenses 195,525 162,772 539,279 413,859
--------- --------- --------- ---------
Income from Operations 63,334 60,210 162,157 156,225
--------- --------- --------- ---------
Other Income (Expense)
Interest income 13,938 11,181 40,052 33,517
Interest expense (21,068) (11,195) (46,253) (29,187)
Gain on the sale of assets 1,048 10,332 4,917 11,414
Other (828) (381) (1,784) (1,572)
--------- --------- --------- ---------
Other income, net (6,910) 9,937 (3,068) 14,172
--------- --------- --------- ---------
Income Before Income Taxes 56,424 70,147 159,089 170,397
Provision for Income Taxes 18,903 24,552 53,295 59,639
--------- --------- --------- ---------
Income Before Extraordinary Item 37,521 45,595 105,794 110,758
Extraordinary Loss on Early Redemption
of Debt, Net of Income Tax Benefit
of $1,639 (3,254) - (3,254) -
--------- --------- --------- ---------
Net Income $ 34,267 $ 45,595 $ 102,540 $ 110,758
========= ========= ========= =========
Basic Earnings (Loss) Per Share
Continuing operations $ 0.39 $ 0.40 $ 1.03 $ 0.97
Extraordinary loss (0.03) -- (0.03) --
--------- --------- --------- ---------
Net income $ 0.36 $ 0.40 $ 1.00 $ 0.97
========= ========= ========= =========
Diluted Earnings (Loss) Per Share
Continuing operations $ 0.39 $ 0.40 $ 1.02 $ 0.96
Extraordinary loss (0.03) -- (0.03) --
--------- --------- --------- ---------
Net income $ 0.36 $ 0.40 $ 0.99 $ 0.96
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
July 3, September 30,
1999 1998
- ---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $629,796 $175,413
Investment securities at market value 14,008 19,354
Accounts receivable, net of allowances for doubtful
accounts of $8,467 and $5,512 203,971 189,521
Current maturities of long-term notes and contracts
receivable, net of allowances 61,143 63,022
Inventories, net of allowances for obsolescence of
$18,778 and $18,574:
Raw materials 61,315 73,749
Work-in-process 4,172 3,746
Finished goods 49,898 55,659
-------- --------
Total inventories 115,385 133,154
-------- --------
Investments to fund liabilities to jackpot winners 41,796 41,216
Deferred income taxes 16,878 16,517
Prepaid expenses and other 30,189 32,346
-------- --------
Total Current Assets 1,113,166 670,543
--------- --------
Long-term notes and contracts receivable, net of
allowances and current maturities 30,165 37,750
-------- --------
Property, plant and equipment, at cost
Land 19,386 19,406
Buildings 70,987 71,136
Gaming operations equipment 86,496 73,222
Manufacturing machinery and equipment 113,999 109,576
Leasehold improvements 4,858 4,955
-------- --------
Total 295,726 278,295
Less accumulated depreciation and amortization (118,515) (109,542)
-------- --------
Property, plant and equipment, net 177,211 168,753
-------- --------
Investments to fund liabilities to jackpot winners 365,732 369,427
Deferred income taxes 136,276 131,708
Intangible assets 137,831 131,552
Other assets 48,457 33,895
-------- --------
Total Assets $2,008,838 $1,543,628
========== ==========
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Balance Sheets (continued from previous page)
<TABLE>
<CAPTION>
July 3, September 30,
1999 1998
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes payable and
capital lease obligations $ 1,674 $ 30,311
Accounts payable 53,326 57,277
Jackpot liabilities 67,054 50,659
Accrued employee benefit plan liabilities 18,198 17,512
Other accrued liabilities 78,692 44,781
----------- -----------
Total Current Liabilities 218,944 200,540
Long-term notes payable and capital lease
obligations, net of current maturities 990,182 322,510
Long-term jackpot liabilities 452,055 479,217
Other liabilities 279 85
----------- -----------
Total Liabilities 1,661,460 1,002,352
----------- -----------
Commitments and contingencies (See Note 10)
Stockholders' equity
Common stock, $.000625 par value; 320,000,000 shares
authorized; 152,802,854 and 152,586,560 shares issued 95 95
Additional paid-in capital 260,781 256,656
Retained earnings 926,771 827,542
Treasury stock; 62,150,809 and 43,721,200 shares, at cost (836,324)
(535,797)
Accumulated other comprehensive loss (3,945) (7,220)
----------- -----------
Total Stockholders' Equity 347,378 541,276
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,008,838 $ 1,543,628
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
July 3, June 30,
1999 1998
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 102,540 $ 110,758
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 39,489 29,270
Provision for bad debts 6,761 3,660
Provision for inventory obsolescence 12,403 8,039
Gain on investment securities and fixed assets (4,917) (11,414)
Common stock awards 921 1,574
(Increase) decrease in assets, net of effects from acquisitions
of businesses:
Receivables (8,564) 59,356
Inventories (20,978) (59,362)
Prepaid expenses and other (290) (2,500)
Other assets (17,735) 10,959
Net accrued and deferred income taxes, net of tax
benefit of employee stock plans 21,338 (5,940)
Increase (decrease) in accounts payable and accrued liabilities,
net of acquisitions of businesses 7,645 (16,743)
Earnings of unconsolidated affiliates (in excess of) less than
distributions 1,575 (19,928)
Other (103) (174)
--------- ---------
Total adjustments 37,545 (3,203)
--------- ---------
Net cash provided by operating activities 140,085 107,555
--------- ---------
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Statements of Cash Flows (continued from previous page)
<TABLE>
<CAPTION>
Nine Months Ended
July 3, June 30,
1999 1998
- --------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Investing Activities
Investment in property, plant and equipment (13,761) (16,818)
Proceeds from sale of property, plant and equipment 2,296
24,212
Purchase of investment securities (1,000) (15,256)
Proceeds from sale of investment securities 10,684 10,445
Proceeds from investments to fund liabilities to jackpot
winners 30,659 28,369
Purchase of investments to fund liabilities to jackpot
winners (27,544) (73,068)
Investment in unconsolidated affiliates -- (1,422)
Acquisition of businesses -- (180,790)
----------- -----------
Net cash provided by (used in) investing activities 1,334 (224,328)
----------- -----------
Cash Flows from Financing Activities
Proceeds from long-term debt 1,645,436 363,448
Principal payments on debt (1,012,494) (256,229)
Payments on jackpot liabilities (87,243) (28,369)
Collections from systems to fund jackpot liabilities 78,594
106,624
Proceeds from employee stock plans 2,737 6,515
Purchases of treasury stock (300,510) (21,879)
Payment of cash dividends (6,474) (10,228)
----------- -----------
Net cash provided by financing activities 320,046 159,882
----------- -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (7,082) (11,313)
----------- -----------
Net Increase in Cash and Cash Equivalents 454,383 31,796
Cash and Cash Equivalents at:
Beginning of Period 175,413 151,771
----------- -----------
End of Period $ 629,796 $ 183,567
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Acquisitions
On March 11, 1999, we signed a definitive agreement with Sodak Gaming, Inc.
