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FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Fiscal Year Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File Number 001-10684
International Game Technology
(Exact name of registrant as specified in its charter)
Nevada 88-0173041
(State of Incorporation) (I.R.S. Employer Identification No.)
9295 Prototype Drive, Reno, Nevada 89511
(Address of principal executive offices)
Registrant's telephone number, including area code: (702) 448-7777
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassName of Each Exchange on Which Registered
Common Stock, Par Value $.000625 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 28, 1998:
$2,443,556,174
The number of shares outstanding of each of the registrant's classes of
common stock, as of November 28, 1998:
107,971,511 shares of Common Stock, $.000625 Par Value
Part III incorporates information by reference from the Registrant's
definitive Proxy Statement to be filed with the Commission within 120 days
after the close of the Registrant's fiscal year.
Table of Contents
Part I
Page
Item 1. Business 2
Item 2. Properties 23
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 7a. Quantitative and Qualitative Factors about Market Risk 35
Item 8. Consolidated Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 67
Part III
Item 10. Directors and Executive Officers of the Registrant 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management 67
Item 13. Certain Relationships and Related Transactions 67
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 68
Signatures 70
Part I
Item 1. Business
General
International Game Technology (the "Company") was incorporated in
December 1980 to acquire the gaming licensee and operating entity,
IGT, and to facilitate the Company's initial public offering. The
Company maintains a presence in all regions where gaming is legal.
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").
In March 1998, the Company completed the purchase of Barcrest
Limited ("Barcrest"), a Manchester, England-based manufacturer and
supplier of gaming related amusement devices and formed IGT-UK.
Also in March 1998, the Company purchased certain assets of Olympic
Amusements Pty. Limited ("Olympic"), a manufacturer and supplier of
electronic gaming machines, gaming systems and other gaming
equipment and services to the Australian gaming market. The Olympic
business was consolidated with IGT-Australia.
IGT is one of the largest manufacturers of computerized casino gaming
products and operators of proprietary gaming systems in the world.
The Company believes it manufactures the broadest range of
microprocessor-based gaming machines available. The gaming machine
product line includes both spinning reel slot machines and video
gaming machines. The Company has developed and operated
electronically-linked, inter-casino proprietary gaming machine
systems for more than ten years. These systems link gaming machines
in various casinos to a central computer which builds a "progressive"
jackpot which increases with every wager made throughout the system.
The systems are designed to increase gaming machine play for
participating casinos by giving players the opportunity to win
jackpots substantially larger or more frequent than those available
from gaming machines which are not linked to a progressive system.
The progressive systems developed and operated by the Company are
collectively referred to as MegaJackpots. 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. In addition,
the Company has developed and sells computerized casino management
systems which provide casino operators with slot and table game
accounting, player tracking and specialized bonusing capabilities.
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 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 and Wheel of Fortune
are registered trademarks of Califon Productions, Inc. Jeopardy! is
a registered trademark of Jeopardy Productions, Inc. Five-Deck
Frenzy is a trademark of Shufflemaster.
The consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Item 1. Business (continued)
For information concerning the revenues, operating results,
identifiable assets, and export sales of the Company's two principal
lines of business and operations by geographic region, see Note 18
of Notes to Consolidated Financial Statements.
RISK FACTORS AND CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This annual report on Form 10-K contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Sections 21E of the Securities Exchange Act
of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events, including statements containing
expressions such as "believes," "anticipates," "plans" or "expects."
The Company cautions that such statements included in this report
and in previously filed periodic reports including reports filed on
Forms 10-K and 10-Q and the Company's operations, financial
condition and results of operations are subject to risks and other
important factors, including, without limitation, the following: a
decline in demand for the Company's gaming products or reduction in
the growth rate of new and existing markets; delays of scheduled
openings of newly constructed or planned casinos; the effect of
changes in 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; 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; a decline in player appeal for the Company's gaming
products or an increase in the popularity of existing or new games
of competitors; 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 Company
executives; approval of pending patent applications of parties
unrelated to the Company that restrict the ability of the Company to
compete effectively with products that are the subject of such
pending patents or infringement upon existing patents; the effect of
regulatory and governmental actions; unfavorable determination of
suitability by gaming regulatory authorities with respect to Company
officers, directors or key employees; the limitation, conditioning
or suspension of any Company gaming license; fluctuations in foreign
exchange rates, tariffs and other barriers; adverse changes in the
credit worthiness of parties with whom the Company has forward
currency exchange contracts; the loss of sublessors of the leased
properties abandoned by the Company; and, with respect to legal
actions pending against the Company, 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.
Gaming Products
The following schedule sets forth net revenues derived from product
sales:
Fiscal Years Ended September 30,
1998 1997 1996
(Dollars in thousands)
Gaming machines
Video products $170,622 $181,266 $144,699
Spinning reel slot 165,403 183,094 254,012
Amusement with prize 22,019 - -
Pachisuro 17,466 20,569 16,732
Video gaming terminals 7,660 11,613 2,185
Other gaming products 1 93,854 64,608 64,024
Total product sales net revenue $477,024 $461,150 $481,652
_______________
1 Other gaming products includes revenues from casino management
systems, parts, equipment and service
Item 1. Business (continued)
The Company develops its gaming products for both domestic and
international markets. In domestic markets, the Company targets the
traditional casino gaming market and the government-sponsored video
machine market. In international markets, the Company targets
amusement with prize ("AWP"), casino-style, gaming-hall, and
government-sponsored video gaming markets.
Description of Gaming Products
Domestic
Over the past decade, advancements in gaming machine technology, the
advent of large, expensive theme-based casinos and growth in
legalized jurisdictions have attracted a greater number of North
American players to slot and video machines. As a result, slot
machine revenue accounts for nearly 75% of total casino revenues.
In the current environment, the casino operator is challenged to
increase the number of patrons and their length of stay in order to
improve profitability in a highly competitive market. Casino
operators are actively seeking out machines with enhanced
entertainment value such as a secondary game or bonusing features,
superior graphics and audio, and recognizable game themes. As these
new games are installed, the disparity between the older and newer
segments of the floor widens and the replacement cycle is
stimulated. In response to this trend, IGT has developed several
new product lines such as the Game King, the Vision series and the S-
Plus Limited which employ advanced technology to incorporate
enhanced entertainment and communication features while retaining
many familiar and popular features of older games.
In the video product line, IGT offers the Game King which is
marketed in both the traditional casino gaming and government-
sponsored markets. Sales of Game King machines represented 26% and
10% of total domestic units sold by the Company in 1998 and 1997,
respectively. The Reduced Instruction Set Computer ("RISC")
processor-based technology of the Game King uses Intel's processor,
the 80960. The Game King product line offers interactive game play
features and graphics in a highly secure and reliable multi-game
package. The internal architecture offers customers improved game
flexibility and expansion capabilities. The Game King also offers
improved security features including silicon signature chips in all
PC boards, enhanced door monitoring, and extensive event log with
time and date stamp available. The Game King product is approved
for use in the government-sponsored jurisdictions of Delaware,
Oregon, Rhode Island, Sweden, West Virginia, and the United States
Army. Game King is also approved and marketed in all traditional
domestic gaming jurisdictions, as well as in Australia. The Game
King platform offers single game slots and poker, the most popular
being Triple Play Draw Poker, in addition to the stud multi-game
formats. An enhanced version of the Game King video platform was
introduced at the 1998 World Gaming Congress.
The Company began sales of its new Vision series slot machine in
early calendar 1998. Vision sales totaled 16% of unit shipments
domestically by the Company in 1998. The Vision series slot
integrates traditional spinning-reel games with a state-of-the-art
liquid crystal display ("LCD") to graphically display bonus
features, game prompts and marketing messages and offers CD quality
sound and additional memory. While the Vision series looks and
feels similar to the industry standard S-Plus slot machine, it
provides enhanced functionality to the casino operator and the
player. Vision, like the Game King, utilizes an advanced 80960
Intel processor to provide more application-rich programs. Casino
operators have increased game flexibility and customization
opportunities with the Vision series. The Vision series is approved
for sale in all U. S. gaming jurisdictions as well as jurisdictions
within Canada, Europe and South America.
In fiscal 1998, the S-Plus Limited series was added to the Company's
spinning reel slot machine product mix. The S-Plus Limited series
combines the classic, reliable S-Plus spinning reel platform with
top box bonus games jointly developed by IGT and Barcrest, a
subsidiary of IGT-UK. Currently, six games for the S-Plus Limited
series are approved for sale in Nevada and pending approvals in
certain other U. S. jurisdictions.
Item 1. Business (continued)
IGT continues to offer a complete line of traditional spinning reel
slot machines sold under the trademark S-Plus. The S-Plus series
slot machines use a microprocessor system that accommodates several
progressive link configurations, enhanced audit trail functions,
selection of game software and optional side-mount or imbedded bill
acceptors. S-Plus machines can run existing S-slot programs or the
latest partitioned software which facilitates program updates,
faster game development and gaming authority approval, and increase
overall customer convenience. A game change can occur quickly by
selecting a new program chip from IGT's game library and by changing
the glass and reel strips. The S-Plus machines are manufactured in
various sizes and colors and are offered in several designs
including upright and slant-top.
The Company was the first to develop computerized video gaming and
under the Players Edge Plus trademark sells a variety of
computerized video gaming machines. The machines include video
poker and "blackjack" products in the upright, slant-top and drop-in
bar models. The Players Edge Plus line is also available in slant-
top keno, dual screen keno, bingo, large screen video poker and
video slots. Players Edge Plus machines offer player appeal, along
with functionality to the operator with features such as multilevel
progressives, imbedded and side-mount bill acceptors, enhanced sound
packages, imbedded progressive meters and data communication
devices. Similar to the S-Plus line, these games now offer an
extensive line of partitioned software.
The Company manufactures and markets video gaming terminals ("VGTs")
for government-sponsored gaming programs. The VGTs are similar to
the Company's video gaming machines, although the method of prize
payments may differ. After inserting money in a VGT, the player is
issued credit and plays the machine as a traditional video machine.
Player wagers are deducted from the credit meter and winnings are
added instead of coins being dropped into a tray. Upon completion
of play, the VGT prints out a ticket showing the remaining amounts
and value of credit. The ticket is redeemable for cash by a clerk
or teller in the retail establishment. VGTs are typically linked to
a central computer for accounting and security purposes and are
monitored by state lotteries or other government agencies.
In fiscal 1998, IGT began installing the IGT Gaming System ("IGS").
IGS supports casinos' control and information needs and replaces the
IGT Smart Marketing and Revenue Tracking ("SMART") system that had
been offered in the past. IGS is a 14 module integrated casino
system which includes player tracking, pit cage and credit, and slot
management, plus specialized modules, including bus scheduling and
events management. IGS is operational, approved and marketed in
most domestic jurisdictions as well as Australia, Canada and South
Africa. In addition to the standard IGT offerings, IGS is
programmed to use the player tracking components and bonusing
software of Acres Gaming, Inc., a gaming company specializing in the
development of ancillary gaming products, to provide the casino
operator with an enhanced ability to market to the slot player
through slot bonusing (see "Marketing and Sales").
The Company's innovations in slot and video technology have
increased the machines' earning potential by improving the ease and
speed of play, using local game preferences, enhancing entertainment
via sound, bonus features and overall aesthetics, and decreasing
down-time through improved reliability and added service features.
All new gaming machines offer a wide variety of games, innovative
designs, sophisticated security features, self-diagnostic
capabilities, and various accounting and data retention functions.
The Company's engineering and game design staff continually provide
technological improvements and ongoing game development. The visual
aspects of the product are upgraded and customized by the Company's
graphic design and silkscreen departments.
International
Gaming machines for the casino markets in Europe, South Africa and
South America are similar to the spinning reel and video games in
the North American market. Features differ in each market but the
games are generally multiple coin games with random outcomes paid in
coins returned to the customer. In some jurisdictions, the machines
pay out in the form of tickets, vouchers or tokens, rather than
coins. Gaming machines in Australia, Japan and the United Kingdom
markets, however, are produced locally and differ substantially from
domestic machines.
Item 1. Business (continued)
The Australian market is the second largest market for casino-type
gaming machines. Gaming machines manufactured and sold in Australia
utilize video and tokenized play exclusively and include enhanced
features such as free games, second screen animations, double up
features and touch and turn bonusing. The Australian gaming
machines are typically multi-reel, multi-line games with low
denominations.
In the United Kingdom, the Company manufacturers and sells AWP
machines. An AWP machine is a game of chance with low stake
wagering for amusement with low value cash prizes, typically under
$10. AWP machines are lower priced machines, approximately half the
price of an S-Plus slot machine, which contributes to a replacement
cycle of less than 18 months.
In the Japanese market, the Company manufacturers and sells
pachisuro machines. A pachisuro machine is a three reel slot
machine played with tokens and is considered a skill game which
allows the player to control the stopping of the reels. The product
is regulated by the Japanese Security Electronics and Communication
Agency ("SECTA") which defines all aspects of the game. Like the
AWP machines, pachisuro machines are lower priced and have a
replacement cycle under 18 months.
Markets for Gaming Products
North American Markets
The total installed base and the Company's share in segments of the
North American gaming market at September 30, 1998 is estimated as
follows:
Installed Base Machine Sales by IGT
Total IGT 1998 1997
Casino style
Nevada 197,100 154,900 14,100 21,400
Riverboat 94,400 79,500 6,400 10,400
Native American 80,800 58,300 5,900 7,000
Atlantic City 36,000 22,000 2,700 4,800
Cruise ship 18,400 14,000 2,200 1,900
Canada 17,600 10,600 3,500 3,800
Colorado 13,600 12,400 2,400 700
Racetracks 6,000 3,800 - 800
Other 2,200 1,800 600 1,100
Government sponsored
Canada 124,000 19,400 - 2,100
Total North America 590,100 376,700 37,800 54,000
Demand for the Company's products comes principally from four
sources: the establishment of new gaming jurisdictions; expansions of
casinos; additions of new casinos within existing gaming markets; and
the replacement of older machines. Gaming machines have a mechanical
life of approximately 10 years, however, replacement cycle times are
driven by market preference and technical advancements and as a
result, may be significantly shorter. Replacement occurs as a result
of technological advances, new designs, improvements in visual
characteristics, the development of new games, general wear and tear
from use, and the evolving preference of casino patrons. The
replacement market has also been fueled by increased competition in
the casino industry to provide the customer more entertaining and
sophisticated games than traditional slots.
Item 1. Business (continued)
Demand is also influenced by the legalization of gaming in North
America. The increased legalization and popularity of gaming as a
component of the "leisure time" industry has presented growth
opportunities for the Company. In the last decade, the introduction
of riverboat gaming in the Midwest U.S., the expansion of Native
American Class III casino gaming, the growth in the Nevada market,
Canadian market and government-sponsored gaming have expanded markets
for gaming machines. While the Company anticipates future growth in
the gaming industry, the rate of growth in the North American
marketplace has diminished since the substantial growth experienced
in the early 1990's. The further expansion of casino-style gaming in
any potential jurisdiction will continue to be the subject of public
debate with legalization typically requiring a public referendum or
other legislative action.
Nevada
Over the past several years, demand for gaming products in this
market has been influenced by the construction of new casino
properties, the expansion or refurbishment of existing operations and
replacement of gaming machines without imbedded bill acceptors. In
fiscal 1998, the Company provided gaming machines to two new Las
Vegas casinos, the Bellagio, a wholly owned subsidiary of Mirage
Resorts, Incorporated and the Reserve Hotel and Casino. In addition,
several other Nevada properties to which the Company sold gaming
machines underwent smaller-scale expansions in fiscal 1998. The
Company estimates that, domestically, 46% of current year sales were
to new or expanding properties compared to 55% in fiscal 1997.
Four major new casinos are currently under construction in Las Vegas:
Mandalay Bay, Paris Resort, Seven Circles Resorts and the Venetian.
All are scheduled to open in calendar 1999. These new properties are
expected to add approximately 8,500 units to the Nevada installed
base. The Company, at present, has commitments for product purchases
from some, but not all, of these properties.
The Company received replacement orders in fiscal 1998 from various
Nevada casinos and anticipates replacement games will continue to be
an important component of machine demand. In the past, significant
expansion such as that expected in Las Vegas in 1999 and successful
implementation of new product lines incorporating such technological
advances as bonus features, enhanced sound, multi denomination and
cashless features have influenced existing casinos to upgrade
products to be competitive. Demand for replacement products is
dependent, in part, upon the willingness of casinos to incur the
costs associated with replacing existing gaming machines with new
machines.
Throughout the 1990's, the addition of new casinos with enhanced
entertainment and leisure activities such as upscale retail, world
class dining establishments and elaborate shows, has increased demand
in the Las Vegas market. The Las Vegas market continues to attract
capital investment with several new properties currently under
construction or in the early planning stages of development. This
growth has a significant impact to the market since historically, new
properties have fueled the replacement market by encouraging existing
casinos to upgrade to new slot products in order to remain
competitive. The following casinos may be developed in fiscal 2001
and beyond: The Aladdin, Desert Inn, Hyatt Lake Las Vegas,
Millennium Circus, Rio II and the Sahara Strip. These openings are
in various developmental stages at this time and the Company does not
have commitments for orders. The completion of potential properties
after 1999 may be influenced by the level of success of the newest
properties in Las Vegas.
Atlantic City
The Atlantic City market consists of 12 large casinos which are
concentrated in the mature boardwalk area and the marina district.
During fiscal 1998, there were no new casino openings in Atlantic
City and Caesar's was the only casino to initiate an expansion. Boyd
Gaming, Mirage Resorts and MGM Grand have announced that they plan to
construct new casinos in the H-tract marina area of Atlantic City.
Construction of the first project, a Boyd and Mirage joint venture,
is estimated to be complete by 2002. The Company does not yet have
commitments for product purchases with these casinos. As in Nevada,
expansion in this market may contribute to demand for replacement
machines in the existing casinos.
Item 1. Business (continued)
The Company sells to this market through a distributor, Atlantic City
Coin and Slot Service Company ("ACCS"). See Note 13 of Notes to
Consolidated Financial Statements which Note is hereby incorporated
by reference.
Midwest Gaming
Riverboat-style gaming began in Iowa in 1991 and as of September
1998 was operating in Illinois, Indiana, Iowa, Louisiana,
Mississippi, and Missouri. The installed base of machines in the
Missouri market is expected to remain at its current level due to
legislation passed in November 1998 allowing riverboats to continue
to operate in the moat areas near the river. The Company delivered
gaming machines to the new Imperial Palace in Mississippi and
Caesars in Indiana during fiscal 1998. Major riverboat operations
scheduled to open throughout fiscal 1999 include Beau Rivage in
Mississippi with approximately 1,400 machines and Bonneville in
Missouri with approximately 950 machines. The Hollywood Casino
Resort Shreveport in Louisiana, which is a joint venture between
Hollywood Casino Corporation and Sodak Gaming, Inc., is anticipated
to open in fiscal 2000 with a potential 1,200 machines. Hollywood
Park, Inc. also plans to open a new facility in Indiana during
fiscal 2000 with approximately 800 machines. The Company currently
has commitments for product purchases from the Beau Rivage, but
otherwise does not have commitments for product purchases from these
properties.