("Sodak") to acquire Sodak, a distributor of casino gaming products and software
systems to Native American casinos and gaming operators in the United States. A
wholly-owned subsidiary of International Game Technology will acquire the
outstanding common stock of Sodak for $10 per share in cash, totaling
approximately $230 million. The transaction has been approved by Sodak
shareholders and IGT has obtained the financing required to fund the
acquisition. The acquisition remains subject to the disposition by Sodak of its
Miss Marquette riverboat casino. Sodak has signed an agreement for the sale of
the riverboat to a third party and expects the sale to occur before October 31,
1999. The completion of the sale is conditioned upon regulatory approvals,
financing and other customary conditions. Subject to Sodak's successful
completion of the sale of the Miss Marquette riverboat casino and satisfaction
of the other conditions to IGT's acquisition of Sodak, we expect the acquisition
to be completed no later than the fourth quarter of calendar 1999.
In June 1999, IGT completed its investment in Access Systems Pty., Ltd.
("Access") of Sydney, Australia. IGT owns a minority shareholder interest in
Access. IGT also holds options to purchase additional shares and notes
convertible into capital stock of Access.
We will use the equity method of accounting for this investment.
2. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were netted against
current and long-term maturities:
July 3, September 30,
1999 1998
----------------------------------------------------------
(Dollars in thousands)
Current $10,714 $10,602
Long-term 7,204 6,126
------ ------
$17,918 $16,728
======= =======
3. Intangible Assets
Intangible assets consist of the following:
July 3, September 30,
1999 1998
----------------------------------------------------------
(Dollars in thousands)
Intellectual property $ 41,656 $ 37,129
Excess of cost over net assets
acquired 107,416 98,778
--------- ---------
149,072 135,907
Less accumulated amortization (11,241) (4,355)
--------- ---------
$ 137,831 $ 131,552
========= =========
4. Concentrations of Credit Risk
The financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents and accounts,
contracts, and notes receivable. We maintain 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. We also distribute a portion of our 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:
July 3, 1999
--------------------------------------------------
Region
Nevada 29%
Atlantic City (distributor and other) 9%
Europe 9%
Other U.S. regions including joint ventures 9%
Australia 8%
Native American casinos (distributor) 8%
South America 8%
Riverboats (greater Mississippi River area) 7%
Japan 5%
Other regions (individually less than 3%) 8%
----
Total 100%
In September 1993, we sold our equity ownership interest in CMS-International
("CMS") to Summit Casinos-Nevada, Inc. ("Summit"), whose owners include senior
management of CMS. We remain as guarantor on certain indebtedness of CMS, which
at July 3, 1999, had an aggregate outstanding balance of $14.3 million,
including principal and accrued interest. On April 16, 1999, the guaranteed
notes were restructured with the lender to include the accrued interest in the
principal balance and to change the maturity dates to October 16, 1999. The
notes remain collateralized by the respective casino properties. In the event
CMS does not repay the notes in accordance with the terms, we expect to be
required to make payment under the guarantee to the lender or make other
arrangements satisfactory to the lender. If this should occur, we would record a
receivable from CMS and assess the collectibility of the receivable.
5. Senior Notes
On May 19, 1999, IGT completed the private placement of $1.0 billion in
aggregate principal amount of Senior Notes pursuant to rule 144A under the
Securities Act of 1933. The Senior Notes were issued in two tranches: $400
million aggregate principal amount of 7.875% Senior Notes, due May 15, 2004,
priced at 99.053% and $600 million aggregate principal amount of 8.375% Senior
Notes, due May 15, 2009, priced at 98.974%. A portion of the proceeds was used
to redeem previously outstanding 7.84% Senior Notes due 2004. This resulted in a
prepayment penalty of $3.3 million after tax, and is reflected in the income
statement as an extraordinary expense. Additionally, we repaid outstanding
borrowings under both our U.S. revolving bank credit facility and our Australian
credit facility and settled a forward equity share repurchase of 4.9 million
shares of our common stock. The remaining net proceeds from the offering are
expected to be used to finance our previously announced plan to acquire Sodak
and to fund working capital and our common stock repurchase program.
On June 21, 1999, IGT filed a Form S-4 registration statement under the
Securities Act of 1933 (Offer to Exchange registered Senior Notes for the
previously placed Senior Notes). The offer to exchange all outstanding 7.875%
Senior Notes due 2004 and all outstanding 8.375% Senior Notes due 2009 for
identical registered notes will expire on August 27, 1999, unless extended.
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
6. Earnings Per Share
The following table shows the reconciliation of basic earnings per share
("EPS") to diluted EPS for income before extraordinary item:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 3, June 30, July 3, June 30,
1999 1998 1999 1998
(Dollars in thousands)
<S> <C> <C> <C> <C>
Income before extraordinary item $ 37,521 $ 45,595 $105,794 $110,758
======== ======== ======== ========
Weighted average common shares outstanding 95,378 113,385 102,819 113,675
Dilutive effect of stock options outstanding 573 1,769 823 1,782
-------- -------- -------- --------
Weighted average common and potential
shares outstanding 95,951 115,154 103,642 115,457
======== ======== ======== ========
Basic earnings per share $ 0.39 $ 0.40 $ 1.03 $ 0.97
Diluted earnings per share $ 0.39 $ 0.40 $ 1.02 $ 0.96
</TABLE>
Options to purchase 2.1 million and 52,000 shares of common stock at July 3,
1999 and June 30, 1998, 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. Options to purchase 1.3 million and
55,000 shares of common stock at July 3, 1999 and June 30, 1998 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.