Although gaming legislation was passed in Detroit, Michigan in 1996,
zoning and legislative problems caused several delays. The
roadblocks have now been substantially cleared and three temporary
casinos are anticipated to open in late 1999, with a potential
increase of approximately 6,000 machines to the installed base
throughout 1999 and 2000. The permanent casinos are expected to add
an additional 4,000 machines to the market in 2001 or after.
Native American Gaming
Casino-style gaming continued to expand on Native American lands
during fiscal 1998. Native American gaming is regulated under the
Indian Gaming Regulatory Act of 1988 which permits specific types of
gaming. Pursuant to these regulations, permissible gaming devices
are denoted as "Class III Gaming" which requires, as a condition to
implementation, that the Native American tribe and the state
government in which the Native American lands are located enter into
a compact governing the terms of the proposed gaming. The Company
places machines only with Native American tribes who have negotiated
compacts with their respective states and have received approval by
the U.S. Department of the Interior.
The Company, through its distributor Sodak Gaming, Inc. ("Sodak"),
began selling machines to authorized Native American casinos in 1990.
The Company has either directly or through its distributor sold
machines to Native American casinos in 17 states. Additionally,
Class III compacts are either under consideration, or there has been
ongoing litigation between Native American tribes and the state
governments in California, Florida, New York and Washington. The
favorable resolution and approval of compacts in any of these states
may provide additional market opportunities for the Company's
products.
In November 1998, a referendum passed in California which authorizes
the state to negotiate compacts with Native American tribes to
continue to operate casino gaming and could substantially expand
Native American gaming in California. However, lawsuits challenging
the constitutionality of the measure have been filed. Prior to the
November 1998 vote on Proposition 5, the state negotiated and the
U.S. Department of the Interior approved 11 Class III gaming
compacts. The approved compacts authorized pari-mutuel gaming
devices that can be provided by modification of the Company's Game
King machine platform. The Company would only commence sales once
compacts have been negotiated and approved by the U.S. Department of
the Interior and after all litigation has been resolved.
Item 1. Business (continued)
There is also potential for gaming expansion in Washington state.
Leaders of 12 tribes and the state Governor recently reached an
agreement that would permit electronic gaming devices at the state's
Native American casinos. The compact amendments have received the
Governor's approval but must still be approved by the U.S. Secretary
of the Interior and the Washington Gambling Commission. The market
is currently estimated at 10,000 games at maturity.
In addition to potential new markets, the demand for gaming equipment
could increase in Native American jurisdictions related to
replacements. The replacement of older machines has begun in a
number of states which have permitted Native American casinos.
Native American gaming experienced rapid expansion in 1992 and 1993,
suggesting that a greater proportion of the installed machine base is
entering the replacement cycle, based on overall gaming industry
trends. Demand for gaming equipment may also increase due to other
states, such as Arizona, Michigan and New Mexico, negotiating gaming
compacts with previously non-compacted tribal governments or
permitting the expansion of existing casinos.
Canada
Government-sponsored gaming in Canada is also a market for the
Company's gaming products. The Company's video gaming terminals are
currently operational in the Canadian provinces of Alberta, Manitoba,
New Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward
Island, Quebec and Saskatchewan. The Company has supplied its
Security Accounting Management System ("SAMS") central computer in
Manitoba.
In addition to government-sponsored video gaming, various Canadian
provincial governments have approved and are operating casino-style
gaming. The following provinces have casino operations: Alberta,
British Columbia, Manitoba, Nova Scotia, Ontario, Quebec,
Saskatchewan and Yukon. During fiscal 1998, the Windsor Casino
opened a permanent casino in Ontario. The Windsor Casino, the first
full service hotel and casino in Canada, installed approximately
2,000 IGT machines during 1998.
Ontario's proposed video lottery program was canceled in April 1998,
in favor of installing mechanical spinning reel slot machines in up
to 18 horse racing tracks and four new charity casinos. The Ontario
Lottery Corporation ("OLC") issued a Request for Proposal ("RFP") in
June 1998 calling for up to 13,200 mechanical spinning reel slot
machines. The Company has received an order for 3,000 machines in
Ontario and expects shipment in early 1999.
Through the British Columbia Lottery Corporation ("BCLC"), the
province of British Columbia has installed spinning-reel slot
machines in 17 charitable casinos. In July 1998, the Canadian
government approved gaming for seven destination resorts in British
Columbia. The British Columbia market potential could further
increase with the proposed addition of gaming at five racetracks and
on ten ferry boats.
Other North American Market Segments
Colorado and South Dakota offer limited stakes casino-style gaming
throughout specified historic mining towns in the cities of Black
Hawk, Central City, Cripple Creek and Deadwood. The Company also
markets its machine products to international cruise ship operators.
The Company provides gaming machines through direct sales to
government-sponsored and private racetracks in Delaware, Iowa, Rhode
Island and West Virginia. The Company also recognizes lease revenue
from machines installed at racetrack facilities in Delaware, Rhode
Island and West Virginia as discussed in the "Lease and Other Gaming
Operations" section.
In 1997, New Mexico passed legislation allowing gaming at Native
American casinos, racetracks, and fraternal organizations within the
state. Along with the existing casinos, six racetracks would each
be allowed to operate 300 gaming machines and approximately 160
fraternal organizations would each be allowed to operate 15 gaming
machines. Regulations are currently being drafted and sales are
expected to commence spring 1999.
Item 1. Business (continued)
Maryland, Massachusetts, New Hampshire and Pennsylvania are
considering the addition of gaming machines to racetrack facilities.
Future expansion is anticipated to continue in the pari-mutuel
wagering industry, however, the rate and the level of expansion is
dependent upon enabling legislation passed by the appropriate state
legislatures.
In September 1996, IGT and Dreamport, Inc. ("Dreamport"), an
indirect subsidiary of GTECH Holdings Corporation ("GTECH"), formed
a joint venture relationship named IGDreamport. In July 1998, IGT
and Dreamport terminated the joint venture in terms of future
opportunities. There are existing commitments in South Carolina and
New Mexico that will continue to be operated under terms of the
joint venture agreement.
International Markets
Demand for casino-style gaming products also exists in several
international jurisdictions. Traditionally, gaming in international
markets has consisted of both casino-style gaming, private clubs and,
in some countries, smaller-scale gaming halls. International casinos
commonly target the tourist population and are usually located in
large urban areas or designated tourist locations. The number of
large-scale casinos per jurisdiction may be limited by the
government. The casinos may be privately-owned, government-owned or
a joint venture between the state and a private operator.
Frequently, the investment in these facilities is significant and
therefore often managed by world-wide casino operators. In addition,
there are corporate and charity-run operations. The Company responds
to the specific requirements of a number of international
jurisdictions by maintaining a local presence which allows the
Company to provide products appropriate for the market.
The number of machines within gaming halls is usually fewer than what
is found in casinos and it is common to find numerous halls located
throughout a jurisdiction. The types of games within the halls can
include AWP machines as well as gaming machines. In some
jurisdictions, the machines pay out in the form of tickets, vouchers
or tokens, rather than coins. These gaming establishments are
usually privately owned and, due to the smaller size of the
locations, the investment required is significantly less than that
for casino developments.
Australia and New Zealand
The Australian market remains the largest and most established
jurisdiction for gaming products outside of North America and is
predominately a replacement market. Casino-style gaming has existed
in Australia since 1973 and now has an installed base of 6,700. The
pub and club market has existed since 1956 and now has an installed
base of 150,000. The combined market share of IGT and Olympic
machines in Australia and New Zealand is in excess of 58,000 units.
The state of New South Wales is the largest and most mature market
for gaming machines in Australia, with an estimated installed base of
87,000 gaming machines in 1,800 pubs and 1,500 not-for-profit clubs.
The New South Wales market will remain an important aspect of the
Company's sales focus, in light of legislation adopted in 1998
allowing for an additional 15 machines per hotel. In addition to New
South Wales, several Australian jurisdictions have implemented or are
considering the legalization or expansion of gaming operations within
their borders. Victoria is Australia's second largest market with an
installed base of 26,000 units.
The Company established manufacturing, sales, marketing and
distribution operations in Sydney in 1985 and began selling gaming
machines in Australia in 1986. In order to access new technologies,
a specialized game design staff and greater market share, IGT-
Australia acquired the assets of Olympic in March 1998 (see Note 2 of
Notes to Consolidated Financial Statements). Olympic has a leading
market share and installed base with particular emphasis on the New
South Wales market. The Company plans, over time, to integrate the
design, manufacturing, service and distribution functions of the two
organizations into one primary site in an effort to achieve a number
of economies of scale. In fiscal 1998, the Company had sales of
approximately 6,000 machines, including 2,000 Olympic machines,
compared to approximately 7,700 units in fiscal 1997.
Item 1. Business (continued)
New Zealand is a market with both casino-style gaming as well as
gaming in pubs and clubs. The current installed base in the New
Zealand market is approximately 13,000 gaming machines. Of these,
IGT estimates its contribution to be approximately 6,100 units. New
regulations enacted in August 1996 considerably relaxed maximum
machine numbers and prize levels for gaming machines in pubs and
clubs and contributed to increased sales to this market in fiscal
1998 and 1997. Regulations governing numbers of machines per site
and prize values may continue to be relaxed, which may allow the
Company to grow its market share.
Europe, Middle East and North Africa
The European, Middle Eastern and North African markets are serviced
by the Company's sales and distribution center located in The
Netherlands. The Company has had a direct sales presence in Europe
since 1992, where gaming is prevalent in casinos and non-casino
environments such as pubs, bars and arcades. Increasing customer
awareness of product availability combined with service and training
assistance has contributed to improvements in the Company's share of
this market. Within the European markets, AWP machines compete with
the casino-style gaming machines.
The Company estimates that throughout Europe, the Middle East and
North Africa, the market base of legally installed casino style
gaming machines is in excess of 80,000. Of these machines, the
Company estimates it manufactured 18,700. In fiscal 1998, the
Company made sales of approximately 3,000 machines in this market,
compared to 2,800 machines in fiscal 1997. The majority of these
machines were sold to casino operations in France, Greece, Lativa,
Poland, Portugal and The Netherlands. The Company also made
additional sales of video gaming terminals for a linked system in
Sweden. The Company does not anticipate substantial growth in the
European install base in the near future and therefore, is reliant
upon replacement sales.
Under an agreement with the University of Iceland Lottery ("UIL"),
the Company supplies video terminals and a central system linking
the video terminals. The central system incorporates a progressive
jackpot feature. The Iceland system, managed by the UIL, began
operating in December 1993 and continues to operate with 330 VLT's
manufactured by the Company. In fiscal 1997 this agreement was
extended through fiscal 2000.
United Kingdom
To further strengthen IGT's presence internationally, IGT-UK was
formed through the purchase of Barcrest in March of 1998 (see Note 2
of Notes to Consolidated Financial Statements). Barcrest
manufactures AWP and club jackpot machines for the Great Britain and
other European markets. These markets are primarily driven by
replacement machine sales. Barcrest also manufactures a top box for
sale into U.S. jurisdictions which enhances player appeal by creating
bonusing features. The top box has been successfully integrated with
the "S-Plus Limited" machine manufactured in North America and may
also be introduced in Latin American markets in fiscal 1999.
IGT-UK sells directly in its largest market, the U.K. Machines are
also sold through distributors to Germany, Spain, The Netherlands and
other smaller European markets. The total European market size for
AWP products is 650,000 machines with an annual replacement market of
approximately 170,000 machines. The installed base of gaming
machines in the U.K. market, which is not expected to grow in the
near term, exceeds 200,000 throughout a variety of outlets including
pubs, clubs, bingo halls, casinos, licensed betting offices and
arcades. Of this number, approximately 55,000 are replaced each
year. Since the acquisition of Barcrest, the Company sold 13,100
machines in fiscal 1998 to this market. New products, which are
typically priced lower than IGT's domestic S-Plus slot, are being
launched in the United Kingdom every four to six weeks. U.K.
manufacturers exported approximately 10,000 machines to Europe during
the year, of which the Company exported 3,500. Export opportunities
arise as various governments recognize the benefits of AWP products.
To capitalize upon these opportunities, IGT-UK has research and
development centers in Holland and Spain that design machines for
various European markets. Each model must comply with the individual
country's legislation and machine sales may fluctuate due to the
effects of the various currencies in the European markets.
Item 1. Business (continued)
South Africa
South Africa has a highly regulated gaming environment allowing
gaming in casinos and the limited payout market ("LPM"). The casino
gaming legislation in South Africa permits the provinces to license a
total of 40 casinos. The market is divided by province, with each of
the nine provinces determining the timing and granting of licenses.
There are currently 21 operational casinos in the country, although
it is anticipated that as many as eight of the existing operations
will be required to close under the provisions of the National
Gambling Act. Four casinos opened in fiscal 1998, three owned by
Tsogo Sun Holding (Proprietary) Ltd. and one owned by Global Resorts.
Four additional casinos are expected to open early in fiscal 1999.
The Company anticipates that as many as 31 new casinos may be
licensed in the country over the next several years. The Company's
sales and service office in Midrand, Gauteng, South Africa serves
this market.
All of the South African provinces are in various stages of
implementing the provisions of the National Gambling Act regarding
casino licensing. The Province of Mpumalanga has awarded three
casino licenses out of the four allocated licenses. The Gauteng
Province has awarded the six allowable licenses and five casinos are
expected to open in fiscal 1999. The Kwazulu Natal province has
awarded three small casino licenses and an additional two licenses
for large casinos are expected in early calendar 1999. All of the
other provinces have enacted gaming legislation and have established
gaming boards. By the end of fiscal 1998, the Company became
licensed as a supplier/manufacturer in three of the nine provinces
and has applications pending in two provinces. The remaining
provinces have yet to request applications for licensing.
During fiscal 1998, the Company sold approximately 1,600 casino
gaming machines in the Africa casino market, compared to 1,100 units
in fiscal 1997. The majority of these were sold in the province of
Gauteng, the second province to award licenses based on the new
legislation. Both the Kwazulu Natal and Western Cape provinces are
expected to announce casino licenses by the end of 1998. The Company
is pursuing additional sales of gaming machines to the new facilities
contemplated under the South African gaming legislation.
The National Gambling Act and most of the provincial gambling bills
also authorize LPM gaming machines in other venues such as bars,
taverns, and social or sports clubs. Licensing will be available for
operators in both casino style and LPM gaming. All suppliers must be
licensed and meet technical specifications in the gaming markets.
The specific limitations will be defined in each province's
regulations. The first LPM operator licenses for the Mpumalanga
Province are expected to be awarded in fiscal 1999.
Japan
The Japanese market consists of approximately 850,000 pachisuro
machines in more than 17,000 gaming halls. The Company estimates
that no one manufacturer has more than 20% of this installed base.
The Japan market is driven by replacements which are estimated at
approximately 500,000 machines annually. The Company opened an
office in Tokyo in 1992 and established a regional distribution
network to market the Company's pachisuro machines. IGT-Japan is a
full member in Nichidenkyo, an association of pachisuro
manufacturers. Beginning in fiscal 1999, IGT-Japan will also utilize
an in-house sales team to market products directly to customers in
Tokyo. The Company anticipates ongoing sales efforts through
existing distributors, coupled with the direct sales team, will have
a positive impact on market share and gross margin.
The Company sold approximately 9,500 units in both fiscal 1998 and
1997. Sales in the Japanese market are driven by the introduction of
new games, with each new game having a sales life of four to five
months. Therefore, success in this market is dependent on the
ability to regularly introduce new games and the popularity of each
new game introduced. The Company released its newest machine, Popper
King, at the beginning of the first quarter of fiscal 1999 and has
received orders for approximately 9,500 units. In an effort to
continually improve and enhance its products, the Company has
submitted another new game to SECTA for approval and continues to
make enhancements on upcoming models.
Item 1. Business (continued)
Barcrest KK, a Japanese subsidiary of IGT-UK, contributed 1,000 units
during the year, which were imported from IGT-UK. Barcrest KK has
applied for full membership in Nichidenkyo which would allow Barcrest
KK to manufacture products in Japan.
Latin America
Casino gaming is currently legal in various forms in Argentina,
Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Panama,
Paraguay, Peru, Uruguay and Venezuela. To serve these markets, the
Company has established offices in Buenos Aires, Argentina; Sao
Paulo, Brazil; and Lima, Peru to market its products in the Latin
American region. During fiscal 1998, the Company sold approximately
4,300 machines in the Latin American market as compared to
approximately 3,300 machines in fiscal 1997. The increase was driven
by sales to Argentina and Brazil.
During the year, the Company dissolved its joint venture
relationships with Sodak and Dreamport in Brazil. IGT is currently
supplying machines and game development to Dreamport for their
operations in Brazil.
The Company is exploring additional business opportunities within
approved jurisdictions in the Latin American marketplace. In
response to the developing Latin American marketplace, the Company
has customized existing products by translating more than 50 games
into Spanish and Portuguese and by adapting graphics and language to
local cultures.
Gaming Operations
The following table shows the revenues recorded from gaming
operations.
Years Ended September 30,
1998 1997 1996
(Dollars in thousands)
Proprietary systems $318,499 $253,953 $234,859
Lease and other gaming operations 28,600 28,867 16,941
Total $347,099 $282,820 $251,800
Proprietary Systems
The Company's revenues and net income have been significantly
enhanced through the growth in wide-area progressive systems in the
North American markets. As previously discussed, the Company
developed and operates systems that link gaming machines in various
casinos in order to build jackpots which increase with each wager
made on that system. These systems are collectively referred to as
MegaJackpots.
As of September 30, 1998, MegaJackpots were operating in 11 domestic
jurisdictions under the following 19 names: Dollars Deluxe, Fabulous
Fifties, Five Deck Frenzy, High Rollers, Jeopardy!, Megabucks,
Megapoker, Nickelmania, Nickels, Nickels Deluxe, Pinball Mania,
Pokermania, Quartermania, Quarters Deluxe, Slotopoly, Super
Megabucks, Totem Pole, Wheel of Fortune, and Wheel of Gold.
Internationally, three MegaJackpot systems are operated under the
names Megabucks, Gullnaman and Super Progresivo.
Item 1. Business (continued)
The following table presents MegaJackpots information by
jurisdiction at September 30, 1998:
Number of Number of
Jurisdiction Systems Machines
Nevada 15 6,200
New Jersey 16 2,600
Riverboat Markets 36 2,100
Native American 15 1,800
Other Domestic 7 700
International 3 500
92 13,900
The Company strives to continually provide innovation and enhanced
player appeal to its MegaJackpots line as it does with the product
lines that are sold directly to the casinos. This has been
accomplished through the introduction of feature rich games with
second event bonusing incorporating popular themes including
Jeopardy! and Wheel of Fortune. The Company's newest systems are
also utilizing the Vision series platform. Slotopoly, introduced in
September 1998 on the Vision platform, is the first system to provide
an "Instant Winner" jackpot. Instant Winner systems will provide
smaller more frequent jackpots which are paid out immediately. All
previous systems focused on large value jackpots paid out over 20 to
31 years. The Company plans to introduce two new Instant Winner
systems in early 1999. The first of these is the Elvis game, which
will feature Elvis songs, video footage and trivia through use of the
Vision series LCD and bonusing capabilities. Party Time is a
collection of four games which incorporate a top box and bonusing
features designed by Barcrest.