We purchased a total of 989,600 shares, or approximately 1% of our
outstanding common stock during the period of July 4, 1999 to August 6, 1999.
There were no other transactions during the same period which would have
materially changed the number of common shares or potential common shares
outstanding.
7. Income Taxes
The provision for income taxes is based on estimated effective annual income
tax rates. 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.
8. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, which requires the
reporting of comprehensive income and its components in the financial
statements. We adopted this Statement beginning October 1, 1998. This Statement
also requires that we classify items of other comprehensive income by their
nature in an annual financial statement. We intend to disclose this information
in our Annual Report on Form 10-K for the year ending October 2, 1999. Items of
other comprehensive income include cumulative foreign currency translation
adjustments and net unrealized gains on investment securities.
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
IGT's total comprehensive income is as follows:
Three Months Ended Nine Months Ended
July 3, June 30, July 3, June 30,
1999 1998 1999 1998
(Dollars in thousands)
Net income $34,267 $45,595 $102,540 $110,758
Net change in other comprehensive
income 3,311 (5,984) 3,275 (9,820)
------- ------- -------- --------
Comprehensive income $37,578 $39,611 $105,815 $100,938
======= ======= ======== ========
9. Supplemental Cash Flows Information
Certain noncash investing and financing activities are not reflected in the
condensed consolidated statements of cash flows.
We manufacture gaming machines which are used on our proprietary systems and
are leased to customers under operating leases. Property, plant and equipment
increased $29.0 million and $8.2 million during the nine months ended July 3,
1999 and June 30, 1998 as the net result of transfers between inventory and
fixed assets.
The tax benefit of employee stock plans totaled $450,000 and $2.9 million for
the nine month periods ended July 3, 1999 and June 30, 1998.
Payments of interest for the first nine months of fiscal 1999 and 1998 were
$36.8 million and $29.3 million. Payments for income taxes were $27.0 million
and $61.4 million for the nine month periods ended July 3, 1999 and June 30,
1998.
10. Contingencies
We have been named in and have brought lawsuits in the normal course of
business. We do not expect the outcome of these suits, including the lawsuits
described below, to have a major effect on the our financial position or results
of future operations.
Ahern
Along with a number of other public gaming corporations, IGT 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. The
Court granted the defendants' motion to transfer venue of the consolidated
action to Las Vegas. 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 amended complaint alleges 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 December 1997, the Court denied the motions that would have
dismissed the Consolidated Amended Complaint or that would have stayed the
action pending Nevada gaming regulatory action. The defendants filed their
consolidated answer to the Consolidated Amended Complaint on February 11, 1998.
At this time, motions concerning class certification are pending before the
Court.
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
WMS
In May 1994, WMS Industries, Inc. instituted a declaratory judgment action
(the "Model 400 Action") against IGT, in the United States District Court for
the Northern District of Illinois. The action sought a declaration that a
certain patent issued in 1984 and owned by IGT (the "Telnaes Patent") was
invalid and that certain reel-type slot machines then made by WMS did not
infringe the Telnaes Patent. We counterclaimed alleging that the Telnaes Patent
was infringed by WMS' reel-type slot machines.
In September 1996, the Trial Court reached a decision in favor of IGT,
finding the Telnaes Patent valid, finding WMS' model 400 slot machine to
infringe the Telnaes Patent, in which we sought a preliminary and permanent
injunction and treble damages. In July 1999, the US Court of Appeals for the
Federal Circuit affirmed the Trial Court's decision that the Telnaes Patent is
valid and that the WMS model 400 slot machine infringed the patent. The Court
affirmed the damages awarded of approximately $10 million plus accrued interest.
The Court vacated the treble damages award and remanded the case to the Trial
Court for further proceedings regarding its finding of willful infringement and
award of treble damages.
In November 1996, we commenced an action against WMS in the Trial Court seeking
a judgment declaring that WMS' Model 401 slot machine also infringed the Telnaes
patent. In December 1996, the Court granted our motion for a preliminary
injunction and enjoined WMS from the manufacture, use and sale of the Model 401
slot machine. WMS filed a notice of appeal on May 7, 1998. In July 1999, the US
Court of Appeals, applying a different infringement standard from the Trial
Court, vacated the preliminary injunction.
Bally
In July 1999, Bally Gaming, Inc. filed a complaint against IGT in the United
States District Court for the District of New Jersey alleging that certain
wide-area progressive system agreements we entered into with customers in
Atlantic City, New Jersey violate federal and New Jersey antitrust laws. The
complaint seeks declaratory and injunctive relief and damages. A hearing on
their motion for preliminary injunction has been set for September 8, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended July 3, 1999 Compared to the Three Months Ended June 30, 1998
Income before extraordinary items for the three months ended July 3, 1999
totaled $37.5 million or $0.39 per diluted share compared to $45.6 million or
$0.40 per diluted share in the prior year quarter. The extraordinary loss of
$3.3 million or $0.03 per diluted share in the current quarter was due to the
prepayment penalty on the early redemption of the 7.84% Senior Notes (see Note 5
in Notes to Condensed Consolidated Financial Statements). Net income for the
current period totaled $34.3 million or $0.36 per diluted share versus $45.6
million or $0.40 per diluted share in the year earlier period. The prior year
quarter benefited from a gain on the sale of the Australian manufacturing
facility of $10.4 million or $0.06 per diluted share.
Revenues and Gross Profit Margins
Total revenues for the third quarter of fiscal 1999 grew 16% to $258.9
million from $223.0 million in the third quarter of fiscal 1998 resulting from
growth in both domestic and international product sales. We shipped 33,700
gaming machines for product sales of $167.6 million for the current quarter
versus 22,100 machines and $130.8 million in the comparable prior year quarter.
IGT sold 20,700 gaming machines, or 61% of total units in international markets,
versus 12,500 gaming machines, or 57% of total units, during the prior year
quarter. The addition of the Barcrest product lines in March 1998, along with
growth in Japanese pachisuro sales drove the international improvement.
Domestically, IGT shipped 13,000 gaming machines during the current quarter
versus 9,500 in the year earlier period. The current quarter included shipments
to Park Place's Paris Resort and The Resort at Summerlin, two of the newest Las
Vegas casinos. IGT also provided 1,300 machines or a 67% market share to the new
MGM temporary casino in Detroit, Michigan. In June 1999, IGT became a licensed
manufacturer for Native American venues in Washington. During the quarter, IGT
sold 1,500 games, approximately a 93% market share, to a Washington licensee who
designs and markets gaming machines for placement in eight Native American
casinos. In addition, domestic volume benefited from increased demand from Sodak
during the current quarter. IGT plans to acquire Sodak by the end of calendar
1999. (See Note 1 in Notes to Condensed Consolidated Financial Statements).
Revenues from gaming operations in the third quarter of fiscal 1999 were
$91.3 million versus $92.1 million for the same period last year. The
fluctuation in gaming operations revenues from the prior year quarter was due
primarily to higher play on Nevada Megabucks in the third quarter of fiscal
1998, which was influenced by a record jackpot won in November 1998. In
comparison to the prior year, the introduction of new systems, such as Elvis,
Triple Play Poker in a MegaJackpots format, and the newest game theme,
Barcrest's Party Time, in various jurisdictions offset the decrease in Nevada
Megabucks revenue and other maturing legacy systems. The installed base of
machines operating on MegaJackpot systems grew to 14,600 units at the end of the
current quarter, up from 13,900 machines one year earlier. Of these,
approximately 10,200 are new platform, higher performing games.
The gross profit on total revenues for the third quarter of fiscal 1999
increased 11% to $118.8 million versus $107.0 million for the third quarter of
fiscal 1998 related primarily to growth in product sales. The gross profit on
product sales improved 11% to $61.2 million compared to $55.3 million for the
corresponding quarter of fiscal 1998. The gross margin percentage on product
sales was 37% for the current quarter versus 42% in the year earlier period,
reflecting a larger percentage of international sales, as well as increased
discounts and inventory obsolescence domestically. Gross profits from gaming
operations totaled $57.5 million for the current quarter compared to $51.7
million in the fiscal 1998 third quarter. The gross margin on gaming operations
improved to 63% for the quarter versus 56% for the year earlier period. The
improvement was
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, (continued)
primarily due to decreased costs of interest sensitive investments IGT purchases
to fund jackpot payments. An increase in the balance of overall gaming
operations revenues relating to joint venture activities which, for accounting
purposes, are recorded net of expenses in gaming operations revenue also
contributed to the margin improvement.
Expenses
Operating expenses were 21% of total revenues for both the current and prior
year quarters. Selling, general and administrative expenses totaled $34.6
million in the third quarter of fiscal 1999 compared to $29.0 million in the
same prior year period. This fluctuation was the result of increased domestic
advertising, marketing, and compliance expenses related to new product
offerings. Depreciation and amortization expense totaled $6.5 million and $5.9
million for the third quarters of fiscal 1999 and 1998.
Research and development expenses totaled $11.2 million for the current
quarter compared to $11.4 million for the third quarter of fiscal 1998. The
provision for bad debts totaled $3.2 million in the third quarter of fiscal 1999
versus $0.5 million in the comparable prior year quarter. This fluctuation
resulted primarily from increased provisions for international receivables
related to growing international volumes.
Other Income and Expense
Other expense for the current quarter totaled $6.9 million including interest
expense of $10.6 million from the $1.0 billion Senior Notes issued in May 1999
(see Note 5 in Notes to Condensed Consolidated Financial Statements). The
increase in interest expense was partially offset by increased interest income
on existing cash balances reserved to fund the acquisition of Sodak, the stock
repurchase program, and other strategic investments. A reduction in current
quarter foreign currency losses in excess of amounts hedged also contributed to
the change in other income and expense. Operation of IGT's MegaJackpot 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. Other income for the prior year quarter included a $10.4
million gain on the sale of the IGT-Australia building.
IGT's worldwide tax rate declined to 33.5% for the third quarter compared to
35% in the prior year. The change reflects the expiration of tax contingencies,
implementation of beneficial tax strategies related to the IGT Foreign Sales
Corporation, research and development credits and structuring of foreign
acquisitions, as well as an increase in foreign operations in jurisdictions
which have lower statutory tax rates.
Nine Months Ended July 3, 1999 Compared to the Nine Months Ended June 30, 1998
Income before extraordinary items for the first nine months of fiscal 1999
totaled $105.8 million or $1.02 per diluted share compared to $110.8 million or
$0.96 per diluted share in the prior year period. Net income for the first nine
months of fiscal 1999 totaled $102.5 million or $0.99 per diluted share compared
to $110.8 million or $0.96 per diluted share in the prior year period. The
extraordinary loss of $3.3 million or $0.03 per diluted share in the current
year-to-date period was due to the prepayment penalty on early redemption of the
7.84% Senior Notes (see Note 5 in Notes to Condensed Consolidated Financial
Statements). The prior year nine month period benefited from a gain on the sale
of the Australian manufacturing building of $10.4 million or $0.06 per diluted
share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, (continued)
Revenues and Gross Profit Margins
Total revenues for the nine months ended July 3, 1999 grew 23% to $701.4
million from $570.1 million for the nine months ended June 30, 1998. IGT shipped
91,600 gaming machines resulting in product sales of $443.8 million for the
first nine months of fiscal 1999 versus 49,300 units and $317.9 million in
product sales in the comparable prior year period. Internationally, we shipped
59,100 gaming machines, or 65% of total units, during the current year-to-date
period versus 22,000 machines, or 45% of total units, during the prior year
period. The replacement markets in the UK and Japan contributed most
significantly to the growth in international sales. Japanese sales totaled
24,900 units, driven by the introduction of IGT-Japan's latest pachisuro game
themes, Popper King, Dynamite and Elvis. Barcrest, our UK subsidiary acquired in
March 1998, sold 23,700 gaming machines during the current period.