The Company operates some of its MegaJackpots systems under joint
marketing alliances with Anchor Games ("Anchor") and Shufflemaster
Gaming. The purpose of these strategic alliances is to combine the
game development efforts of other companies with the Company's wide-
area progressive system expertise. Wheel of Fortune, which is
offered through a joint venture with Anchor, has proven to be a
successful system. The system started in December 1996 in Nevada and
New Jersey with approximately 240 machines and as of September 1998,
5,300 machines were operating in 10 jurisdictions. Other
developments with the Anchor joint venture include Pinball Mania,
Totem Pole and Wheel of Gold. There are approximately 600 of these
machines operating in five jurisdictions.
The Company also supplies some of its MegaJackpots games as "stand
alone" games that are not linked to a progressive system in
jurisdictions where progressive systems are currently awaiting
approval. They are leased on a per machine per day basis. Stand
alone games are operated in Colorado, Connecticut, Illinois and
Indiana. Connecticut, Illinois and Indiana are new jurisdictions
added in fiscal 1998. Approximately 540 machines are operated as
stand alone games. Most of these games were developed in connection
with the Anchor joint venture.
The Company recognizes that all games, including MegaJackpot systems
games, have a finite life cycle. Therefore, a policy of
systematically replacing, either wholly or in part, older systems
experiencing declining play levels with new systems incorporating
enhanced entertainment value and improved player appeal, serves to
increase revenue generation overall as well as on a per unit basis.
During fiscal 1998, the Company removed five MegaJackpot systems in
three jurisdictions.
The operation of linked progressive systems varies among
jurisdictions as a result of different gaming regulations. In all
jurisdictions, the casinos pay a percentage of the handle to fund the
progressive jackpot. Funding of the progressive jackpot differs by
jurisdiction but is generally administered by the Company. Jackpots
are currently paid in equal installments over a 20 to 31 year period.
Instant Winner jackpots will be paid out at the time they are won. In
Atlantic City, the progressive jackpot fund is administered by a
trust managed by representatives of the participating casinos. The
trust records a liability to the Company for an annual casino
licensing fee as well as an annual machine rental fee for each
machine. In Colorado, funding of progressive jackpots is
administered by a
Item 1. Business (continued)
separate fund managed by the Company. Progressive system lease fees
are paid to the Company from this fund. In Macau, the casino pays
the Company a fee based on the net win and the casino pays the
progressive jackpot winner.
In October 1998, federal legislation was passed which would permit
the jackpot winners to elect to receive a lump sum payment of the
discounted value of progressive jackpots in lieu of annual
installments. Before the Company can offer such payments to winners,
regulatory agencies in each jurisdiction must also approve such
payments. A number of jurisdictions have approved this change and
approvals are pending in other jurisdictions (see Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Note 10 of Notes to Consolidated Financial
Statements).
The Company also offers "leased" link progressive systems which link
gaming machines within a single casino or multiple casinos of common
ownership. Currently, three major hotel casinos operate leased link
progressive systems with approximately 234 gaming machines linked on
all such systems.
Lease and Other Gaming Operations
The Company leases gaming equipment to its customers. As of
September 30, 1998, the Company leased approximately 2,300 gaming
machines primarily in the Midwestern riverboat, Nevada and West
Virginia markets. Additionally, the Company leased 370 gaming
machines in Peru. The Company has also provided approximately 1,500
machines under participation and rental agreements primarily in the
Nevada casino market and in the Iceland and Norway markets.
IGT supplied the central computer system that links approximately
9,000 video gaming terminals in Oregon. The Company currently leases
approximately 2,200 machines to the Oregon State Lottery and will
continue to provide them with video gaming terminals under a separate
lease agreement which will expire in April 2002.
Rhode Island operates a video lottery system linking VLT's at two
pari-mutuel facilities. As of September 30, 1998, there were
approximately 1,600 terminals operating on the system. IGT supplied
approximately 340 Game King multi-game video terminals installed on
this system and receives revenue for the use of the terminals. The
lease agreement with the Rhode Island Lottery will expire in
September 2000.
Under a technology provider license with the Delaware State Lottery,
the Company leases approximately 1,300 video gaming machines to the
state. These machines are located at three pari-mutuel facilities
across the state. The Company receives a percentage of revenue for
use and maintenance of these machines. The technology lease
agreement between the Company and the Delaware Lottery will expire in
December 2001. During fiscal 1998, the Delaware legislature
increased the percentage of machines that one vendor could have at
each racetrack from 50% to 65%. Also included in this legislative
action was authorization for the State Lottery to expand the total
number of machines from 3,000 to 6,000. As a result of this
legislative action, the Company anticipates increasing its number of
machines at the three pari-mutuel facilities.
The Company presently has 600 machines under lease at Mountaineer
Race Track in Chester, West Virginia. These machines are connected
to the IGT SAMS central computer, which is installed at the West
Virginia lottery offices in Charleston, West Virginia. An IGT SAMS
central system also controls 800 machines, 400 of which were provided
by IGT, at Charles Town Race Track in Charles Town, West Virginia.
In January 1993, the Company began operating gaming machines at the
Reno/Tahoe International Airport under a contract with the Washoe
County Airport Authority ("WCAA"). The Company and the WCAA share in
the net win of approximately 200 machines currently operating with a
minimum annual guaranteed amount.
Item 1. Business (continued)
Marketing and Sales
The most significant factor influencing the purchase of all types of
gaming machines is player appeal followed by a mix of elements
including service, price, reliability, technical capability and the
financial condition and reputation of the manufacturer. Player
appeal is key because it combines the machine design, hardware,
software and play features that ultimately improve the earning power
of gaming machines and the customer's return on investment. Any
decrease in the popularity of the Company's gaming products or an
increase in the popularity of existing or new products of competitors
would adversely effect the Company and its results of operations.
IGT devotes substantial resources to continually upgrade its products
and conduct ongoing game development. The Company's customer service
organization is also a significant contributor to IGT's overall
competitive position.
The Company has made significant investments in research and
development of products tailored toward the specific demands of its
customers (casino operators) as well as the users of its products.
In this context, IGT has for a number of years developed annually
more than 25 different game themes which are tested to measure
consumer appeal. IGT uses Megatest, an on-line computerized testing
and monitoring system, to evaluate and forecast acceptance of new
products. Megatest uses the Company's wide-area progressive
technology to monitor from a central computer the performance of
games placed in a representative sample of casinos throughout the
state of Nevada. The new product test games are measured against a
control group to evaluate the performance of the test games in real-
time. The Megatest program allows IGT to test more games with
greater accuracy and in a shorter time frame and results in the
release of high-performing games.
In international markets, the Company's strategy is to respond to
developing markets with local presence, customized games, new product
introductions and local production where feasible.
In addition to offering an expansive product line, the Company
provides customized services in response to specific casino requests.
These services include high quality graphics design, silkscreen
printing of gaming machine glass, video graphics and customized game
development. During the current year, the Company worked closely
with the management of the new Bellagio casino to customize the games
and machines to Bellagio's unique theme. The Company also offers
customized design services that utilize computer-aided design and
three-dimensional studio software programs. The Company's interior
design department has the ability to generate a casino floor layout
and can create a proposed casino slot mix for its customers. The
final design incorporates casino colors, themes, signage, custom
graphics and includes either an overhead floor plan layout, viewable
from any angle, or a three-dimensional moving walk-through of the
casino.
The Company considers its customer service department an important
aspect of the overall marketing strategy. IGT typically provides a
90-day service and parts warranty for its gaming machines. The
Company currently has more than 400 trained service personnel for
customer assistance and maintains service offices domestically in 11
jurisdictions and internationally in Argentina, Australia, Brazil,
England, Japan, New Zealand, Peru, South Africa and The Netherlands.
IGT also offers its customers educational programs and several
customer-related services. The Company provides customer education
in the form of installation training at IGT locations, on-site
training and videotape instruction. Other custom services include a
24-hour customer service hotline, a quarterly technical newsletter,
customer notifications, a Slot Line newsletter for slot floor
managers, and program summary reports designed to answer specific
software systems questions. The Technical Assistance Center ("TAC")
is a fully staffed facility to provide 24-hour telephone support to
all types of casino system customers. The TAC has access to a range
of field support engineering resources to resolve technical issues.
Item 1. Business (continued)
IGT also provides information to customers through a password
protected Intranet website. Customers can access this product
information network 24 hours a day, seven days a week. The system
lets users view and download a variety of information related to IGT
products and services. This system gives customers information on
demand and provides a direct link for two-way communication between
the customer and IGT.
Marketing services were expanded in September 1997, when the Company
launched its Internet site at www.igtgame.com. The 380-page site
includes information about the Company, its products, MegaJackpots
systems, job opportunities, sales offices and strategic alliances.
The most popular feature of the website is the MegaJackpots meters
that simulate current jackpot totals for over 90 progressive systems
operating in the United States. A MegaJackpot merchandise feature
was added this year with the purpose of extending the brand identity
of these popular games.
IGT markets gaming products and proprietary systems through its
internal sales staff, agents and distributors. The Company employs
more than 400 sales personnel in several United States office
locations, as well as Australia, Canada, Europe, Latin America, New
Zealand, South Africa and the United Kingdom.
IGT uses distributors for sales to specific markets including
Louisiana, New Jersey, New Zealand, Native American reservations, a
Canadian maritime province, the Caribbean, France and Japan. The
Company's agreements with distributors do not specify minimum
purchases but generally provide that the Company may terminate the
distribution agreement if certain performance standards are not met
(see Legal Proceedings).
The Company's products and services are sold to gaming operators in
jurisdictions where gaming is legal. Its products and services are
also sold to government entities which conduct gaming operations.
During fiscal 1998, the Company's ten largest customers accounted
for 25% of its gaming product sales. Sodak, the Company's principal
distributor of gaming products to Native American reservations, was
the largest purchaser of the Company's products, accounting for
approximately 8% of total product sales. The Company believes the
loss of this distributor would not have a long-term material adverse
effect on product sales of the Company, as other means of
distribution to this market are available.
The nature of the Company's business encompasses large initial orders
of gaming products upon the opening, expansion or renovation of a
casino, as well as for the start-up of government-sponsored video
gaming operations. Subsequent orders from established customers
result from remodeling or expansion of existing facilities, as well
as replacement of machines due to technological advancements, new
designs and upgrades. Sales of the Company's products can fluctuate
from quarter to quarter as new jurisdictions legalize gaming and new
casinos in established gaming markets are opened. Revenues and
earnings of casino suppliers have traditionally been considered to be
of a cyclical nature influenced by the timing of new domestic casino
openings or expansions. The Company has enjoyed some success in
lessening this cyclical effect by expanding gaming operations which
produce recurring revenues, and by geographic diversification of
product sales through international expansions.
In January 1997, the Company entered into a strategic alliance with
Acres Gaming, Inc. ("Acres") utilizing the Acres Bonusing System
("ABS"), which when combined with the Company's IGS system, was
intended to strengthen the Company's position in this marketplace.
Certain performance issues related to the ABS arose, however, which
have caused the relationship between the Company and Acres to
deteriorate. In September 1998, Al Crosson, Vice-Chairman of the
Company, resigned from the board of directors of Acres. The Company
has the right to nominate a successor director to the board of
directors of Acres, but has not elected to do so. On October 1,
1998, Acres sent to the Company a notice of intent to terminate the
Master Agreement for Product Development, Purchase and Sales between
the Company and Acres, entered into in January 1997. The Master
Agreement will terminate on January 2, 1999. On June 19, 1998, Acres
provided the Company a full money-back guarantee on approximately
$1.6 million for certain bonusing software and an advance provided by
the Company regarding the ABS software. The Company paid the advance
to Acres in June 1998 following installation of the ABS at the
Orleans Hotel & Casino ("Orleans")
Item 1. Business (continued)
in Las Vegas. In November 1998, the Company and the Orleans informed
Acres about various ABS-related deficiencies occurring at the Orleans
and the Company requested a refund of the above-mentioned amount.
Under the terms of the guarantee, Acres has 30 days to cure the
deficiencies. The Company, Acres and the Orleans are attempting to
resolve the deficiencies.
Competition
The market for gaming machines and proprietary systems is intensely
competitive.
Product Sales
U.S. and foreign manufacturers which compete with the Company in the
casino-style gaming machine market are Anchor, Aristocrat Leisure
Limited ("Aristocrat"), Bally Gaming, Inc. ("Bally"), a subsidiary of
Alliance Gaming Corporation, Casino Data Systems ("CDS"), Sigma Game,
Inc. ("Sigma"), Silicon Gaming, Inc., Video Lottery Consultants,
Inc., a subsidiary of Powerhouse Technologies, Inc. ("Powerhouse")
and WMS Industries, Inc. ("WMS"). All have developed casino products
and are either authorized to sell products or are in the licensing
process in many U.S. gaming jurisdictions. There are several
competitors for the international markets including Aristocrat,
Atronic Casino Technology, Ltd ("Atronic"), a subsidiary of Atronic
Casino Technology Distribution GMBH, Circa Group ("Circa"), Franco
Gaming, Ltd ("Franco"), a division of Recreativos Franco and
Novomatic Industries ("Novomatic").
The Company's IGS system provides accounting and player tracking
analytical support to operators. In the accounting and player
tracking systems product market, the Company competes with Bally, CDS
and several other system manufacturers.
The Company considers itself one of four primary competitors in the
video gaming terminal market. Competitors in this market include:
GTECH, Spielo, a supplier based in Canada, Powerhouse and WMS.
These suppliers have an established presence in the lottery market,
substantial resources and specialize in the development and
marketing of gaming terminals to governments. The Company continues
to view the video lottery industry as an important market for its
products.
Gaming Operations
The notable competitors in the progressive systems market are Bally
and CDS. CDS' "Xtreme Jackpots" recently received Gaming
Laboratories International, Inc.'s ("GLI") approval in October 1998.
GLI contracts with various states' gaming agencies and engages in
testing and certification of gaming machine hardware, software and
accounting systems. Worldwide, approximately 12 jurisdictions have
their own testing labs and the majority of the remainder contract
with GLI. In addition, CDS has developed a quarter slot progressive
system to compete with the Company's Quartermania and Quarters Deluxe
products. Bally's progressive system, "Thrillions," recently
received approval from Nevada regulators.
IGT provides substantial marketing and advertising support for its
MegaJackpots systems products and competes on the basis of the
Company's progressive systems brand names, product appeal, jackpot
awards, player loyalty, and technical and marketing experience.
Item 1. Business (continued)
Manufacturing and Suppliers
The Company manufactures gaming machines in Australia, the United
Kingdom, the U.S. and through manufacturing relationships with third
parties in Brazil and Japan. The manufacturing operations primarily
involve the assembly of electronic components, cables, harnesses,
video monitors and prefabricated parts purchased from outside
sources. The Company also operates a cabinet manufacturing and
silkscreen facility in the U.S. The Company has a broad base of
suppliers for its required material and utilizes multi-sourcing
practices to assure component availability. IGT purchases
approximately 17,500 discrete parts from 130 suppliers. The Company
uses its quality control groups to assure supplier quality as well
as internal quality of the products produced. Domestic
manufacturing has been ISO 9002 certified since 1996. The Company
has positive business relations with its suppliers and continually
reviews the business needs of the Company with them.
The Company generally carries a significant amount of inventory due
to the broad range of products it manufactures and to facilitate its
capacity to fill customer orders on a timely basis. At October 30,
1998 and 1997, the Company had an estimated $77.7 million and $51.6
million, respectively, in backlog orders. This represents a normal
backlog and the Company reasonably expects to fill the October 30,
1998 backlog within fiscal 1999.
Research and development activities sponsored by the Company totaled
$38.1 million, $31.1 million and $25.7 million for the years ended
September 30, 1998, 1997 and 1996, respectively. Research and
development activities for specific customers are charged to cost of
product sales and totaled $879,000, $448,000 and $835,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.
Patents, Copyrights and Trade Secrets
The Company's computer programs and technical know-how are its main
trade secrets, and management believes that they can best be
protected by using technical devices to protect the computer
programs and by enforcing contracts with certain employees and
others with respect to the use of proprietary information, trade
secrets and covenants not to compete. The Company has obtained
patents and copyrights with respect to various aspects of its games
and other products, including progressive systems and player
tracking systems, and has patent applications on file for
protection of certain developments it has created. No assurance can
be given that the pending applications will be granted. These
patents range in subject matter from new game designs, including
interactive video games and new slot game techniques, as well as
bonus and secondary game features, gaming device components such as,
coin-handling apparatus, fiber-optic light pens, coin-escalator
mechanisms, optical door interlock, linked games, gaming systems and
a variety of other aspects of video and electronic slot machines and
associated equipment. There can be no assurance that the patents
will not be infringed or that others will not develop technology
that does not violate the patents.
The Company's intellectual property portfolio includes United States
Patent No. 4,448,419, referred to as the Telnaes patent or the
"virtual reel" patent. The Telnaes patent expires in 2002. The
Company believes that rights under the Telnaes patent are important
to the manufacture of spinning reel slot machines and the expiration
of the patent may increase competition in the market for spinning
reel machines and progressive systems. However, most of the
Company's competitors currently hold licenses of various forms under
this patent including Bally, CDS, Sigma, and Universal Distributing.
As a result of the acquisitions of Barcrest and Olympic during the
current year, the Company's intellectual property portfolio includes
additional patents, trademarks and design applications. These
intellectual properties relate to and cover various aspects of the
products manufactured and marketed by these companies.
Item 1. Business (continued)
Employees
As of September 30, 1998, the Company, including all subsidiaries,
employed approximately 3,400 persons, including 556 in
administrative positions, 409 in sales and 650 in engineering. Of
the total employees, IGT, the Company's North American operations,
accounted for 2,235; IGT-Australia, 549; IGT-UK, 456; and
approximately 100 employees at other subsidiaries of the Company.
The total number of employees increased in fiscal 1998 by
approximately 800 as compared with the number of employees at
September 30, 1997, mainly due to the acquisitions of Barcrest and
Olympic.
Government Regulation
Nevada Regulation
The manufacture, sale and distribution of gaming devices in Nevada
are subject to extensive state laws, regulations of the Nevada
Gaming Commission and State Gaming Control Board (the "Nevada
Commission"), and various county and municipal ordinances. These
laws, regulations and ordinances primarily concern the
responsibility, financial stability and character of gaming
equipment manufacturers, distributors and operators, as well as
persons financially interested or involved in gaming operations.
The manufacture, distribution and operation of gaming devices
require separate licenses. The laws, regulations and supervisory
procedures of the Nevada Commission seek to (i) prevent unsavory or
unsuitable persons from having a direct or indirect involvement with
gaming at any time or in any capacity, (ii) establish and maintain
responsible accounting practices and procedures, (iii) maintain
effective control over the financial practices of licensees,
including establishing minimum procedures for internal fiscal
affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports
with the Nevada Commission, (iv) prevent cheating and fraudulent
practices, and (v) provide a source of state and local revenues
through taxation and licensing fees. Changes in such laws,
regulations and procedures could have an adverse effect on the
Company's operations.
A Nevada gaming licensee is subject to numerous restrictions.
Licenses must be renewed periodically and licensing authorities have
broad discretion with regard to such renewals. Licenses are not
transferable. Each type of machine sold by the Company in Nevada
must first be approved by the Nevada Commission, which may require
subsequent machine modification. Substantially all material loans,
leases, sales of securities and similar financing transactions must
be reported to or approved by the Nevada Commission. Changes in
legislation or in judicial or regulatory interpretations could occur
which could adversely affect the Company.