Domestic shipments improved 19% to 32,500 gaming machines during the current
nine month period versus to 27,300 units in the comparable prior year period.
The four major new casino openings in the Las Vegas, Nevada market positively
impacted IGT during 1999. Year-to-date shipments to new Las Vegas properties
included Park Place's Paris Resort, The Resort at Summerlin, Circus Circus' new
Mandalay Bay and the Venetian Resort. Also contributing to the current year
improvement were shipments of 3,000 machines for a market share of approximately
55% to the Ontario Lottery Commission and 1,300 machines for a market share of
approximately 67% to the new MGM temporary casino in Detroit, Michigan.
Increased demand in the Native American markets during fiscal 1999 also
positively impacted domestic revenues for the current nine month period. In June
1999, IGT became a licensed manufacturer for Native American venues in
Washington. Current year sales included 1,500 games for a market share of
approximately 93% to a Washington licensee who designs and markets gaming
machines for placement in eight Native American casinos.
Revenues from gaming operations in the first nine months of fiscal 1999
increased to $257.6 million from $252.2 million for the same period last year.
This increase was primarily attributable to the continued popularity of the
Wheel of Fortune game. In addition to Wheel of Fortune, over the past year, IGT
has introduced new progressive systems with enhanced entertainment value and
improved player appeal including Elvis, Jeopardy!, Party Time, Slotopoly, Super
Megabucks and Triple Play Poker in various jurisdictions. Increases in revenue
from these new systems have partially offset revenues from IGT's legacy games,
including Nevada Megabucks, which have experienced declining play levels. The
addition of wide area progressive gaming in Iowa also contributed positively to
the overall increase in gaming operations revenues. The installed base of
machines operating on MegaJackpot systems grew to 14,600 units at the end of the
current period compared to 13,900 machines one year earlier. Of these,
approximately 10,200 are new platform, higher performing games.
The gross profit on total revenues for the nine months ended July 3, 1999
increased to $316.3 million from $272.2 million for the prior year period. This
16% improvement resulted from an increase of $27.7 million in product sales
gross profit and a $16.5 million increase in gaming operations gross profit. The
gross profit on product sales grew to $162.2 million from $134.5 million
reported for the corresponding period of fiscal 1998. The gross margin
percentage on product sales was 37% for the current nine month period compared
to 42% in the year earlier period reflecting the larger mix of international
sales, which grew to 45% of total product sales from 36% in the year earlier
period. A higher mix of new product lines, which carry higher margin dollars but
lower margin percentages, as well as increased discounts and inventory
obsolescence, influenced the domestic gross margin percentage. The gross margin
on gaming operations grew to $154.1 million or 60% in the third quarter of
fiscal 1999 versus $137.6 million or 55% for the comparable period of fiscal
1998. The improvement in gross profit margin was primarily due to the declining
cost of interest sensitive assets. Joint venture activities totaling $57.9
million, which, for accounting purposes, are reported net of expenses in gaming
operations revenue also contributed to the improvement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, (continued)
Expenses
Selling, general and administrative expenses increased $23.5 million to $96.3
million in the third quarter of fiscal 1999 in comparison to the same prior year
period. This fluctuation was primarily due to the inclusion of operating
expenses attributable to the businesses acquired in the UK and Australia in
March 1998, along with increased domestic advertising, marketing, and compliance
expenses related to new product offerings.
Depreciation and amortization expense totaled $18.8 million and $12.7 million
for the nine months ended July 3, 1999 and June 30, 1998. This increase was
primarily due to amortization of goodwill and additional depreciation of the
acquired assets.
Research and development expenses increased $5.4 million over the prior year
period due primarily to the additional research and development centers in the
UK and Australia. The provision for bad debts totaled $6.8 million and $3.7
million for the current and prior year periods. This fluctuation resulted
primarily from increased provisions for international receivables.
Operating expenses as a percent of total revenues were 22% for the period
ended July 3, 1999 versus 20% in the comparable prior year period. The fiscal
1998 year to date period included only three months of expenses related to the
Barcrest and Olympic businesses, which we acquired in March 1998. The
fluctuation in operating expenses as a percent of revenues was primarily
attributable to lower sales volume experienced by IGT-Australia.
Other Income and Expense
Other expense for the nine months ended July 3, 1999 was $3.1 million,
reflecting increased interest expense in the current quarter on the $1.0 billion
Senior Notes issued in May 1999 (see Note 5 in Notes to Condensed Consolidated
Financial Statements). The increase in interest expense was partially offset by
increased interest income on existing cash balances reserved to fund the
acquisition of Sodak, the stock repurchase program, and other strategic
investments. A reduction in current year-to-date foreign currency losses in
excess of amounts hedged also contributed to the change in other income and
expense. Operation of IGT's MegaJackpot 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 $763,000 over the comparable
prior year period as a result of growth in proprietary systems. Other income in
the prior year included a $10.4 million gain on the sale of the IGT-Australia
building.
In March 1998, IGT-Australia acquired certain assets of Olympic Amusements
Pty. Limited. IGT-Australia experienced a net loss of approximately $9.8 million
during the nine months ended July 3, 1999. Although we are addressing the
manufacturing and sales challenges in Australia, we anticipate IGT-Australia to
experience losses in the near term.