A publicly traded corporation must be registered and found suitable
to hold an interest in a corporate subsidiary which holds a gaming
license. International Game Technology has been registered by the
Nevada Commission as a publicly traded holding company and was
permitted to acquire IGT as its wholly-owned subsidiary. As a
registered holding company, it is required periodically to submit
detailed financial and operating reports to such Commission and
furnish any other information which the Commission may require. No
person may become a stockholder of, or receive any percentage of
profits from, a licensed subsidiary without first obtaining licenses
and approvals from the
Nevada Commission. Officers, directors and key employees of a
licensed subsidiary and of the Company who are actively engaged in
the administration or supervision of gaming must be found suitable.
No proceeds from any public sale of securities of a registered
holding corporation may be used for gaming operations in Nevada or
to acquire a gaming property without the prior approval of the
Nevada Commission. The Company believes it has all required licenses
to carry on its business in Nevada.
Officers, directors, and certain key employees of the Company who
are actively and directly involved in gaming activities of the
Company's licensed gaming subsidiary may be required to be licensed
or found suitable. Officers, directors, and certain key employees
of the Company's licensed gaming subsidiary must file applications
with the
Item 1. Business (continued)
Nevada Commission and may be required to be licensed or found
suitable. Employees associated with gaming must obtain work permits
which are subject to immediate suspension under certain
circumstances. In addition, anyone having a material relationship
or involvement with the Company may be required to be found suitable
or licensed, in which case those persons would be required to pay
the costs and fees of the State Gaming Control Board (the "Control
Board") in connection with the investigation. An application for
licensure or finding of suitability may be denied for any cause
deemed reasonable by the Nevada Commission. A finding of
suitability is comparable to licensing and both require submission
of detailed personal and financial information followed by a
thorough investigation. Changes in licensed positions must be
reported to the Nevada Commission. In addition to its authority to
deny an application for a license or finding of suitability, the
Nevada Commission has jurisdiction to disapprove a change in
position by such officer, director, or key employee.
The Nevada Commission has the power to require the Company and its
licensed gaming subsidiary to suspend or dismiss officers,
directors or other key employees and to sever relationships with
other persons who refuse to file appropriate applications or whom
the authorities find unsuitable to act in such capacities.
Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and its licensed gaming subsidiary are required to
submit detailed financial and operating reports to the Nevada
Commission. If it were determined that gaming laws were violated by
a licensee, the gaming licenses it holds could be limited,
conditioned, suspended or revoked subject to compliance with certain
statutory and regulatory procedures. In addition to the licensee,
the Company and the persons involved could be subject to substantial
fines for each separate violation of the gaming laws at the
discretion of the Nevada Commission. In addition, a supervisor
could be appointed by the Nevada Commission to operate the Company's
gaming property and, under certain circumstances, earnings generated
during the supervisor's appointment could be forfeited to the State
of Nevada. The limitation, conditioning or suspension of any gaming
license or the appointment of a supervisor could (and revocation of
the gaming license would) materially and adversely affect the
Company's operations.
The Nevada Commission may also require any beneficial holder of the
Company's voting securities, regardless of the number of shares
owned, to file an application, be investigated, and be found
suitable, in which case the applicant would be required to pay the
costs and fees of the Control Board investigation. If the
beneficial holder of voting securities who must be found suitable is
a corporation, partnership, or trust, it must submit detailed
business and financial information including a list of beneficial
owners. Any person who acquires 5% or more of the Company's voting
securities must report the acquisition to the Nevada Commission; any
person who becomes a beneficial owner of 10% or more of the
Company's voting securities must apply for a finding of suitability
within 30 days after the Chairman of the Nevada Board mails the
written notice requiring such finding.
Under certain circumstances, an Institutional Investor, as such term
is defined in the Nevada Regulations, which acquires more than 10%,
but not more than 15%, of the Company's voting securities may apply
to the Nevada Commission for a waiver of such finding of suitability
requirements, provided the institutional investor holds the voting
securities for investment purposes only. An institutional investor
will not be deemed to hold voting securities for investment purposes
unless the voting securities were acquired and are held in the
ordinary course of business as an institutional investor and not for
the purpose of causing, directly or indirectly, the election of a
majority of the board of directors of the Company, any change in the
Company's corporate charter, bylaws, management, policies or
operations of the Company, or any of its gaming affiliates, or any
other action which the Nevada Commission finds to be inconsistent
with holding the Company's voting securities for investment purposes
only. Activities which are not deemed to be inconsistent with
holding voting securities for investment purposes only include: (i)
voting on all matters voted on by stockholders; (ii) making
financial and other inquiries of management of the type normally
made by securities analysts for informational purposes and not to
cause a change in its management, policies or operations; and (iii)
such other activities as the Nevada Commission may determine to be
consistent with such investment intent.
Item 1. Business (continued)
The Nevada Commission has the power to investigate any debt or
equity security holder of the Company. The Clark County Liquor and
Gaming Licensing Board, which has jurisdiction over gaming in the
Las Vegas area, may similarly require a finding of suitability for a
security holder. The applicant stockholder is required to pay all
costs of such investigation. The bylaws of the Company provide for
the Company to pay such costs as to its officers, directors or
employees.
Any person who fails or refuses to apply for a finding of
suitability or a license within 30 days after being ordered to do so
by the Nevada Commission or Chairman of the Nevada Board may be
found unsuitable. The same restrictions apply to a record owner if
the record owner, after request, fails to identify the beneficial
owner. Any stockholder found unsuitable and who holds, directly or
indirectly, any beneficial ownership of the Common Stock beyond such
period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to
disciplinary action, and possible loss of its approvals, if, after
it receives notice that a person is unsuitable to be a stockholder
or to have any other relationship with the Company, the Company (i)
pays that person any dividend or interest upon voting securities of
the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by
that person, (iii) gives remuneration in any form to that person,
for services rendered or otherwise, or (iv) fails to pursue all
lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value. Additionally the
Clark County authorities have taken the position that they have the
authority to approve all persons owning or controlling the stock of
any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of
any debt security of the Company to file applications, be
investigated and be found suitable to own the debt security of the
Company. If the Nevada Commission determines that a person is
unsuitable to own such security, then pursuant to the Nevada Gaming
Control Act (the "Nevada Act"), the Company can be sanctioned,
including the loss of its approvals, if without the prior approval
of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes
any voting right by such unsuitable person in connection with such
securities; (iii) pays the unsuitable person remuneration in any
form; or (iv) makes any payment to the unsuitable person by way of
principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Commission at any time. If any
securities are held in trust by an agent or by a nominee, the record
holder may be required to disclose the identity of the beneficial
owner to the Nevada Commission. A failure to make such disclosure
may be grounds for finding the record holder unsuitable. The
Company is also required to render maximum assistance in determining
the identity of the beneficial owner. The Nevada Commission has the
power at any time to require the Company's stock certificates to
bear a legend indicating that the securities are subject to the
Nevada Act and the regulations of the Nevada Commission. To date,
the Nevada Commission has not imposed such a requirement.
The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or
proceeds therefrom are intended to be used to construct, acquire or
finance gaming facilities in Nevada, or retire or extend obligations
incurred for such purposes. Such approval, if given, does not
constitute a finding, recommendation, or approval by the Nevada
Commission or the Nevada Board to the accuracy or adequacy of the
prospectus or investment merits of the securities. Any
representation to the contrary is unlawful. Changes in control of
the Company through merger, consolidation, acquisition of assets or
stock, management or consulting agreements or any form of takeover
cannot occur without the prior investigation of the Control Board
and approval of the Nevada Commission. Entities seeking to acquire
control of the Company must satisfy the Nevada Board and Nevada
Commission in a variety of stringent standards prior to assuming
control of the Company. The Nevada Commission may also require
controlling stockholders, officers, directors and other persons
having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as
part of the approval process relating to the transaction.
Item 1. Business (continued)
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other
corporate defense tactics that affect corporate gaming licensees in
Nevada, and corporations whose stock is publicly-traded that are
affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established
a regulatory scheme to ameliorate the potentially adverse effects of
these business practices upon Nevada's gaming industry and to
further Nevada's policy to (i) assure the financial stability of
corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and
(iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before the Company can make
exceptional repurchases of voting securities above the current
market price thereof and before a corporate acquisition opposed by
management can be consummated. Nevada's gaming laws and regulations
also require prior approval by the Nevada Commission if the Company
were to adopt a plan of recapitalization proposed by the Company's
Board of Directors in opposition to a tender offer made directly to
its stockholders for the purpose of acquiring control of the
Company.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such
persons (collectively, "Licensees"), and who proposes to become
involved in a gaming venture outside of Nevada is required to
deposit with the Control Board, and thereafter maintain, a revolving
fund in the amount of $10,000 to pay the expenses of investigation
by the Control Board of the licensee's participation in foreign
gaming.
The revolving fund is subject to increase or decrease at the
discretion of the Nevada Commission. Thereafter, Licensees are
required to comply with certain reporting requirements imposed by
the Nevada Act. A licensee is also subject to disciplinary action
by the Nevada Commission if it knowingly violates any laws of the
foreign jurisdiction pertaining to the foreign gaming operation,
fails to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming
operations, engages in activities that are harmful to the State of
Nevada or its ability to collect gaming taxes and fees, or employs a
person in the foreign operation who has been denied a license or
finding of suitability in Nevada on the grounds of personal
unsuitability.
Other Jurisdictions
Many other jurisdictions in which the Company does business require
various licenses, permits, and approvals in connection with the
manufacture and/or the distribution of gaming devices, and operation
of progressive systems, typically involving restrictions similar in
most respects to those of Nevada.
Thus far the Company has never been denied any such necessary
governmental licenses, permits or approvals. No assurances, however,
can be given that such required licenses, permits or approvals will
be given or renewed in the future.
The National Gambling Impact Study Commission was created in August
1996 to conduct a comprehensive legal and factual study of the
social and economic impacts of gambling on federal, state, local and
Native American tribal governments and on communities and social
institutions. Their report is due to Congress, the President and
the governors by June 20, 1999. The impact of the results of this
study on the Company are unknown at this time.
Item 2. Properties
The Company has completed the three year project to construct its
new "South Meadows" facility in Reno, Nevada. The manufacturing and
warehousing facility was completed in January 1996, the corporate
offices were completed in March 1997, and the 85,000 square foot
cabinet manufacturing facility was completed in April 1998. The
combined square footage of these facilities is approximately 1.0
million square feet. Essentially, all employees in Reno, Nevada now
work at the South Meadows facility. The total cost of these
facilities, including the site, was $93.7 million.
Item 2. Properties, (continued)
In connection with its previous manufacturing facilities in Reno,
the Company leases two buildings with a total square footage of
approximately 179,000. The lease on these facilities expires in
2003. The Company has vacated the buildings and subleases 91,500
square feet to third parties. A sublessor will be sought for the
remaining space.
Additionally, IGT leases approximately 140,000 square feet of office
and warehouse space in Las Vegas, Nevada along with approximately
156,000 square feet in other Nevada locations and various
jurisdictions where it conducts business including Canada, Colorado,
Delaware, Florida, Indiana, Iowa, Louisiana, Mississippi, Missouri,
Montana and New Jersey.
IGT-Europe leases approximately 35,000 square feet of office and
warehouse space in Hoofddorp, The Netherlands.
IGT-Australia leases approximately 162,900 square feet of office,
production and warehouse space in Sydney, New South Wales,
Australia. In Wellington, New Zealand, IGT-Australia owns a 12,000
square foot office and warehouse facility. Additionally, IGT-
Australia leases approximately 63,900 square feet of office and
warehouse space in various locations throughout Australia.
IGT-UK owns a 122,300 square foot manufacturing facility and leases
approximately 17,200 square feet of manufacturing space in Ashton,
UK. Additionally, IGT-UK leases 29,200 square feet of warehouse
space in Newark, UK.
Internationally, the Company leases approximately 39,000 square feet
of office and warehouse space in Argentina, Brazil, Japan, Peru and
South Africa.
Item 3. Legal Proceedings
The Company has been named in and has brought lawsuits in the normal
course of business. Management does not expect the outcome of these
suits to have a material adverse effect on the Company's financial
position or results of future operations. For a description of
certain of these matters, see Note 13 of Notes to Consolidated
Financial Statements, which Note is hereby incorporated by reference
in response to this item.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
The Company's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol "IGT". The following table sets forth for
the periods presented the high and low sales prices of the common
stock as traded on the NYSE:
Fiscal 1998 High Low
First Quarter $26 13/16 $21 7/8
Second Quarter 26 3/16 23 3/16
Third Quarter 28 9/16 23 5/8
Fourth Quarter 28 7/8 18 1/2
Fiscal 1997 High Low
First Quarter $23 1/2 $17 5/8
Second Quarter 19 3/4 16 1/4
Third Quarter 19 1/8 15 3/8
Fourth Quarter 23 1/4 16 1/2
As of November 20, 1998, there were approximately 5,421 record
holders of the Company's common stock. The closing price of the
common stock was $23 1/16 on that date.
The Company declared four quarterly dividends of $.03 per share in
both fiscal 1998 and fiscal 1997. It is anticipated that comparable
cash dividends will continue to be paid in the future.
The Company's transfer agent and registrar is The Bank of New York ,
P.O. Box 11258, Church Street Station, New York, NY 10286, (800) 524-
4458.
Item 6. Selected Financial Data
The following information has been derived from the Company's
consolidated financial statements:
Years Ended September 30,
1998 1997 1996 1995 1994
(Amounts in thousands, except
per share data)
Selected Income Statement Data
Total revenues $ 824,123 $ 743,970 $ 733,452 $620,786 $674,461
Income from operations $ 218,877 $ 191,437 $ 169,833 $139,341 $197,906
Net income $ 152,446 $ 137,247 $ 118,017 $ 92,648 $140,447
Basic earnings per share $ 1.35 $ 1.14 $ 0.93 $ 0.71 $ 1.08
Diluted earnings per share $ 1.33 $ 1.13 $ 0.93 $ 0.71 $ 1.05
Cash dividends declared
per common share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12
Weighted average common
shares outstanding 113,064 120,715 126,555 130,198 129,632
Weighted average common and
common equivalent shares
outstanding 114,703 121,829 127,412 131,094 135,858
Selected Balance Sheet Data
Working capital $ 470,003 $ 406,958 $ 488,150 $508,917 $480,698
Total assets $1,543,628 $1,215,052 $1,154,187 $971,698 $868,008
Long-term notes payable and
capital lease obligations $ 322,510 $ 140,713 $ 107,155 $107,543 $111,468
Stockholders' equity $ 541,276 $ 519,847 $ 623,200 $554,090 $520,868
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The Company operates principally in two lines of business: the
manufacture and sale of gaming products (product sales); and
development and operation of proprietary systems and gaming equipment
leasing (gaming operations).
Fiscal 1998 Compared to Fiscal 1997
Net income for the year ended September 30, 1998 totaled $152.4
million or $1.33 per diluted share compared to $137.2 million or
$1.13 per diluted share for fiscal 1997. Continued growth in
proprietary systems revenue and increased international product
sales, primarily due to acquisitions, were the most significant
contributors to the 11% improvement in net income over the prior
year period.
Revenues and Cost of Sales
Fiscal 1998 revenues of $824.1 million improved 11% over fiscal 1997
revenues of $744.0 million. This improvement resulted from a 23%
increase in gaming operations revenues as well as a small increase
in product sales.
The Company shipped 77,000 gaming machines for total product sales
revenues of $477.0 million in fiscal 1998 compared to 79,300 units
for $461.2 million in the prior fiscal year. Domestic revenues were
influenced by a shift in demand to the Company's newer, more
advanced product lines such as the Game King, S-Plus Limited and
Vision machines. Due to the advanced features and components of
these products, they carry a higher average price per unit. The
percentage of new product lines increased to 43% of total domestic
units sold for fiscal 1998, compared to 10% in the prior year,
resulting in higher average revenue per unit overall. Domestic
shipments totaled 37,800 units for the year ended September 30, 1998
compared to 54,000 units in the year earlier period. The Company
maintained its market share in domestic markets where fewer new
casino openings and expansions slowed growth in fiscal 1998.
Fiscal 1998 domestic shipments included 5,900 units to Sodak, the
Company's distributor to Native American markets, and 2,100 machines
shipped to Bellagio, Mirage Resorts' newest luxury resort in Las
Vegas.
International unit shipments of 39,200 accounted for 51% of total
units, the highest percentage in Company history, compared to 25,300
in fiscal 1997. International unit shipments improved 55% due
primarily to acquisitions along with improved sales in South Africa
and Latin America. Barcrest, the Company's recently acquired
subsidiary in the U.K., sold 13,100 units since its acquisition by
the Company in March 1998. Machine shipments to Argentina and other
Latin America markets increased to 4,300 units in the current year,
1,000 more than in fiscal 1997. The Company sold 1,600 units in the
South African market including sales to newly licensed casinos in
the Gauteng province. Shipments to other international
jurisdictions including Europe, Japan and Asia remained consistent
or increased slightly year over year. Machine shipments in the
Australia market totaled 6,200 units in fiscal 1998, including 2,000
Olympic machines, compared to 7,700 units last year.
The gross margin on product sales was 41% in the current year period
compared to 44% in fiscal 1997. This fluctuation is the result of
an increase in the mix of new product lines, including Game King, S-
Plus Limited and Vision, which have lower gross margin percentages
yet higher gross margin dollars. The gross margin was also impacted
by the higher percentage of international sales during 1998 which
are typically at lower gross margins.
The pace of growth within domestic and international markets is
outside the control of the Company and has been and continues to be
influenced by public opinion and the legal and electoral processes.
The Company cannot predict the rate at which domestic and
international markets will develop and any slowdown or delay in the
growth of new markets will adversely affect the Company's future
results.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Gaming operations revenue totaled $347.1 million and $282.8 million
for the years ended September 30, 1998 and 1997, respectively. This
23% increase was the result of continued popularity of Wheel of
Fortune, strong play on Nevada Megabucks and the introduction of new
systems. The total installed base of gaming machines operating on
the Company's MegaJackpot systems at September 30, 1998 increased to
13,900 games on 92 systems from 11,700 machines on 67 systems at the
end of fiscal 1997. Joint venture games including Wheel of Fortune
contributed $65.2 million to total gaming operations revenues.
Joint venture results are reported net of expenses in gaming
operations revenue. The Nevada Megabucks jackpot attained record
levels in 1998 contributing to the year over year improvement in
gaming operations revenues. IGT introduced 15 new systems in 11
jurisdictions during the year including Slotopoly in Nevada and
Jeopardy! in six jurisdictions. The current year also benefited
from a full year of operation of MegaJackpots in Missouri where
linked progressive systems were introduced in June 1997. The
Company continues to pursue additional markets, domestically and
internationally, for its linked progressive games.
The gross margin on gaming operations revenues was 54% compared to
49% in the prior fiscal year. This improvement was due primarily to
profits from joint venture activities which, for accounting
purposes, are reported net of expenses in gaming operations
revenues. However, declining interest rates for the year resulted
in higher costs for the interest-sensitive assets which the Company
purchases to fund jackpot payments. The Company anticipates
declining interest rates will continue to increase costs of
operations into fiscal year 1999.