Financial Condition, Liquidity and Capital Resources
We believe that existing cash balances, short-term investments and available
borrowing capacity together with funds generated from operations will be
sufficient to meet operating requirements for the next twelve months. IGT's
unrestricted cash and short-term investments are available for strategic
investments, mergers and acquisitions, as well as to fund our stock buyback
program.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, (continued)
Working Capital
Working capital increased $424.2 million to $894.2 million since the prior
year end. This increase was primarily due to proceeds from the $1.0 billion
Senior Notes issued in May 1999. A portion of the proceeds of these notes is
expected to be used in the fourth quarter to complete the acquisition of Sodak
(see Note 1 in Notes to Condensed Consolidated Financial Statements). Additional
changes in current assets contributed to the overall fluctuation in working
capital including an increase in accounts receivable, offset by inventory
reductions. Both were the result of sales volumes. Changes in current
liabilities, contributing to the overall fluctuation in working capital,
included a decrease in current maturities of long-term debt resulting from the
repayment of outstanding debt with proceeds from the $1 billion Senior Notes
issued in May 1999. The decrease in current maturities of long-term debt was
partially offset by increases in other current liabilities, including
liabilities to jackpot winners, accrued income taxes, and accrued liabilities.
Liabilities to jackpot winners increased due to the jackpot winners' option to
elect a discounted single cash payment in lieu of annual installments.
Outstanding options to winners are classified as current. The increase in
accrued income taxes is expected to be offset by tax benefits in the fourth
quarter. Accrued liabilities includes accrued interest on new borrowings.
Cash Flows
IGT's cash and cash equivalents totaled $629.8 million at the end of the
current period, a $454.4 million increase from the prior fiscal year end. Cash
provided by operating activities for the first nine months of fiscal 1999 and
1998 totaled $140.1 million and $107.6 million. During these periods,
fluctuations in receivables and inventories, influenced by sales volumes and
timing, resulted in the most significant changes in cash flows from operating
activities.
Purchases of treasury stock of $300.5 million were the primary use of
financing cash in the current period. Proceeds from additional borrowings of
$633.0 million, net of repayments on outstanding lines of credit and Senior
Notes redeemed, were used primarily to fund stock repurchases and working
capital. We expect to use a large portion of working capital to finance our
planned acquisition of Sodak. Net borrowings in the prior year period were used
primarily to acquire businesses.
Our proprietary systems provide cash through collections from systems to fund
jackpot liabilities and from maturities of US government securities purchased to
fund jackpot liabilities. Cash is used to make payments to jackpot winners or to
purchase investments to fund liabilities to jackpot winners. These activities
used cash of $5.5 million in the current period and provided cash of $33.6
million in the prior year period.
Federal legislation was passed in October 1998 which allows jackpot winners
the option to receive the discounted value of progressive jackpots won in lieu
of annual installments. For jackpots won after this date, we have made this
offer to winners in jurisdictions which have also permitted such payments. For
jackpots won prior to the effective date of the legislation, the winner may make
this election after July 1, 1999. As a result, fiscal 1999 fourth quarter cash
flows from operating activities may increase due to the realization of deferred
tax assets related to the timing of the tax deductibility of jackpot payments.
The realization of the deferred tax asset is dependent upon the number of
winners who make this election. We cannot predict the cash flow impact at this
time.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, (continued)
Credit Facilities
Our domestic and foreign bank credit facilities totaled $275.9 million at
July 3, 1999. Of this amount, $1.7 million was drawn, $3.3 million was reserved
for letters of credit and the remaining $270.9 million was available. We are
required to comply with certain covenants contained in these agreements which,
among other things, limit financial commitments we may make without the written
consent of the lenders and require the maintenance of certain financial ratios,
minimum working capital and net worth. At July 3, 1999, we were not in breach of
any applicable covenants.
In May 1999, IGT received net proceeds of $990.1 million from the issuance of
$1.0 billion in aggregate principal amount of Senior Notes. The Senior Notes
were issued in two tranches: $400 million aggregate principal amount of 7.875%
Senior Notes, due May 15, 2004, priced at 99.053%, and $600 million aggregate
principal amount of 8.375% Senior Notes, due May 15, 2009, priced at 98.974%. A
portion of the proceeds was used to redeem previously outstanding 7.84% Senior
Notes due 2004. This prepayment resulted in an after-tax extraordinary expense
of $3.3 million. Additionally, we repaid outstanding borrowings under both our
US revolving bank credit facility and our Australian credit facility and settled
a forward equity share repurchase for 4.9 million shares of our common stock.
The remaining net proceeds from the offering are expected to be used to finance
our previously announced plan to acquire Sodak and to fund working capital and
our common stock repurchase program.
On June 21, 1999, IGT filed a Form S-4 registration statement under the
Securities Act of 1933 (Offer to Exchange registered Senior Notes for the
previously placed Senior Notes). The offer to exchange all outstanding 7.875%
Senior Notes due 2004 for the 7.875% Senior Exchange Notes due 2004 and all
outstanding 8.375% Senior Notes due 2009 became effective in July 1999. The
offer will expire on August 27, 1999, unless extended.
Stock Repurchase Plan
A stock repurchase plan was originally authorized by the Board of Directors
in October 1990. As of August 6, 1999, IGT was authorized to purchase a
remaining 3.9 million shares under the Board authorization. During the period of
October 1, 1998 to August 6, 1999, we reacquired 19.4 million shares for an
aggregate purchase price of $318.9 million. During the third fiscal quarter, IGT
entered into a forward equity purchase agreement for 4.9 million shares of its
common stock and used proceeds of the Senior Notes offering to settle the
forward agreement on May 19, 1999.
Recently Issued Accounting Standards
On June 30, 1997, the FASB issued SFAS No. 131, which establishes additional
standards for segment reporting in financial statements. This statement is
effective for our fiscal year ending October 2, 1999. We intend to comply with
the disclosure requirements of this statement in our fiscal 1999 Annual Report
on Form 10-K and we do not anticipate a material impact on the results of
operations for each segment.
On June 30, 1998, the FASB issued SFAS No. 133, which establishes accounting
and reporting standards for derivative instruments and hedging activities. This
statement is effective for the first quarter of our fiscal year ending September
29, 2001. We believe that adoption of this statement will not have a material
impact on our financial condition or results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, (continued)
Recent Legislation
In March 1999, legislation was introduced in the Nevada legislature, on behalf
of the Nevada Resort Association. This legislation proposed additional
regulations for gaming manufacturers who provide products to casino customers
through revenue sharing arrangements and wide-area progressive systems. The bill
was passed in May 1999. It requires gaming manufacturers to pay their "full
proportionate share" of: (a) the Nevada gaming revenue tax; (b) the $80 annual
per gaming machine tax; and (c) the $250 annual tax paid on slot machines by
certain Nevada casinos. The bill also imposes additional regulatory requirements
on gaming manufacturers. We do not believe the requirements of this bill will
have a material adverse effect on our results of operations.