Expenses
Operating expenses as a percent of total revenue were 20% in both
fiscal 1998 and 1997. The $7.6 million increase in selling, general
and administrative expenses reflects the additional operating
expenses of Barcrest and Olympic. Domestic selling, general and
administrative expenses remained consistent with the prior year.
Depreciation and amortization expenses totaled $18.6 million in the
current year compared to $11.8 million in fiscal 1997. This
increase reflects the amortization of the excess of the purchase
price over the net assets acquired in the Barcrest and Olympic
acquisitions as well as additional depreciation on the acquired
assets.
Research and development expenses increased $7.0 million relative to
the prior year. The additional research and development centers in
the U.K. and Australia and the Company's commitment to new product
development domestically contributed to a 50% increase in research
and development personnel from the prior year. Bad debt expense
declined relative to the prior year as the Company aligned the
receivable reserve with favorable collection experience.
Other Income and Expense
Other income and expense decreased $5.5 million to $15.7 million for
the year compared to $21.2 million for the prior year. This
decrease is primarily due to increased interest costs of $5.2
million on the corporate and Australian lines of credit due to
borrowings related to the acquisitions of Barcrest and Olympic and
treasury stock purchases. Operation of the Company'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 $2.4 million over fiscal 1997 as a result of growth
in proprietary systems.
The Company sold its Australian manufacturing and office facility at
a gain of approximately $10.4 million during the year. The Company
leases back approximately one third of the facility for its
Australian operations. The gain on the sale of assets in the prior
period related to sales of investment securities.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Business Segments Operating Profit (See Note 18 of Notes to
Consolidated Financial Statements)
Manufacturing and gaming operations operating profit reflects an
allocation of selling, general, administrative and engineering
expenses to each of these business segments.
Manufacturing operating profit was $84.2 million for the year ended
September 30, 1998 compared to $109.7 million in the prior period.
This fluctuation resulted from a 3% decline in product sales gross
margin due to lower unit sales volume and an increase in the sales of
new product lines that have a lower gross margin. A higher
percentage of international sales, which typically have lower gross
margins, also impacted operating profit for the manufacturing
segment.
Fiscal 1998 gaming operations operating profit increased $55.0
million or 48% compared to the prior year period. This improvement
resulted primarily from the continued popularity of Wheel of Fortune
and strong play on Nevada Megabucks. Higher costs of interest-
sensitive assets purchased to fund jackpot payments partially offset
the overall increase.
Fiscal 1997 Compared to Fiscal 1996
Net income for fiscal 1997 was $137.2 million or $1.13 per diluted
share compared to $118.0 million or $.93 per diluted share in fiscal
1996. Growth in revenue, declining operating expenses, and gains on
the sale of investment securities contributed to this improvement in
earnings over the prior year.
Revenues and Cost of Sales
Revenues for the year ended September 30, 1997 totaled $744.0 million
representing an increase of $10.5 million over fiscal 1996 revenues
of $733.5 million. This improvement resulted from a 12% increase in
gaming operations revenues partially offset by a 4% decrease in
product sales revenues.
Product sales revenues were $461.2 million on shipments of 79,300
gaming machines in fiscal 1997 compared to $481.7 million on
shipments of 85,400 gaming machines in fiscal 1996. Product sales in
the traditional North American market were impacted by slower growth
rates in the introduction of new casinos, in the expansion of
existing properties and in the replacement of existing machines.
Sales of 54,000 units in 1997 in the North American market decreased
from 62,600 units in the prior year. Shipments to Nevada casinos
remained consistent year over year but sales to the Midwestern
riverboat, Native American and New Jersey markets declined slightly.
The Company maintained or increased its market share of the domestic
orders during the year and provided more than 4,200 machines to the
new riverboat operations in Indiana. Sales of 5,900 video lottery
and gaming machines to the Canada market positively impacted revenues
for the year.
The Company was profitable in all international regions in fiscal
1997. Product sales in international markets increased for a second
year to a total of $139.3 million compared to $117.6 million in
fiscal 1996. Total international shipments reached 25,300 units
during the current year compared to 22,800 in fiscal 1996. Machine
sales of 7,700 units in Australia in 1997, an increase of 1,700
units, led this growth. A full year of sales in the Japanese
pachisuro market also contributed to the improvement. International
sales during the year included 700 gaming machines to the first South
African casinos in the Mpumalanga province.
The gross margin on product sales declined slightly to 44% in 1997
versus 45% in 1996. This fluctuation was, primarily, a function of a
higher international sales mix and to a lesser extent, lower domestic
volumes.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Gaming operations revenue totaled $282.8 million and $251.8 million
in the years ended September 30, 1997 and 1996, respectively. This
12% increase resulted primarily from growth in the proprietary
systems including those operated under joint venture agreements. The
Company had approximately 11,700 machines on 67 systems at September
30, 1997 versus 9,400 games on 44 systems at September 30, 1996. The
Wheel of Fortune proprietary system, operated in conjunction with
Anchor, began operation in December 1996 and accounted for 3,100
machines at the end of fiscal 1997. Gaming operations revenues were
also positively impacted by increased participation revenue from the
Delaware racetracks. The Company will continue to pursue additional
markets, domestically and internationally, for its linked progressive
games. However, growth in proprietary systems is dependent on
government approval and subject to increasing competition in all
markets.
The gross margin on gaming operations revenues was 49% for fiscal
1997 versus 45% for fiscal 1996. This improvement was primarily due
to revenues from joint venture activities, which, for accounting
purposes, are reported net of expenses. Higher costs of interest-
sensitive assets which the Company purchases to fund jackpot payments
partially offset the overall increase.
Expenses
Selling, general and administrative expenses decreased $10.1 million
or 9% to $98.4 million compared to the prior year. This decline was
primarily due to one-time charges of $8.2 million in fiscal 1996
attributable to the vacating of leased buildings in connection with
the move to the Company's new facilities and management changes. The
remainder of the decrease related to cost reduction efforts both
domestically and internationally.
Depreciation and amortization totaled $11.8 million and $12.6 million
for the years ended September 30, 1997 and 1996, respectively. This
decrease resulted from declines in depreciation on previously leased
facilities partially offset by increases in depreciation on the
administrative portion of the Company's new facility.
Research and development expenses were $31.1 million in fiscal 1997,
an increase of $5.4 million over the prior year. This increase
reflects the Company's focus on introducing several new products for
sale and for use on proprietary systems. Staffing levels have
increased approximately 15% and a lower percentage of custom
engineering projects, which are charged to the customer, were
required in fiscal 1997 versus fiscal 1996.
The provision for bad debt was $9.5 million in fiscal 1997 compared
to $11.6 million in fiscal 1996. Year over year, reserves on product
sales were recorded at consistent levels. Reserves of $3.4 million
were recorded in fiscal 1996 related to receivables in the developing
Asian and Papua New Guinea markets. Additional reserves of $1.3
million were recorded in 1997 relating to the higher mix of
international sales.
Other Income and Expense
Interest income totaled $41.7 million for fiscal 1997, a $2.6
million or 7% increase over the prior year. Higher balances of
interest income producing assets associated with the Company's
progressive systems accounted for an increase of $5.8 million.
Higher average interest rates charged on receivable balances also
contributed to the increase. Sales of investment securities to fund
purchases of treasury stock resulted in a $4.2 million decrease in
interest and dividend income.
Interest expense for fiscal 1997 was $30.4 million compared to $23.5
million in fiscal 1996. This fluctuation was primarily due to
increased interest expense of $5.3 million associated with the growth
in jackpot liabilities. Interest expense attributable to the Senior
Notes (see Note 8 of Notes to Consolidated Financial Statements) also
increased over the prior year due to the cessation of the
capitalization of interest related to the construction of the
Company's new facilities.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
In fiscal 1997, the Company realized gains on the sale of assets of
$12.9 million relating to the sale of investment securities to fund
purchases of treasury stock. Comparatively, the Company had a net
loss of $5.1 million in fiscal 1996 due to writedowns of the
Company's investments in joint ventures within the developing markets
of Asia and South America and the Company's investment in Radica
Games Limited ("Radica").
Other income and expense netted a loss of $3.0 million and a gain of
$4.0 million for the years ended September 30, 1997 and 1996,
respectively. Both years were impacted by one-time legal
settlements.
Business Segments Operating Profit (See Note 18 of Notes to
Consolidated Financial Statements)
Manufacturing and gaming operations operating profit reflects an
allocation of selling, general, administrative and engineering
expenses to each of these business segments.
Manufacturing operating profit for fiscal 1997 decreased $5.6 million
or 5% compared to the prior year. This decline resulted from a 4%
decrease in product sales and slightly lower gross profit margins.
Gaming operations operating profit for fiscal 1997 increased 28% or
$24.9 million. This improvement resulted primarily from revenues
from joint venture activities which for accounting purposes are
recorded net of expenses. Higher costs of interest-sensitive assets
purchased to fund jackpot payments partially offset the overall
increase.
Foreign Operations
Approximately 39% and 30% of the Company's total product sales in
fiscal 1998 and 1997, respectively, were derived outside of North
America. To date, the Company has not experienced significant
translation or transaction losses related to foreign exchange
fluctuations.
Liquidity and Capital Resources
Working Capital
Working capital totaled $470.0 million at September 30, 1998 compared
to $407.0 million at September 30, 1997. Working capital increased
$13.4 million as a result of acquisitions of businesses (see Note 2
of Notes to Consolidated Financial Statements).
Changes in current assets, excluding acquired current assets,
contributing to the overall fluctuation in working capital include
decreases in receivables related to lower sales volume domestically,
increases in domestic inventories due to carrying a broader range of
product offerings and increased other current assets.
Current assets and liabilities relating to jackpot liabilities
increased in response to the overall growth in progressive systems.
Working capital declined $2.0 million as a result of the net effect
of fluctuations in the assets and liabilities relating to progressive
systems. Increases in accounts payable related to timing of payments
and increases in other accrued liabilities also contributed to the
fluctuation in working capital.
Cash Flows
The Company's cash and cash equivalents totaled $175.4 million at
September 30, 1998, a $23.6 million increase from the prior year end.
Cash provided by operating activities for the years ended September
30, 1998, 1997 and 1996 totaled $107.1 million, $118.1 million and
$55.3 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 flows
from operating activities.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
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 $36.3 million, $28.2 million and
$4.1 million for fiscal 1998, 1997 and 1996, respectively.
Uses of cash from investing activities included purchases of
property, plant and equipment totaling $15.9 million, $33.1 million
and $71.6 million in fiscal 1998, 1997 and 1996, respectively.
Capital expenditures during these periods related primarily to the
construction of the Company's manufacturing and administrative
facilities in Reno, Nevada. The total cost of the facilities was
$93.7 million. Additionally, purchases of manufacturing and office
equipment to support the Company's expansion contributed to cash used
in investing activities each year.
Repurchases of the Company's stock were $122.2 million, $225.5
million and $44.9 million for the years ended September 30, 1998,
1997 and 1996, respectively. Proceeds from additional borrowings of
$194.2 million, net of principal repayments, in fiscal 1998, were
used primarily to acquire businesses and purchase treasury shares.
Fiscal 1999 cash flows from operating activities may increase due to
the realization of deferred tax assets as a result of recent
legislation which permits the jackpot winners to elect a single
payment at the discounted value of the jackpot in lieu of annual
installments. The timing of the tax deductibility of these payments
has resulted in a deferred tax asset of $124.7 million at September
30, 1998. The realization of the deferred tax asset is dependent
upon the number of winners who make this election and enabling gaming
regulatory rule changes in jurisdictions operating progressive
systems. The Company cannot predict the cash flow impact at this
time (see Note 10 of Notes to Consolidated Financial Statements).
Stock Repurchase Plan
A stock repurchase plan was originally authorized by the Board of
Directors in October 1990. This repurchase program currently allows
the purchase of up to a total of 64.0 million shares of the
Company's common stock. As of September 30, 1998, the Company was
authorized to purchase a remaining 23.3 million shares. During the
fiscal years ended September 30, 1998 and 1997, the Company
repurchased 5.5 million shares for an aggregate purchase price of
$122.2 million and 13.1 million shares for an aggregate purchase
price of $225.5 million, respectively. During the period of October
1, 1998 through November 20, 1998, the Company purchased 920,000
shares for an aggregate purchase price of $16.1 million.
Recently Issued Accounting Standards
On June 30, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("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.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
On June 30, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments and hedging activities and is effective for the Company's
fiscal year ending September 30, 2000. Management believes that
adoption of this statement will not have a material impact on its
financial condition or results of operations.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to be consistent with the
presentation used in fiscal year 1998.
Lines of Credit
As of September 30, 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 amounts reserved as security for
letters of credit. At September 30, 1998, $57.2 million was
available under this line of credit and $2.9 million was reserved as
security for letters of credit.
IGT-Australia entered into a facility agreement in March 1998, which
included a $17.8 million line of credit. The line bears interest at
various rates and is supported by a guarantee from the Company. At
September 30, 1998, $13.3 million was available under this line.
IGT-Japan had a $5.1 million line of credit available as of
September 30, 1998. The line is supported by a guarantee from the
Company and bears interest at 2%. At September 30, 1998,
approximately $3.6 million was available under this line.
IGT-UK had a $1.4 million unsecured line of credit available as of
September 30, 1998, bearing interest at the bank rate plus a margin
of 1.5%. At September 30, 1998, $1.4 million was available under
this line.
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.
Impact of Inflation
Inflation has not had a significant effect on the Company's
operations during the three fiscal years in the period ended
September 30, 1998.
Year 2000
The Year 2000 readiness issue, which is common to most businesses,
arises from the inability of computer information systems with date
sensitive processes to properly recognize and accurately process date-
sensitive information on and beyond January 1, 2000. 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, management has and is continuing to
actively analyze, assess, and plan for various Year 2000
contingencies across the Company.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
The Company has undertaken various initiatives intended to ensure
that its 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.
All subsidiaries of the Company will perform the identification,
assessment, remediation and testing phases. However, the Company has
identified its largest manufacturing locations, IGT (North America),
IGT-UK, and IGT-Australia as critical operating locations as most
other subsidiaries are dependent upon these locations. IGT and IGT-
UK have substantially completed the identification and assessment
phases. IGT-Australia has completed the identification process and
is progressing through the assessment phase, which is scheduled for
completion by January 1999. At this stage, the Company believes that
its Year 2000 deficiencies will be remedied through computer
equipment and software replacement or modification in a timely
fashion.
The Company is utilizing both internal and external resources to
accomplish its Year 2000 plan, which began in December 1997 and is
expected to be substantially complete by June 1999. The Company
estimates that as of November 30, 1998, it had completed
approximately 40% of the initiatives necessary to fully address
potential Year 2000 issues. The remaining project efforts are
underway and are anticipated to be completed prior to any currently
anticipated impact on its computer equipment and software.
The Company engaged third parties to review the IGT and IGT-UK
information systems plans and has incorporated the recommendations
into the plan. The Company has also initiated efforts to ensure the
readiness of its products and services. As part of its assessment of
current products and services, IGT is currently upgrading all wide-
area progressive jackpot system software. The Company has installed
the software upgrade in Nevada and will submit the software update to
regulators for approval in all other jurisdictions in the first
quarter of 1999. The Company is in the process of notifying all of
its customers who may have products with Year 2000 readiness issues
and expects this notification to be completed by March 1999.
IGT uses an AS400 for the majority of its 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. The testing phase is
expected to be completed by June 1999. IGT-UK is in the process of
implementing Oracle as an enterprise wide improvement to its
information systems and a resolution to Year 2000 readiness issues.
Implementation of this system is expected to be complete by February
1999.
The Company has also surveyed its key vendors and service providers
to determine the extent to which interfaces with such entities are
vulnerable to Year 2000 issues. As of November 30, 1998, the Company
had received responses from approximately 50% of such third parties,
a majority of which have provided assurances that they are either
Year 2000 ready or expect to address all their significant Year 2000
issues on a timely basis. A follow-up mailing to significant vendors
and service providers that did not initially respond, or whose
responses were deemed unsatisfactory by the Company, is scheduled for
the first quarter 1999. Although the Company has 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 the Company may rely will be timely converted or
that such failure to convert by another company would not have an
adverse effect on the Company's systems.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
The Company believes that the cost of its Year 2000 efforts are not
expected to exceed $3 million, which will be funded from operating
cash flows. Approximately $2.1 million of this total is for the
replacement of non-compliant equipment and software which is expected
to be capitalized as fixed assets in fiscal 1999. As of September
30, 1998, the Company had incurred costs of approximately $849,000,
including the cost of third party reviews. Two of the Company's
subsidiaries are implementing enterprise wide information system
improvements which also resolve Year 2000 issues. The cost of
implementing these systems has not been included in this cost as the
implementations were not initiated specifically to resolve the Year
2000 issue. A significant portion of the software remediation costs
are not likely to be incremental to the Company's results of
operations, but rather 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 the Company's current systems may be
postponed. The Company does not expect the postponement of these
enhancements to have a significant impact on the Company's financial
condition or results of operations.
The Year 2000 issue presents a number of other risks and
uncertainties that could impact the Company, including but not
limited to third parties whose services we rely upon in order 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 the Company does business, which could result in lost
production, sales, or administrative difficulties on the part of the
Company. The Company believes that the implementation of new
business systems and completion of the Year 2000 project as
scheduled, will significantly reduce the risk of significant
operating problems with our operating systems, facilities and
products. Our Year 2000 project requires the majority of our
application systems to be remedied and tested by June 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 the first quarter 1999. While the Company continues to believe
the Year 2000 issues will not materially affect its consolidated
financial position or results of operations, it remains uncertain as
to what extent, if any, the Company may be impacted.
Item 7a. Quantitative and Qualitative Factors about Market Risk
Market Risk
Under established procedures and controls, the Company enters into
contractual arrangements, or derivatives, in the ordinary course of
business to hedge its exposure to foreign exchange rate and interest
rate risk. The counterparties to these contractual arrangements are
major financial institutions. Although the Company is exposed to
credit loss in the event of nonperformance by these counterparties,
management believes that losses related to counterparty credit risk
is not likely.
Foreign Currency Risk
The Company routinely uses forward exchange contracts to hedge its
net exposures, by currency, related to the foreign currency
denominated monetary assets and liabilities of its operations. The
primary business objective of this hedging program is to maintain an
approximately balanced position in foreign currencies so that gains
and losses resulting from exchange rate changes are minimized. At
September 30, 1998, the Company had net foreign currency transaction
exposure of $54.8 million of which $43.7 million was hedged with
currency forward contracts. In addition, from time to time, the
Company may enter into forward exchange contracts to establish with
certainty the U.S. dollar amount of future firm commitments
denominated in a foreign currency.
Given the Company's balanced foreign exchange position, a ten
percent adverse change in foreign exchange rates upon which these
contracts are based would result in exchange gains and losses from
these contracts that would, in all material aspects, be fully offset
by exchange gains and losses on the underlying net monetary
exposures for which the contracts are designated as hedges.
Item 7a. Quantitative and Qualitative Factors about Market Risk,
(continued)
As currency exchange rates change, translation of the income
statements of the Company's international businesses into U.S.
dollars affects year-over-year comparability of operating results.
The Company does not generally hedge translation risks because cash
flows from international operations are generally reinvested
locally. IGT does not enter into hedges to minimize volatility of
reported earnings.
Changes in the currency exchange rates that would have the largest
impact on translating the Company's international operating profit
include the Australian dollar, British pound and the Japanese yen.
Management estimates that a 10% change in foreign exchange rates
would impact reported operating profit by less than $3.0 million.
This sensitivity analysis disregards the possibility that rates can
move in opposite directions and that gains from one area may or may
not be offset by losses from another area.
Interest Rate Risk
The Company's results of operations are exposed to fluctuations in
the costs of U.S. Government securities used to fund liabilities to
jackpot winners. The Company records gaming operations expense for
future jackpots based on current rates for these U.S. government
securities which are impacted by market interest rates and other
economic conditions. Therefore, the gross profit on gaming
operations decreases when interest rates decline. Management
estimates that a 10% decline in interest rates would impact gaming
operations gross profit by $4.3 million. The Company currently does
not manage this exposure with derivative financial instruments.
The Company uses an interest rate swap to effectively convert
floating rate debt in Australia to fixed rate debt. A one
percentage point adverse change in the interest rates upon which
this contract is based would, in all material respects, be offset by
interest expense on the underlying debt.
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Financial Statements Page
Independent Auditors' Report 38
Consolidated Statements of Income for the
years ended September 30, 1998, 1997 and 1996 39
Consolidated Balance Sheets, at September 30, 1998 and 1997 40
Consolidated Statements of Cash Flows for the
years ended September 30, 1998, 1997 and 1996 42
Consolidated Statements of Changes in Stockholders'
Equity for the years ended September 30, 1998, 1997 and 1996 44
Notes to Consolidated Financial Statements 45
Independent Auditors' Report
To the Stockholders and Board of Directors of International Game
Technology:
We have audited the accompanying consolidated balance sheets of
International Game Technology and Subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of income,
cash flows and changes in stockholders' equity for each of the three
years in the period ended September 30, 1998. Our audits also
included the consolidated financial statement schedule listed in the
Index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
International Game Technology and Subsidiaries as of September 30,
1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended September 30,
1998 in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Reno, Nevada
November 2, 1998
Consolidated Statements of Income
Years Ended September 30,
1998 1997 1996
(Amounts in thousands except per
share amounts)
Revenues
Product sales $477,024 $461,150 $481,652
Gaming operations 347,099 282,820 251,800
Total revenues 824,123 743,970 733,452
Costs and Expenses
Cost of product sales 279,337 256,480 265,550
Cost of gaming operations 158,528 145,245 139,706
Selling, general and administrative 105,945 98,380 108,469
Depreciation and amortization 18,635 11,846 12,570
Research and development 38,066 31,074 25,701
Provision for bad debts 4,735 9,508 11,623
Total costs and expenses 605,246 552,533 563,619
Income from Operations 218,877 191,437 169,833
Other Income (Expense)
Interest income 45,346 41,738 39,178
Interest expense (41,049) (30,422) (23,535)
Gain (loss) on investments 1,031 12,885 (4,311)
Gain (loss) on the sale of assets 10,115 (24) (793)
Other 212 (2,989) 4,031
Other income, net 15,655 21,188 14,570
Income Before Income Taxes 234,532 212,625 184,403
Provision for Income Taxes 82,086 75,378 66,386
Net Income $152,446 $137,247 $118,017
Basic Earnings Per Share $ 1.35 $ 1.14 $ 0.93
Diluted Earnings Per Share $ 1.33 $ 1.13 $ 0.93
Weighted Average Common Shares
Outstanding 113,064 120,715 126,555
Weighted Average Common and Common
Equivalent Shares Outstanding 114,703 121,829 127,412
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Balance Sheets
September 30,
1998 1997
(Dollars in thousands)
Assets
Current assets
Cash and cash equivalents $ 175,413 $ 151,771
Investment securities, at market value 19,354 14,944
Accounts receivable, net of allowances for
doubtful accounts of $5,512 and $5,899 189,521 173,783
Current maturities of long-term notes and
contracts receivable, net of allowances 63,022 74,686
Inventories, net of allowances for
obsolescence of $18,574 and $14,881:
Raw materials 73,749 50,484
Work-in-process 3,746 3,606
Finished goods 55,659 38,354
Total inventories 133,154 92,444
Investments to fund liabilities to jackpot
winners 41,216 35,088
Deferred income taxes 16,517 18,229
Prepaid expenses and other 32,346 10,601
Total Current Assets 670,543 571,546
Long-term notes and contracts receivable,
net of allowances and current maturities 37,750 32,524
Property, plant and equipment, at cost
Land 19,406 25,391
Buildings 71,136 74,366
Gaming operations equipment 73,222 66,240
Manufacturing machinery and equipment 109,576 99,015
Leasehold improvements 4,955 5,306
Total 278,295 270,318
Less accumulated depreciation and
amortization (109,542) (91,842)
Property, plant and equipment, net 168,753 178,476
Investments to fund liabilities to jackpot
winners 369,427 313,719
Deferred income taxes 131,708 98,072
Intangible assets 131,552 1,273
Other assets 33,895 19,442
Total Assets $1,543,628 $1,215,052
Consolidated Balance Sheets
September 30,
1998 1997
(Dollars in thousands)
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes
payable and capital lease obligations $ 30,311 $ 25,414
Accounts payable 57,277 46,238
Jackpot liabilities 50,659 42,485
Accrued employee benefit plan liabilities 17,512 17,147
Accrued dividends payable 3,266 3,411
Other accrued liabilities 41,515 29,893
Total Current Liabilities 200,540 164,588
Long-term notes payable and capital
lease obligations, net of current
maturities 322,510 140,713
Long-term jackpot liabilities 479,217 389,235
Other liabilities 85 669
Total Liabilities 1,002,352 695,205
Commitments and contingencies
Stockholders' equity
Common stock, $.000625 par value;
320,000,000 shares authorized; 152,586,560
and 151,882,710 shares issued 95 95
Additional paid-in capital 256,656 243,950
Retained earnings 818,988 688,597
Treasury stock; 43,721,200 and 38,174,676
shares, at cost (535,797) (413,617)
Net unrealized gain on investment securities 1,334 822
Total Stockholders' Equity 541,276 519,847
Total Liabilities and Stockholders' Equity $1,543,628 $1,215,052
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
Years Ended September 30,
1998 1997 1996
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $152,446 $137,247 $118,017
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 41,468 35,024 30,502
Provision for bad debts 4,735 9,508 11,623
Provision for inventory obsolescence 9,173 10,022 16,550
(Gain) loss on investment securities
and fixed assets (11,146) (12,861) 5,104
Common stock awards 1,973 2,636 1,236
(Increase) decrease in assets, net of
effects from acquisitions of businesses:
Receivables 8,585 (25,166) (40,623)
Inventories (54,664) (14,260) (63,220)
Prepaid expenses and other (21,696) 6,875 (14,069)
Other assets 6,473 467 (2,009)
Net deferred income tax asset, net of
tax benefit of employee stock plans (22,343) (29,357) (29,187)
Increase in accounts payable and accrued
liabilities, net of effects from
acquisitions of businesses 6,187 11,253 21,272
Earnings of unconsolidated affiliates in
excess of distributions (14,042) (13,172) -
Other (23) (134) 65
Total adjustments (45,320) (19,165) (62,756)
Net cash provided by operating
activities 107,126 118,082 55,261
Consolidated Statements of Cash Flows
Years Ended September 30,
1998 1997 1996
(Dollars in thousands)
Cash Flows from Investing Activities
Investment in property, plant and equipment (16,828) (33,088) (71,575)
Proceeds from sale of property, plant and
equipment 24,452 6,579 4,112
Purchase of investment securities (15,191) (27,898) (31,041)
Proceeds from sale of investment securities 12,528 78,338 23,524
Proceeds from investments to fund liabilities
to jackpot winners 40,286 36,100 28,179
Purchase of investments to fund liabilities
to jackpot winners (102,122) (113,224) (112,999)
Investment in unconsolidated affiliates (1,422) (3,379) -
Acquisition of businesses (181,764) - -
Net cash used in investing activities (240,061) (56,572) (159,800)
Cash Flows from Financing Activities
Proceeds from long-term debt 624,199 63,185 7,986
Principal payments on debt (430,018) (11,425) (8,297)
Payments on jackpot liabilities (40,286) (36,100) (28,179)
Collections from systems to fund jackpot
liabilities 138,442 141,467 117,119
Proceeds from employee stock plans 7,484 3,671 3,885
Purchases of treasury stock (122,180) (225,474) (44,861)
Payments of cash dividends (13,594) (14,526) (15,277)
Net cash provided by (used in)
financing activities 164,047 (79,202) 32,376
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (7,470) (437) 450
Net Increase (Decrease) in Cash and Cash
Equivalents 23,642 (18,129) (71,713)
Cash and Cash Equivalents at:
Beginning of Year 151,771 169,900 241,613
End of Year $175,413 $151,771 $169,900
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30,
1998 1997 1996
(Amounts in thousands)
Common Stock
Balance at beginning of year
151,883; 150,690; and 150,119 shares $ 95 $ 94 $ 94
Employee stock plans
704; 1,193; and 571 shares - 1 -
Balance at end of year
152,587 shares at 1998 $ 95 $ 95 $ 94
Additional Paid-In Capital
Balance at beginning of year $ 243,950 $ 237,365 $ 231,338
Employee stock plans 7,484 3,671 3,885
Common stock awards 1,973 2,636 1,236
Tax benefit of employee stock plans 3,249 278 906
Balance at end of year $ 256,656 $ 243,950 $ 237,365
Retained Earnings
Balance at beginning of year $ 688,597 $ 567,565 $ 463,039
Currency translation adjustments (8,606) (2,022) 1,687
Dividends declared (13,449) (14,193) (15,178)
Net income 152,446 137,247 118,017
Balance at end of year $ 818,988 $ 688,597 $ 567,565
Treasury Stock
Balance at beginning of year $(413,617) $(188,143) $(143,281)
Purchases of treasury stock (122,180) (225,474) (44,862)
Balance at end of year $(535,797) $(413,617) $(188,143)
Net Unrealized Gain on Investment Securities
Balance at beginning of year $ 822 $ 6,319 $ 2,900
Increase (decrease) in net unrealized
gain on investment securities 512 (5,497) 3,419
Balance at end of year $ 1,334 $ 822 $ 6,319
The accompanying notes are an integral part of these consolidated
financial statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
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. The
Company operates principally in two lines of business: the
manufacture and sale of gaming products (product sales) and the
operation of wide-area progressive systems and gaming equipment
leasing (gaming operations). The Company's revenues are generated
domestically and internationally where the Company sells products in
Africa, Australia, Europe, Japan, South America and the United
Kingdom.
IGT is one of the largest manufacturers of computerized casino gaming
products and operators of proprietary gaming systems in the world.
The Company believes it manufactures the broadest range of
microprocessor-based gaming machines available. The gaming machine
product line includes both spinning reel slot machines and video
gaming machines. The Company has developed and operated
electronically-linked, inter-casino proprietary gaming machine
systems for more than ten years. These systems link gaming machines
in various casinos to a central computer which builds a "progressive"
jackpot which increases with every wager made throughout the system.
The systems are designed to increase gaming machine play for
participating casinos by giving players the opportunity to win
jackpots substantially larger or more frequent than those available
from gaming machines which are not linked to a progressive system.
The progressive systems developed and operated by the Company are
collectively referred to as MegaJackpots. 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. In addition,
the Company has developed and sells computerized casino management
systems which provide casino operators with slot and table game
accounting, player tracking and specialized bonusing capabilities.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Product Sales
The Company makes product sales for cash, on normal credit terms of
90 days or less, and over longer term installments. Generally,
sales are recorded when the products are shipped and title passes to
the customer.
Gaming Operations
The following table shows the revenues recorded from gaming
operations.
Years Ended September 30,
1998 1997 1996
(Dollars in thousands)
Proprietary systems $318,499 $253,953 $234,859
Lease operations 28,600 28,867 16,941
Total $347,099 $282,820 $251,800
Notes to Consolidated Financial Statements, (continued)
Gaming operations revenues consist of revenues relating to the
operations of the proprietary systems, a share of the net gaming
winnings from the operation of machines at customer locations, and
the lease and rental of gaming and video lottery machines. The
Company operates several proprietary systems in accordance with
joint venture agreements and accounts for this activity under the
equity method. The Company's portion of joint venture related
income, net of expenses, is also included in gaming operations
revenue.
The Company's linked proprietary systems are operated in Colorado,
Louisiana, Mississippi, Missouri, Nevada, New Jersey, South Dakota
and in Native American casinos and internationally in Iceland, Macau
and Peru. Stand alone versions of some of the MegaJackpots games
are also operated in Connecticut, Colorado, Illinois and Indiana.
The operation of linked progressive systems varies among
jurisdictions as a result of different gaming regulations. In all
jurisdictions, the casinos pay a percentage of the handle to fund the
progressive jackpot. Funding of the progressive jackpot differs by
jurisdiction but is generally administered by the Company. Jackpots
are currently paid in equal installments over a 20 to 31 year period.
Jackpots on some of the Company's newer MegaJackpots games will be
paid out at the time they are won. In Atlantic City, the progressive
jackpot fund is administered by a trust managed by representatives of
the participating casinos. The trust records a liability to the
Company for an annual casino licensing fee as well as an annual
machine rental fee for each machine. In Colorado, funding of
progressive jackpots is administered by a separate fund managed by
the Company. Progressive system lease fees are paid to the Company
from this fund. In Macau, the casino pays the Company a fee based on
the net win and the casino pays the progressive jackpot winner.
Research and Development
Research and development costs are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents include operating cash as well as cash
required for funding current systems jackpot payments and purchasing
investments to meet obligations for making payments to jackpot
winners. Cash in excess of daily requirements is generally invested
in various marketable securities. If these securities have original
maturities of three months or less, they are considered cash
equivalents. Such investments are stated at cost, which
approximates market.
Investment Securities
The Company's investment securities have been classified as
available-for-sale and stated at market value. Unrealized gains and
losses, net of income tax effects, are excluded from income and
reported as a separate component of stockholders' equity. Market
value is determined by the most recently traded price of the
security at the balance sheet date. Net realized gains or losses
are determined on the specific identification cost method.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Depreciation and Amortization
Depreciation and amortization are provided on the straight-line
method over the following useful lives:
Buildings 40 years
Gaming operations equipment 3 to 5 years
Manufacturing machinery and equipment 3 to 15 years
Leasehold improvements Term of lease
Intellectual property 3 to 8 years
Excess of cost over net assets acquired 40 years
Notes to Consolidated Financial Statements, (continued)
Maintenance and repairs are expensed as incurred. The costs of
improvements are capitalized. Gains or losses on the disposition of
assets are included in income.
Long-Lived Assets
The Company reviews the carrying amount of long-lived assets and
certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Such reviews have not had a material effect on the
Company's results of operations or financial position.
Investments to Fund Liabilities to Jackpot Winners
These investments represent discounted U.S. Treasury Securities
purchased to meet obligations for making payments to linked
progressive systems jackpot winners. At September 30, 1998, the
Company had both the intent and ability to hold these investments to
maturity and, therefore, classified them as held-to-maturity.
Accordingly, these investments are stated at cost, adjusted for
amortization of premiums and accretion of discounts over the term of
the security using the interest method. Securities in this
portfolio have maturity dates through 2028. See Note 10 for events
subsequent to the Company's fiscal year end which may affect the
Company's intent and ability to hold these investments to maturity.
Other Assets
Other assets is primarily comprised of investments in joint ventures
which are accounted for under the equity method. Other assets also
includes deposits and certain investments.
Earnings Per Share
Earnings per share is computed based upon the weighted average
number of common and common equivalent shares outstanding.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Foreign Currency Translation
The functional currency of certain of the Company's international
subsidiaries is the local currency. For those subsidiaries that the
local currency is the functional currency, assets and liabilities
are translated at exchange rates in effect at the balance sheet
date, and income and expense accounts at average exchange rates
during the year. Resulting translation adjustments are recorded
directly to a separate component of stockholders' equity. For
subsidiaries whose functional currency is the U.S. dollar, gains and
losses on non-U.S. dollar denominated assets and liabilities are
recorded in income.
Notes to Consolidated Financial Statements, (continued)
Derivatives
The Company uses derivative financial instruments to reduce its
exposure resulting from fluctuations in foreign exchange rates and
interest rates. Derivative financial instruments are used to
minimize the Company's net exposure, by currency, related to the
foreign currency denominated assets and liabilities of its
operations. These gains and losses are included in income. The
Company also hedges firm foreign currency commitments by entering
into forward exchange contracts. Gains and losses on these hedges
are included as a component of the hedged transaction when recorded.
The Company uses interest rate swap agreements to effectively change
a variable rate liability to a fixed rate. Amounts paid under
interest rate swap agreements are accrued as interest rates change
and are recognized over the life of the agreement as an adjustment
to interest expense. The counterparties to each of these agreements
are major commercial banks. Management believes that losses related
to credit risk are remote.
Recently Issued Accounting Standards
On June 30, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("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 the
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.
On June 30, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments and hedging activities and is effective for the Company's
fiscal year ending September 30, 2000. Management believes that
adoption of this statement will not have a material impact on its
financial condition or results of operations.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to be consistent with the
presentation used in fiscal year 1998.
2. Acquisitions
In late March 1998, the Company completed the purchase of Barcrest
Limited ("Barcrest"), a Manchester, England-based manufacturer and
supplier of gaming related amusement devices and the purchase of
certain assets of Olympic Amusements Pty. Limited ("Olympic"), a
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 $181.8 million was
allocated to the net assets of $76.5 million based on estimated fair
values of the tangible assets, intangible assets and liabilities at
the dates of acquisition. The Company is substantially complete with
its evaluation of the fair values of these assets and liabilities and
does not anticipate material adjustments in fiscal 1999. The excess
of the purchase price over the net assets acquired, totaled $105.3
million. These acquisitions were funded primarily with additional
borrowings on the Company's line of credit, as well as long-term
borrowings by the Company's Australian subsidiary. Results of
Barcrest and Olympic since acquisition are included in the results of
operations for the year.
Notes to Consolidated Financial Statements, (continued)
3. Investment Securities
A summary of investment securities at September 30, 1998 and 1997
follows:
Gross Gross
Net Unrealized Unrealized Market
Cost Gains Losses Value
(Dollars in thousands)
September 30, 1998
Total equity securities $17,301 $3,009 $(956) $19,354
September 30, 1997
Corporate bonds $ 6,454 $ 96 $ - $ 6,550
Equity securities 7,225 1,299 (130) 8,394
Total investment securities $13,679 $1,395 $(130) $14,944
At September 30, 1997 debt securities had maturity dates ranging
from one month to 26 years.
The proceeds from sales of available-for-sale securities were $12.5
million, $78.3 million and $23.5 million for fiscal 1998, 1997 and
1996, respectively. The gross realized gains were $1.1 million,
$13.6 million and $472,000 for fiscal 1998, 1997 and 1996,
respectively. The gross realized losses were $187,000, $574,000 and
$205,000 for fiscal 1998, 1997 and 1996, respectively.
4. Notes and Contracts Receivable
The Company grants customers extended payment terms under contracts
of sale. These contracts are generally for terms of one to five
years, with interest recognized at prevailing rates, and are secured
by the related equipment sold.