Year 2000
The term Y2K is used to refer to a worldwide computer-related problem where
software programs and embedded programs in computer systems will not work
properly when processing a date later than December 31, 1999. If the Company or
its customers, suppliers, or other third parties fail to make corrections for
programs that have defined dates using a two-digit year, this could result in
system failure or malfunction of certain computer equipment, software, and other
devices dependent upon computerized mechanisms that are date sensitive. This
problem may cause disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities. Assessments of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is difficult to
predict the actual impact. Recognizing this uncertainty, we have and are
continuing to actively analyze, assess, and plan for various Year 2000
contingencies across the Company.
We have undertaken various initiatives intended to ensure that our computer
equipment and software will function properly with respect to dates in and
beyond the Year 2000. Information technology ("IT") systems impacted by the Year
2000 issue include systems commonly thought of as IT systems, such as
accounting, data processing and telephone/PBX systems, as well as systems that
are not commonly thought of as IT systems, such as alarm systems, security
systems, fax machines, mail machines, automated assembly lines, and other
miscellaneous systems. Both IT and non-IT systems may contain imbedded
technology which compounds the identification, assessment, remediation, and
testing efforts.
We are utilizing both internal and external resources to accomplish our Year
2000 plan, which began in December 1997. With the exception of IGT-Australia, we
expect to be substantially complete by September 1999. We estimate that as of
August 6, 1999, we had completed approximately 70% of the initiatives necessary
to fully address potential Year 2000 issues. The remaining project efforts are
underway and we anticipate these will be completed prior to any currently
anticipated impact on our computer equipment and software.
All of our subsidiaries will perform the identification, assessment,
remediation and testing phases. However, we have identified our largest
manufacturing locations, IGT (North America), IGT-Australia, IGT-Japan and
IGT-UK as critical operating locations as most other subsidiaries are dependent
upon these locations. IGT uses an AS400 for the majority of its North American
software applications, including the manufacturing process, and has identified
this as a critical system. The assessment and remediation efforts on the system
have been substantially completed. IGT-UK has finished the implementation of
Oracle as an enterprise wide improvement to its information systems and a
resolution to Year 2000 readiness issues. We engaged third parties to review the
IGT and IGT-UK information systems plans. Their recommendations have been
incorporated into our plan. IGT and IGT-UK have substantially completed the
identification, assessment and remediation phases and are now 85% completed in
the testing phase. IGT-Japan utilizes a third party to manufacture its products
and has received assurance that this manufacturer is Year 2000 ready.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, (continued)
IGT-Australia restructured their information systems department under a new
director in the third fiscal quarter and has now completed its assessment phase
of its Year 2000 efforts. Internal business systems are in the final stages of
remediation and initial testing has begun with completion projected for October
1999. The remediation of gaming systems is now fully underway and scheduled for
completion by December 1999.
In addition, we have assessed the risk and reviewed Year 2000 readiness plans
of Sodak (see Note 1 in Notes to Condensed Consolidated Financial Statements).
Sodak has implemented the integrated Oracle application system as an
enterprise-wide improvement to their information systems and a resolution to
Year 2000 processing requirements. The majority of their application systems
have been tested and remediated. At this stage, we believe that our Year 2000
deficiencies will be remedied through computer equipment and software
replacement or modification in a timely fashion.
We have also initiated efforts to ensure the readiness of our products and
services. As part of our assessment of current products and services, we have
completed upgrading all wide-area progressive jackpot system software in all
jurisdictions. All of our customers who may have products with Year 2000
readiness issues have been notified.
We have also surveyed our key vendors and service providers to determine the
extent to which interfaces with these entities make us vulnerable to Year 2000
issues. As of August 6, 1999, we received responses from approximately 90% of
such third parties. The majority of these entities provided assurances that they
are either Year 2000 ready or expect to address all their significant Year 2000
issues on a timely basis. We continue to follow-up with significant vendors and
service providers that did not initially respond, or whose responses were deemed
unsatisfactory by us. While we have developed a system of communicating with
vendors to understand their ability to continue providing services and products
through the Year 2000 without interruption, there can be no assurance that the
systems of other companies on which we may rely will be timely converted or that
such failure to convert by another company would not have an adverse effect on
our systems.
At this time, we do not believe that the cost of our Year 2000 efforts will
exceed $3.0 million, which will be funded from operating cash flows.
Approximately $1.8 million of this total was for the replacement of
non-compliant equipment and software which we will capitalize as fixed assets in
fiscal 1999. As of August 6, 1999, we spent approximately $2.0 million,
including the cost of third party reviews. Two of our subsidiaries are
implementing enterprise wide information system improvements which will also
resolve Year 2000 issues. These costs were not included in the above amount
because the implementations were not initiated specifically to resolve the Year
2000 issue. A major portion of the software remediation costs are not likely to
be incremental to our results of operations, but will represent the redeployment
of existing information technology and other resources. As a result of the
redeployment of internal resources for the Year 2000 remediation efforts,
certain enhancements of our current systems may be postponed. We do not
anticipate the postponement of these enhancements to have a significant impact
on our financial condition or results of operations.