The Company has provided loans, principally for financial
assistance, to several customers. At September 30, 1998 and 1997,
the balance of such loans totaled $2.1 million and $2.9 million,
respectively. At September 30, 1998, there were no allowances for
doubtful loans. Allowances for doubtful loans at September 30, 1997
totaled $351,000. These loans are generally for terms of one to five
years with interest at prevailing rates. The following table
represents the estimated future collections of notes and contracts
receivable, net of allowances, at September 30, 1998:
Years Ending September 30, Estimated Receipts
(Dollars in thousands)
1999 $ 63,022
2000 30,835
2001 6,353
2002 358
2003 204
$100,772
Notes to Consolidated Financial Statements, (continued)
At September 30, 1998 and 1997, the following allowances for
doubtful notes and contracts were netted against current and long-
term maturities:
September 30,
1998 1997
(Dollars in thousands)
Current $10,602 $ 8,605
Long-term 6,126 9,624
$16,728 $18,229
5. Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts, contracts, and notes receivable. At
September 30, 1998, the Company had bank deposits in excess of
insured limits of approximately $29.5 million.
Product sales and the resulting receivables are concentrated in
specific legalized gaming regions. The Company also distributes a
portion of its products through third party distributors resulting in
significant distributor receivables.
Accounts, contracts, and notes receivable by region as a percentage
of total receivables are as follows:
September 30, 1998
Region
Nevada 32%
Atlantic City (distributor and other) 10%
South America 10%
Australia 9%
Europe 9%
Native American casinos (distributor) 8%
Riverboats (greater Mississippi River area) 7%
Colorado 4%
Other regions (individually less than 3%) 11%
Total 100%
In September 1993, the Company sold its equity ownership interest in
CMS-International ("CMS") to Summit Casinos-Nevada, Inc. ("Summit"),
whose owners include senior management of CMS. The Company remains
as guarantor on certain indebtedness of CMS, which had aggregate
outstanding balances of $14.1 million and $14.8 million at September
30, 1998 and 1997, respectively. The guaranteed notes have due dates
of December 1, 1998 and January 1, 2000 and are also collateralized
by the respective casino properties. In the event the notes are not
repaid in accordance with the terms, the Company may be required to
make payment under the guarantee to the lender. In such event, the
Company would record a receivable from CMS and assess the
collectibility of the receivable.
6. Corporate Headquarters and Manufacturing Facility
The Company has completed the three year project to construct its
new "South Meadows" facility in Reno, Nevada. The manufacturing and
warehousing facility was completed in January 1996, the corporate
offices were completed in March 1997, and the 85,000 square foot
cabinet manufacturing facility was completed in April 1998. The
combined square footage of these facilities is approximately 1.0
million square feet. Essentially, all employees in Reno, Nevada now
work at the South Meadows facility. The total cost of these
facilities, including the site, was $93.7 million.
Notes to Consolidated Financial Statements, (continued)
7. Intangible Assets
Intangible assets consist of the following:
September 30,
1998 1997
(Dollars in thousands)
Intellectual property $ 37,129 $1,550
Excess of cost over net assets
acquired 98,778 -
135,907 1,550
Less accumulated amortization (4,355) (277)
$131,552 $1,273
8. Notes Payable and Capital Lease Obligations
Notes payable and capital lease obligations consist of the
following:
September 30,
1998 1997
(Dollars in thousands)
Lines of credit $195,913 $ 57,741
Senior notes 85,700 100,000
Australian facility agreement 71,196 8,347
Capital lease obligations (see Note 9) 12 39
Total 352,821 166,127
Less current maturities 30,311 25,414
Long-term notes payable and capital lease
obligations, net of current maturities $322,510 $140,713
Lines of Credit
As of September 30, 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 amounts reserved as security for
letters of credit. At September 30, 1998, $57.2 million was
available under this line of credit and $2.9 million was reserved as
security for letters of credit.
IGT-Australia entered into a facility agreement in March 1998 which
included a $17.8 million line of credit. The line bears interest at
various rates and is supported by a guarantee from the Company. At
September 30, 1998, $13.3 million was available under this line.
IGT-Japan had a $5.1 million line of credit available as of
September 30, 1998. The line is supported by a guarantee from the
Company and bears interest at 2%. At September 30, 1998,
approximately $3.6 million was available under this line.
IGT-UK had a $1.4 million unsecured line of credit available as of
September 30, 1998, bearing interest at the bank rate plus 1.5%. At
September 30, 1998, $1.4 million was available under this line.
Notes to Consolidated Financial Statements, (continued)
Senior Notes
In September 1994, the Company completed a $100.0 million private
placement of 7.84% Senior Notes (the "Senior Notes"). The first
annual principal installment of $14.3 million was paid in September
1998. Annual principal payments of approximately $14.3 million
continue until September 2004. Interest is paid quarterly. The net
proceeds from the Senior Notes of $99.6 million were used to finance
the construction of a new manufacturing and headquarters facility
and for general corporate purposes.
Australian Facility Agreement
In March 1998, IGT-Australia entered into a facility agreement which
includes a $71.2 million note requiring quarterly principal payments
commencing in March 1999 and ending in December 2003. The note
bears interest at various rates. The proceeds of the loan were used
to purchase certain assets in the Olympic acquisition.
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.
The following table represents the future fiscal year principal
payments of the notes and capital lease obligations at September 30,
1998:
Years Ending September 30, Principal Payments
(Dollars in thousands)
1999 $ 30,311
2000 23,645
2001 24,979
2002 214,979
2003 24,979
2004 and after 33,928
$352,821
9. Commitments
The Company leases certain of its facilities and equipment under
various agreements for periods through the year 2006. The following
table shows the future minimum rental payments required under these
operating and capital leases which have initial or remaining non-
cancelable lease terms in excess of one year as of September 30,
1998.
Operating Capital
Years Ending September 30, Leases Leases Total
(Dollars in thousands)
1999 $ 5,706 $ 12 $ 5,718
2000 4,867 4,867
2001 3,841 3,841
2002 2,152 2,152
2003 480 480
2004 and after 621 621
Total minimum payments $17,667 12 $17,679
Amount representing interest -
Capital lease obligations 12
Less current portion 12
Long-term capital lease
obligations $ -
Notes to Consolidated Financial Statements, (continued)
The cost and related accumulated depreciation of equipment under
capital leases as of September 30, 1998 was $155,000 and $103,000,
respectively, and at September 30, 1997 was $155,000 and $76,000,
respectively.
Certain of the facility leases provide that the Company pay
utilities, maintenance, property taxes, and certain other operating
expenses applicable to the leased property, including liability and
property damage insurance. The lease term for the Company's
recently vacated manufacturing facility in Reno, Nevada extends
through February 2003 and the related payments are included in the
schedule above. The Company has subleased approximately half of
this facility to third parties. The terms of the sublease
agreements call for payments of $4.4 million for the period of
October 1998 through February 2003. The Company previously accrued
for the future gross lease payments of these abandoned buildings,
net of anticipated sublease receipts, and does not anticipate
additional impact on the Company's results of operations.
The total rental expense for the fiscal years ended September 30,
1998, 1997 and 1996 was approximately $5.1 million, $3.6 million and
$6.4 million, respectively.
10. Liabilities to Jackpot Winners
The Company receives a percentage of the amount played or machine
rental and service fees from the linked progressive systems to fund
the related jackpot payments. The jackpots are paid in 20 to 31
equal annual installments without interest. The following schedule
sets forth the future fiscal year payments for the jackpot winners
under these systems at September 30, 1998:
Years Ending September 30, Payments
(Dollars in thousands)
1999 $ 41,505
2000 41,505
2001 41,505
2002 41,506
2003 41,506
2004 and after 483,697
$691,224
Jackpot liabilities in the amount of the present value of the
jackpots are recorded concurrently with the recognition of the
related revenue. Jackpot liabilities include discounted payments
due to winners for jackpots won and amounts accrued for jackpots not
yet won that are contractual obligations of the Company. Jackpot
liabilities consist of the following:
September 30,
1998 1997
(Dollars in thousands)
Gross payments due to jackpot winners $ 691,224 $ 600,648
Unamortized discount on payments to
jackpot winners (277,859) (249,603)
Accrual for jackpots not yet won 116,511 80,675
Total jackpot liabilities 529,876 431,720
Less current liabilities (50,659) (42,485)
Long-term jackpot liabilities $ 479,217 $ 389,235
The Company amortizes the discounts on the liabilities, recognizing
it as interest expense, and records commensurate interest income on
the investments purchased to fund the payments to the jackpot
winners. During fiscal 1998, 1997 and 1996, the Company recorded
interest expense on jackpot liabilities and interest income on
jackpot investments of
Notes to Consolidated Financial Statements, (continued)
$25.6 million, $21.2 million and $16.0 million, respectively. The
Company was required to maintain cash and investments relating to
systems liabilities totaling $56.7 million and $37.5 million at
September 30, 1998 and 1997, respectively.
Federal legislation was passed October 21, 1998 which would permit
jackpot winners to elect to receive the discounted value of
progressive jackpots won in lieu of annual installments. For
jackpots won after this date, the Company will make 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. Upon the winner's
election after July 1, 1999, investments currently held by the
Company to fund these liabilities will be sold to settle the
liability. Management believes that this change in circumstance
will not be inconsistent with the classification of these
investments as held to maturity and does not expect a material
impact to fiscal 1999 operating results as a result of this change.
11. Financial Instruments
The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest and
foreign exchange rates. While these hedging instruments are subject
to fluctuations in value, such fluctuations are generally offset by
the value of the underlying exposures being hedged. The Company is
not a party to leveraged derivatives and does not hold or issue
financial instruments for speculative purposes.
Foreign Currency Management
The Company routinely uses forward exchange contracts to hedge its
net exposures, by currency, related to the non-functional currency
denominated monetary assets and liabilities of its operations. The
primary business objective of this hedging program is to maintain an
approximately balanced position in foreign currencies so that gains
and losses resulting from exchange rate changes are minimized. At
September 30, 1998, the Company had net foreign currency transaction
exposure of $54.8 million of which $43.7 million was hedged with
currency forward contracts. In addition, from time to time, the
Company may enter into forward exchange contracts to establish with
certainty the U.S. dollar amount of future firm commitments
denominated in a foreign currency.
Interest Rate Management
In fiscal 1998, the Company effectively converted variable rate debt
in Australia to fixed rate debt using an interest rate swap
agreement with three counterparties. These swaps, which were
required under the Australia facility agreement, mature in October
2003 and have quarterly interest settlement dates. Therefore, there
were no unrealized gains or losses at September 30, 1998. The
carrying value of the debt at September 30, 1998 totaled $71.2
million.
Other Off-Balance Sheet Instruments
In the normal course of business, the Company is a party to
financial instruments with off-balance-sheet risk such as
performance bonds and other guarantees, which are not reflected in
the accompanying balance sheets. At September 30, 1998 and 1997,
the Company had performance bonds outstanding totaling $2.2 million
relating to the Company's operation of two lottery systems and a
gaming machine route. The Company is liable to reimburse the bond
issuer in the event the bond is exercised as a result of the
Company's non-performance. At September 30, 1998 and 1997, the
Company had outstanding letters of credit, issued under the
Company's line of credit (see Note 8), totaling $2.9 million and
$2.4 million, respectively, which were issued to insure payment by
the Company to certain vendors and governmental agencies.
Management does not expect any material losses to result from these
off-balance-sheet instruments.
At September 30, 1998, the Company had foreign currency contracts to
hedge firm commitments in the amount of $1.2 million in Australia.
The gain or loss on these instruments is deferred and will be
recognized in income when the hedged transactions occur. At
September 30, 1998, the unrealized gains/losses on these
instruments, which mature within six months, were immaterial to the
consolidated financial statements.
Notes to Consolidated Financial Statements, (continued)
The following table presents the carrying amount and estimated fair
value of the Company's financial instruments:
September 30,
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Dollars in thousands)
Assets
Cash and cash equivalents $175,413 $175,413 $151,771 $151,771
Investment securities 19,354 19,354 14,944 14,944
Notes and contracts receivable 100,772 118,845 107,210 124,407
Investments to fund liabilities
to jackpot winners 410,643 465,900 348,807 361,082
Liabilities
Jackpot liabilities 529,876 584,924 431,720 454,829
Notes payable and capital lease
obligations 352,821 358,778 166,127 170,490
Foreign currency contracts
On balance sheet 43,737 43,779 - -
Off balance sheet 1,200 1,199 - -
The carrying value of cash and cash equivalents approximates fair
value because of the short term maturity of those instruments. The
estimated fair value of investment securities and investments to
fund liabilities to jackpot winners are based on quoted market
prices. The estimated fair value of jackpot liabilities is based on
quoted market prices of investments which upon maturity will be used
to fund these liabilities. The fair value of the Company's notes
and contracts receivable is estimated by discounting the future cash
flows using interest rates determined by management to reflect the
credit risk and remaining maturities of the related notes and
contracts. The estimated fair value of the Senior Notes, included
in notes payable and capital lease obligations, was based on the
yield required at the respective year end of a private placement of
similar terms and credit valuation. The carrying value of the lines
of credit, also included in notes payable and capital lease
obligations, approximates fair value. The estimated fair value of
foreign currency contracts is based on quoted market prices for an
instrument with terms similar to the contract at year end.
12. Earnings Per Share
Effective October 1, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." Weighted average shares for the years ended
September 30, 1997 and 1996 have been restated in accordance with
SFAS No. 128. The following table shows the reconciliation of basic
earnings per share ("EPS") to diluted EPS:
Years Ended September 30,
1998 1997 1996
(Dollars in thousands, except
per share amounts)
Net income $152,446 $137,247 $118,017
Weighted average common shares
outstanding 113,064 120,715 126,555
Dilutive effect of stock options
outstanding 1,639 1,114 857
Weighted average common and common
equivalent shares outstanding 114,703 121,829 127,412
Basic earnings per share $ 1.35 $ 1.14 $ 0.93
Diluted earnings per share $ 1.33 $ 1.13 $ 0.93
Notes to Consolidated Financial Statements, (continued)
Options to purchase 159,000, 127,000 and 683,544 shares of common
stock at September 30, 1998, 1997 and 1996, respectively, 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. The Company has purchased a total of 920,000
shares, or approximately 1%, of its outstanding common stock during
the period October 1, 1998 to November 20, 1998. There were no other
transactions in the same period which would have materially changed
the number of common shares or potential common shares outstanding.
13. 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 lawsuits described below, to have a material
adverse effect on the Company's financial position or results of
future operations.
Along with a number of other public gaming corporations, 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.
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.
The Company previously disclosed in its September 30, 1997 Form 10-K
that its exclusive distributorship agreement between the Company and
Atlantic City Coin and Slot Service Company ("ACCS") whereby ACCS
agreed to sell certain products on behalf of the Company, principally
into the Atlantic City, New Jersey market, was expected to end in
June 1998 upon expiration of the term of the agreement. In September
1997, the Company notified ACCS that it would not renew the
agreement. ACCS subsequently filed suit in the U.S. District Court
for the District of New Jersey against the Company seeking, among
other things, injunctive relief under the New Jersey Franchise
Practices Act. On July 13, 1998, the Court granted ACCS' motion for
injunctive relief, preliminarily enjoining the Company's termination
of the 1993 agreement. The Company and ACCS have executed a
settlement agreement that resolves all outstanding claims. The
agreement has been lodged with the court and it is anticipated the
court will approve the agreement in December 1998. The agreement
provides that, among other things, ACCS will remain the Company's
distributor pursuant to the 1993 agreement.
14. Income Taxes
SFAS No. 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The
Company determines the net current deferred tax asset or liability
and the net noncurrent asset or liability separately for federal,
state, and foreign jurisdictions.
Notes to Consolidated Financial Statements, (continued)
The effective income tax rates differ from the statutory United
States federal income tax rates as follows:
Years Ended September 30,
1998 1997 1996
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
Taxes at federal statutory rate $82,086 35.0% $74,419 35.0% $64,545 35.0%
Foreign subsidiaries tax 591 0.3 (158) 0.0 3,855 2.1
State income tax, net 2,049 0.9 2,084 1.0 2,834 1.5
Foreign sales corporation (1,453) (0.6) (1,380) (0.7) (1,567) (0.8)
Other, net (1,187) (0.6) 413 0.2 (3,281) (1.8)
Provision for income taxes $82,086 35.0% $75,378 35.5% $66,386 36.0%
Components of the provision for income taxes were as follows:
Years Ended September 30,
1998 1997 1996
(Dollars in thousands)
Current
Federal $106,431 $102,171 $ 90,992
State 4,657 3,632 3,898
Foreign 2,922 1,652 4,076
Total current 114,010 107,455 98,966
Deferred
Federal (30,862) (30,283) (28,493)
State (2,149) (308) (1,225)
Foreign 1,087 (1,486) (2,862)
Total deferred (31,924) (32,077) (32,580)
Provision for income taxes $ 82,086 $ 75,378 $ 66,386
Pre-tax income subject to United States taxation totaled $213.0 million, $
200.8 million and $178.0 million for fiscal 1998, 1997 and 1996,
respectively. Pre-tax income subject to foreign taxation totaled
$21.5 million, $11.8 million and $6.4 million for fiscal 1998, 1997
and 1996, respectively.
Notes to Consolidated Financial Statements, (continued)
Significant components of the Company's deferred tax assets and
liabilities are as follows:
September 30,
1998 1997
(Dollars in thousands)
Current deferred tax assets
Reserves not currently deductible $ 13,208 $ 11,653
Reserve differential for gaming activities 2,315 45
Foreign subsidiaries 687 3,909
Other 1,062 3,065
Current deferred tax liabilities
Unrealized gain on investment securities (719) (443)
Other (36) -
Net current deferred tax asset 16,517 18,229
Non-current deferred tax assets
Reserve differential for gaming activities 122,407 88,029
Foreign subsidiaries 5,328 6,585
State income taxes 4,368 2,971
Other 7,655 2,055
Non-current deferred tax liabilities
Difference between book and tax basis
of property (5,793) (1,301)
Amortization of goodwill (1,732) -
Other (525) (267)
Net non-current deferred tax asset 131,708 98,072
Net deferred tax asset $148,225 $116,301
15. Employee Benefit Plans
Employee Incentive Plans
Under a discretionary program effective January 1, 1986 and
reviewable annually by the Company's Board of Directors, the Company
contributed 11% of consolidated operating profits before incentives
(excluding IGT-Australia and IGT-UK) to the following three employee
incentive plans: profit sharing and 401(k) plan; cash sharing; and
management bonus. The total annual contributions under all three
plans were $25.9 million, $22.7 million and $21.8 million in fiscal
1998, 1997 and 1996, respectively.
The profit sharing plan was originally adopted in 1980 for the
Company's employees working in the United States. Benefits vest over
a seven year period of employment. Effective January 1, 1993, the
Company began distributing a portion of the profit sharing plan
contribution under a 401(k) retirement plan matching program. Per
the plan agreement, the Company matches 100% of employee
contributions up to $500 and an additional 50% of the next $500
contributed by the employee. This allows for maximum annual Company
contributions of $750 to each employee's 401(k) account. These
contributions vest immediately. In fiscal 1998, 1997 and 1996, the
Company match portion of the total profit sharing contribution was
$991,000, $933,000 and $913,000, respectively. The Company's foreign
subsidiaries have similar retirement plans.