The Year 2000 issue presents a number of other risks and uncertainties that
could impact IGT, including, but not limited to third parties whose services we
rely upon to produce and sell our products, such as key suppliers and customers,
public utilities, telecommunication providers, financial institutions, or
certain regulators of the various jurisdictions where we do business. Failure or
interruption of any of these services could result in lost production, sales, or
administrative difficulties on the part of IGT. We believe that the
implementation of new business systems and the completion of the Year 2000
project as scheduled will significantly reduce the risk of operational
difficulties within our operating systems, facilities and products. Our Year
2000 project requires the majority of our application systems to be remedied and
tested by September 30, 1999. In those instances where completion by the end of
1999 is not assured, appropriate contingency plans are in development or to be
determined by September 30, 1999. Our Year 2000 project teams are reviewing the
<PAGE>
support which may be necessary during the first week of the new year to
investigate non-functioning applications, remediate and test the programs, and
implement the corrected applications. In addition, manual back-up procedures are
being considered in user areas to ensure continuity of essential business
operations. We believe that our most reasonably likely exposure to Year 2000
readiness issues is in the IGT-Australia gaming systems. IGT-Australia is
remediating these systems and is preparing a contingency plan. While we continue
to believe the Year 2000 issues will not materially affect our consolidated
financial position or results of operations, it remains uncertain as to what
extent, if any, we may be impacted.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Some of the statements contained in this report discuss future expectations,
contain projections of results of operations or our financial condition or state
other "forward-looking" information. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The
forward-looking statements include, for example:
o the statement that the outcome of pending legal actions are not expected to
have a material adverse effect on our financial position or results of
operations
o the statements that adoption of new accounting pronouncements are not
expected to have a material impact on our financial condition or results of
operations
o the statements regarding estimated completion dates and costs for the
Year 2000 project
o other statements containing expressions such as "believes," "anticipates,"
"plans" or "expects" used in the our periodic reports on Forms 10-K and 10-Q
filed with the SEC.
We caution that such statements included in this report and in previously
filed periodic reports including reports filed on Forms 10-K and 10-Q and our
operations, financial condition and results of operations are subject to risks
and other important factors, including, without limitation, the following:
o a decline in demand for our gaming products or reduction in the growth
rate of new and existing markets
o delays of scheduled openings of newly constructed or planned casinos
o a decline in the public acceptance of gaming o a decline in the demand
for replacement machines o a decrease in the desire of established
casinos to upgrade machines in response to added competition from newly
constructed casinos
o a decline in player appeal for our gaming products or an increase in the
popularity of existing or new games of competitors
o changes in interest rates causing a reduction of investment income or in
the market interest rate sensitive investments
o with respect to legal actions to which we are a party, the discovery of facts
not presently known to us or determinations by judges, juries or other
finders of fact which do not accord with our evaluation of the possible
liability or outcome of existing litigation
o with respect to the Year 2000, IGT's ability to successfully remedy the
Year 2000 readiness issues
o unfavorable public referendums or anti-gaming legislation
o the effect of changes in economic conditions
o unfavorable legislation affecting or directed at manufacturers or operators
of gaming products and systems
o delays in approvals from regulatory agencies
o political and economic instability in developing international markets
o the loss of a significant distributor
o loss or retirement of key Company executives
o approval of pending patent applications of parties unrelated to us that
restrict the our ability to compete effectively with products that are the
subject of such pending patents or infringement upon existing patents
o the effect of regulatory and governmental actions
<PAGE>
o unfavorable determination of suitability by gaming regulatory
authorities with respect to Company officers, directors or key employees
o the limitation, conditioning or suspension of any Company gaming license
o fluctuations in foreign exchange rates, tariffs and other barriers
o adverse changes in the credit worthiness of parties with whom we have forward
currency exchange contracts
o the loss of sublessors of the leased properties abandoned by us.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our 10-Q and 10-K reports to the SEC. You should understand that it is not
possible to predict or identify all such factors. Therefore, you should not
consider any such list to be a complete set of all potential risks or
uncertainties.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In July 1999, Bally Gaming, Inc. filed a complaint against IGT in the United
States District Court for the District of New Jersey alleging that certain
wide-area progressive system agreements that IGT has entered into with its
customers in Atlantic City, New Jersey violate federal and New Jersey antitrust
laws. The complaint seeks declaratory and injunctive relief and damages. A
hearing on the plantiff's motion for preliminary injunction has been set for
September 8, 1999. IGT denies the allegations and intends to vigorously defend
this matter.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
We want to remind stockholders that a stockholder proposal submitted pursuant
to Rule 14a-8 under the Securities Exchange Act of 1934 for inclusion in our
proxy statement and form of proxy for the 2000 Annual Meeting of Stockholders
must be received by us by September 30, 1999. Such a proposal must also comply
with the requirements as to form and substance established by the Securities and
Exchange Commission for such proposals. A stockholder otherwise desiring to
bring discussion before an annual meeting of stockholders (including any
proposal relating to the nomination of a director to be elected to the Board of
Directors) must submit a proposal that is received at our principal executive
offices on or before December 14, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K, dated July 22, 1999.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 17, 1999
INTERNATIONAL GAME TECHNOLOGY
By:/s/Maureen Mullarkey
Maureen Mullarkey
Chief Financial Officer and
Vice President, Finance
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353944
<NAME> International Game Technology
<MULTIPLIER> 1000
[LEGEND]
This schedule contains summary financial information extracted from the
Condensed Consolidated Statements of Income for the nine months ended July
3, 1999 and the Condensed Consolidated Balance Sheet as of July 3, 1999.
[/LEGEND]
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Oct-02-1999
<PERIOD-START> Apr-04-1999
<PERIOD-END> Jul-03-1999
<CASH> 629,796
<SECURITIES> 14,008
<RECEIVABLES> 203,971
<ALLOWANCES> 19,181
<INVENTORY> 115,385
<CURRENT-ASSETS> 1,113,166
<PP&E> 295,726
<DEPRECIATION> 118,515
<TOTAL-ASSETS> 2,008,838
<CURRENT-LIABILITIES> 218,944
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 347,283
<TOTAL-LIABILITY-AND-EQUITY> 2,008,838
<SALES> 443,793
<TOTAL-REVENUES> 701,436
<CGS> 281,635
<TOTAL-COSTS> 385,133
<OTHER-EXPENSES> 147,385
<LOSS-PROVISION> 6,761
<INTEREST-EXPENSE> 46,253
<INCOME-PRETAX> 159,089
<INCOME-TAX> 53,295
<INCOME-CONTINUING> 105,794
<DISCONTINUED> 0
<EXTRAORDINARY> (3,254)
<CHANGES> 0
<NET-INCOME> 102,540
<EPS-BASIC> 1.00
<EPS-DILUTED> .99
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