The cash sharing plan calls for semi-annual distributions to all non
IGT-Australia and IGT-UK employees. The management bonuses are paid
out annually to key employees throughout the Company. IGT-Australia
and IGT-UK have similar employee incentive plans.
Notes to Consolidated Financial Statements, (continued)
Stock-Based Compensation Plans
The Company has three stock-based compensation plans, which are
described below.
Employee Stock Purchase Plan
In 1987, the Company adopted a Qualified Employee Stock Purchase
Plan. Under this Plan, each eligible employee may be granted an
option to purchase a specific number of shares of the Company's
common stock. The term of each option is 12 months, and the
exercise date is the last day of the option period. Employees who
have completed 90 days of service with the Company are eligible.
Employees who are officers, 5% or more shareholders, employees
receiving more than $80,000 in annual compensation and employees of
certain subsidiaries are excluded.
An aggregate of 2.4 million shares may be made available under this
plan. Employees may participate in this plan only through payroll
deductions up to a maximum of 10% of their base pay. The option
price is equal to the lesser of 85% of the fair market value of the
common stock on the date of grant or on the date of exercise. At
September 30, 1998, 719,000 shares were available under this plan.
Restricted Stock Awards
In March 1996, 600,000 shares were issued to six employees at a
price of $.01 per share. In accordance with employment agreements,
these restricted stock awards vest in increments over a five year
period. Dividends on the shares issued are paid to the employees.
The unvested shares issued to the employees are subject to
repurchase by the Company at $.01 per share if the employee's
employment terminates for certain reasons prior to the vesting of
such shares.
In February 1997, the Company amended the 1993 Stock Option Plan to
permit the grant of restricted stock awards of a fixed number of
shares to participants determined by the Company's Board of
Directors. Restricted stock awarded to a participant may not be
voluntarily or involuntarily sold, assigned, transferred, pledged or
encumbered during the restricted period. Shares awarded to
participants in fiscal 1998 and 1997 totaled 10,000 and 200,000
shares, respectively, at a price of $.01 per share as determined by
the Board of Directors. The shares vest in increments over a five
year period.
Stock Option Plans
In 1981, the Company adopted a Stock Option Plan under which
nonqualified and incentive stock options to purchase up to 27.1
million shares may be granted. This plan expired in December 1996.
In 1993, the Company adopted an additional Stock Option Plan under
which nonqualified and incentive stock options to purchase up to 5.0
million shares may be granted to employees and up to 250,000
nonqualified stock options may be granted to non-employee directors
of the Company.
Notes to Consolidated Financial Statements, (continued)
Options have been granted at fair market value on the date of grant
and, except for non-employee director options, typically vest
ratably over five years although a shorter period may be provided,
and expire 10 years subsequent to the grant. At September 30, 1998,
options to purchase 540,000 shares were available for grant under
the plans.
Number Weighted Average
of Shares Exercise Price
Outstanding at October 1, 1995 3,480,402 $ 12.64
Granted 2,581,189 $ 13.59
Forfeited or expired (1,327,561) $ 16.78
Exercised (482,995) $ 5.86
Outstanding at September 30, 1996 4,251,035 $ 12.64
Granted 1,876,361 $ 18.07
Forfeited or expired (271,557) $ 13.98
Exercised (299,102) $ 8.56
Outstanding at September 30, 1997 5,556,737 $ 14.56
Granted 809,617 $ 23.30
Forfeited or expired (170,984) $ 17.63
Exercised (617,742) $ 10.27
Outstanding at September 30, 1998 5,577,628 $ 16.19
Options exercisable at September 30,
1998 2,540,732 $ 14.25
1997 2,366,978 $ 12.76
1996 764,285 $ 8.93
Valuation of Stock-Based Compensation Plans
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" on October 1, 1996. As permitted by SFAS No. 123, the
Company continues to apply Accounting Principles Board Opinion No.
25 to its stock-based compensation. Accordingly, no compensation
expense has been recognized for the stock option and employee stock
purchase plans. The compensation expense that has been charged
against income for the restricted stock award plan was $2.0 million,
$2.6 million and $1.2 million for fiscal 1998, 1997 and 1996,
respectively. SFAS No. 123 requires compensation expense to be
measured based on the fair value of the equity instrument awarded.
Notes to Consolidated Financial Statements, (continued)
If compensation expense for the Company's three stock-based
compensation plans had been determined in accordance with SFAS No.
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts shown below.
Years Ended September 30,
1998 1997 1996
(Dollars in thousands, except
per share amounts)
Net income
As reported $152,446 $137,247 $118,017
Pro forma 146,948 132,506 115,251
Basic earnings per share
As reported $ 1.35 $ 1.14 $ 0.93
Pro forma 1.30 1.10 0.91
Diluted earnings per share
As reported $ 1.33 $ 1.13 $ 0.93
Pro forma 1.28 1.10 0.90
Weighted average fair value of
options granted during the year $ 8.27 $ 6.27 $ 3.98
Weighted average fair value of
restricted stock awards granted
during the year $ 23.75 $ 18.24 $ 14.16
The fair value for stock-based compensation was estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998, 1997 and 1996,
respectively: interest rates (zero-coupon U.S. government issues
with a remaining life of 1.5 years) of 5.6%, 5.6% and 5.1%; dividend
yields of .47%, .71% and .73%; volatility factors of the expected
market price of the Company's common stock of .35, .44 and .46;
weighted-average expected life of stock options of 1.5 years and an
expected life of 1.0 years for employee stock purchases.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee stock based compensation has characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock based compensation.
16. Related Party Transactions
Related party transactions included in the consolidated financial
statements are as follows:
1998 1997 1996
(Dollars in thousands)
Years Ended September 30,
Total revenues $84,994 $35,601 $11,843
September 30,
Accounts receivable $ 8,205 $25,433 $ 1,151
Current maturities of
long-term notes and
contracts receivable - 1,831 2,911
Long-term notes and contracts
receivable 4 123 2,474
Notes to Consolidated Financial Statements, (continued)
Joint Ventures
The Company has entered into a number of joint venture agreements
(the "Ventures") with various gaming or gaming related companies.
Activities of these Ventures include placement of progressive system
and other participation games and pursuit of video lottery
opportunities of pari-mutuel based wagering. The Company owns a 50%
share in each of the Ventures and recognized net revenues of $65.2
million during fiscal 1998. During the year, $56.2 million in asset
and expense transfers and $1.4 million in capital contributions were
made to the Ventures. At September 30, 1998, the Company had
accounts receivable balances from these Ventures of $6.9 million.
The largest aggregate amount of indebtedness outstanding at any time
during the year was $25.5 million.
The Company applies the equity method of accounting to the joint
ventures. Summarized financial information from the Spin for Cash
Joint Venture and Master License Agreement with Anchor Gaming (the
"Anchor joint venture"), which began operations in the quarter ended
December 31, 1996, is as follows:
Years ended September 30,
1998 1997
(Dollars in thousands)
Revenues $246,851 $60,672
Expenses 117,294 31,202
Operating income 129,557 29,470
Net income 130,979 29,148
As of September 30,
1998 1997
(Dollars in thousands)
Total assets $171,742 $83,300
Total liabilities 107,815 48,209
Total equity 63,927 35,091
Other Related Parties
During fiscal 1997 and 1996, a member of the Company's Board of
Directors was an officer of, and had an equity interest in, a Nevada
gaming business from which the Company recognized revenues of
$956,000 and $536,000, respectively. The Company had contracts and
accounts receivable balances from this customer of $243,000 at
September 30, 1997. He is also a director and officer of the parent
company of additional gaming businesses, from which the Company
recognized revenues of $19.8 million, $21.5 million and $11.3
million during the fiscal years ended September 30, 1998, 1997 and
1996, respectively. The Company had contracts and accounts
receivable balances from these businesses of $1.3 million at both
September 30, 1998 and 1997. The largest aggregate amount of
indebtedness outstanding at anytime during the year was $2.0
million.
Effective October 1, 1993, the Company entered into an Agreement
with National Holdings, Inc. ("NHI") to form IGT-NHI Joint Venture
Company ("IGT-NHI") to engage in the business of supplying and
operating bingo halls and electronic gaming devices in the Peoples
Republic of China. Prior to the dissolution of IGT-NHI in fiscal
1997, the Company had a 33% ownership interest in IGT-NHI. During
fiscal 1997 and 1996, the Company wrote off the receivables from IGT-
NHI, totaling $401,000 and $1.9 million, respectively. These
balances were substantially reserved in fiscal 1996.
Notes to Consolidated Financial Statements, (continued)
The Company entered into a joint venture agreement with a wholly-
owned subsidiary of Ladbroke Group PLC to form Ladbroke Gaming
Argentina ("LGA") on January 27, 1995. LGA, 50% of which was owned
by the Company, was formed to install gaming machines and conduct
gaming operations within authorized gaming establishments in
Argentina. In May, 1996, the Company sold its investment in LGA,
recognizing a loss of $912,000. No revenues from this joint venture
were recognized in fiscal 1998, 1997 or 1996. At September 30,
1998, no amounts were owed the Company by LGA for the sale of this
investment. At September 30, 1997, LGA owed the Company $400,000.
17. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not reflected
in the consolidated statements of cash flows. No notes or capital
lease obligations were issued by the Company to obtain property,
plant and equipment in the year ended September 30, 1998. The
Company issued notes or incurred capital lease obligations to obtain
property, plant and equipment in the years ended September 30, 1997
and 1996 of $12,000 and $143,000, respectively.
The Company manufactures gaming machines which are used on its
proprietary systems and are leased to customers under operating
leases. Property, plant and equipment increased $17.3 million,
$11.0 million and $21.0 million in the years ended September 30,
1998, 1997 and 1996, respectively, as the net result of transfers
between inventory and fixed assets.
The Company had dividends declared, but not yet paid at September
30, 1998, 1997 and 1996, totaling $3.3 million, $3.4 million and
$3.8 million, respectively.
The tax benefit of stock options and the employee stock purchase
plan totaled $3.2 million, $278,000 and $906,000 for the years ended
September 30, 1998, 1997 and 1996, respectively.
Payments of interest for the years ended September 30, 1998, 1997
and 1996 were $41.2 million, $30.5 million and $26.3 million,
respectively. Payments for income taxes for the years ended
September 30, 1998, 1997 and 1996 were $101.2 million, $97.0 million
and $102.1 million, respectively.
During the year, the fair value of assets acquired and liabilities
assumed in conjunction with acquisitions of business (see Note 2)
totaled $100.1 million and $23.6 million, respectively.
Notes to Consolidated Financial Statements, (continued)
18. Business Segments
The Company operates principally in two lines of business: the
manufacture and sale of gaming products (product sales) and the
operation of wide-area progressive systems and gaming equipment
leasing (gaming operations).
Years Ended September 30,
1998 1997 1996
(Dollars in thousands)
Revenues
Manufacture of gaming products $ 477,024 $ 461,150 $ 481,652
Gaming operations 347,099 282,820 251,800
Total $ 824,123 $ 743,970 $ 733,452
Operating Profit
Manufacture of gaming products $ 84,213 $ 109,730 $ 115,370
Gaming operations 169,795 114,769 89,887
Total 254,008 224,499 205,257
Other expense, including interest
expense (19,476) (11,874) (20,854)
Income Before Income Taxes $ 234,532 $ 212,625 $ 184,403
Capital Expenditures
Manufacture of gaming products $ 5,149 $ 4,676 $ 38,420
Gaming operations 2,411 2,255 5,817
Corporate 9,268 26,157 27,338
Total $ 16,828 $ 33,088 $ 71,575
Depreciation and Amortization
Manufacture of gaming products $ 9,615 $ 4,668 $ 3,201
Gaming operations 18,017 19,683 15,846
Corporate 13,836 10,673 11,455
Total $ 41,468 $ 35,024 $ 30,502
Identifiable Assets
Manufacture of gaming products $ 639,914 $ 460,104 $ 447,829
Gaming operations 754,849 600,918 440,729
Corporate 148,865 154,030 265,629
Total $1,543,628 $1,215,052 $1,154,187
Notes to Consolidated Financial Statements, (continued)
The Company's operations are based in the United States and
internationally. The table below presents information as to the
Company's operations by these two regions.
Years Ended September 30,
1998 1997 1996
(Dollars in thousands)
Revenues
Domestic
Unaffiliated customers $ 634,695 $ 601,934 $ 612,071
Inter-area transfers 36,809 30,455 33,774
International
Unaffiliated customers 189,428 142,036 121,381
Inter-area transfers 7,023 - -
Eliminations (43,832) (30,455) (33,774)
Total $ 824,123 $ 743,970 $ 733,452
Operating Profit
Domestic $ 217,493 $ 205,331 $ 198,948
International 36,515 19,168 6,309
Total 254,008 224,499 205,257
Other expense, including
interest expense (19,476) (11,874) (20,854)
Income Before Income Taxes $ 234,532 $ 212,625 $ 184,403
Identifiable Assets
Domestic $1,235,868 $1,092,317 $1,047,383
International 307,760 122,735 106,804
Total $1,543,628 $1,215,052 $1,154,187
On a consolidated basis the Company does not recognize intersegment
revenues or expenses upon the transfer of gaming products between
segments. Operating profit is revenue and interest income related
to investments to fund jackpot liabilities less cost of sales and
operating expenses, including related operating depreciation and
amortization, provisions for bad debts, and an allocation of a
portion of selling, general and administrative and research and
development expenses. Other expense includes interest expense,
interest income and gain (loss) on sale of assets.
During the fiscal years ended September 30, 1998, 1997 and 1996, the
Company made net sales of $38.4 million, $35.4 million and $61.5
million, respectively, to Sodak, the Company's principal distributor
of gaming products to Native American reservations. These sales
aggregated approximately 8%, 8% and 13% of the Company's total
product sales for the fiscal years 1998, 1997 and 1996,
respectively. The Company believes the loss of this customer would
not have a long-term material adverse effect on product sales as
other means of distribution to this market are available.
The Company had total export sales from the United States of
approximately $33.9 million, $33.6 million and $24.3 million during
the fiscal years ended September 30, 1998, 1997 and 1996,
respectively.
Notes to Consolidated Financial Statements, (continued)
19. Selected Quarterly Financial Data (Unaudited)
First Qtr Second Qtr Third Qtr Fourth Qtr
(Dollars in thousands,
except per share amounts
and stock prices)
1998
Total revenues $ 165,011 $182,090 $222,982 $254,040
Income from operations 42,786 53,223 60,210 62,658
Net income 29,665 35,492 45,595 41,694
Diluted earnings per share $ .26 $ .31 $ .40 $ .37
Stock price
High $26 13/16 $26 3/16 $28 9/16 $ 28 7/8
Low $21 7/8 $23 3/16 $23 5/8 $ 18 1/2
1997
Total revenues $ 189,381 $164,371 $163,849 $226,369
Income from operations 49,774 40,023 41,899 59,741
Net income 33,668 27,714 34,472 41,393
Diluted earnings per share $ .27 $ .22 $ .29 $ .36
Stock price
High $23 1/2 $19 3/4 $19 1/8 $ 23 1/4
Low $17 5/8 $16 1/4 $15 3/8 $ 16 1/2
1996
Total revenues $ 156,223 $160,547 $196,635 $220,047
Income from operations 30,674 29,048 51,290 58,821
Net income 27,663 19,370 34,721 36,263
Diluted earnings per share $ .21 $ .15 $ .27 $ .28
Stock price
High $13 3/4 $15 1/8 $18 1/4 $ 21 3/8
Low $10 3/4 $10 3/4 $14 1/8 $ 15 1/2
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
The information required by Items 10, 11, 12 and 13 is incorporated
by reference from the 1998 Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days of the end of the
fiscal year covered by this report.
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(a)(1) Consolidated Financial Statements:
Reference is made to the Index to Financial
Statements and Related Information under Item 8 in Part II
hereof where these documents are listed.
(a)(2) Consolidated Financial Statement Schedule: Page
VIII Valuation and Qualifying Accounts 71
Other financial statement schedules are either not
required or the required information is included in the
Consolidated Financial Statements or Notes thereto.
Parent Company Financial Statements - Financial
Statements of the Registrant only are omitted under Rule 3-
05 as modified by ASR 302.
(a)(3) Exhibits:
3.1 Articles of Incorporation of International Game
Technology, as amended (incorporated by reference to Exhibit
3.1 to Registrants Report on Form 10-K for the year ended
September 30, 1995).
3.2 Second Restated Code of Bylaws of International Game
Technology, dated November 11, 1987 (incorporated by reference
to Exhibit 3.2 to Registrants Report on Form 10-K for the year
ended September 30, 1995).
4.1 Note Agreement for the 7.84% Senior Notes due September 1,
2004 (incorporated by reference to Exhibit 4.1 to Registrants
Report on Form 10-K for the year ended September 30, 1995).
10.1 Stock Option Plan for Key Employees of International Game
Technology, as amended (incorporated by reference to Exhibit
10.26 to Registration Statement No. 33-12610 filed by
Registrant).
10.2 International Game Technology 1993 Stock Option Plan
(incorporated by reference to Exhibit A to the Proxy Statement
for the 1997 Annual Meeting of Shareholders).
10.3 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.3 to Registrants Report on Form 10-K for the year
ended September 30, 1997).
10.4 Employment Agreement with David P. Hanlon, former Chief
Executive Officer, President, Chief Operating Officer, Chief
Financial Officer and Treasurer dated December 1, 1994 and
amendment dated January 1, 1995 (incorporated by reference to
Exhibit 10.8 to Registrants Report on Form 10-K for the year
ended September 30, 1996).
10.5 Employment Agreement with Robert A. Bittman, Executive Vice
President, Product Development dated March 12, 1996
(incorporated by reference to Exhibit 10.9 to Registrants
Report on Form 10-K for the year ended September 30, 1996).
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K (continued)
10.6 Form of officers and directors indemnification agreement
(incorporated by reference to Exhibit 10.10 to Registrants
Report on Form 10-K for the year ended September 30, 1996).
10.7 Credit Agreement by and among International Game Technology
and the Bank of New York, Wells Fargo and other banks, dated May 22,
1997 (incorporated by reference to Exhibit 10.11 to Registrant's
Report on Form 10-Q for the quarter ended June 30, 1997).
10.8 Employment Agreement with G. Thomas Baker, President, Chief
Operating Officer dated March 12, 1997. (incorporated by reference to
exhibit 10.8 to Registrants Report on Form 10-K for the year ended
September 30, 1997).
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 (incorporated by reference to Exhibit 10.9 to
Registrant's Report on Form 10-Q for the quarter ended March 31,
1998).
10.10 Joint Venture Agreement, dated December 3, 1996 by and
between International Game Technology and Anchor Games, a
d.b.a. of Anchor Coin.
11 Computation of Earnings Per Share
21 Subsidiaries
23 Independent Auditors' Consent
24 Power of Attorney (see page 70 hereof)
27 Financial data schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the three-month period
ended September 30, 1998.
99.1 Financial statements of Spin for Cash Joint Venture and Master
License Agreement for the years ended September 30, 1998 and
1997.
Power of Attorney
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 14th day of December, 1998.
International Game Technology
By:/s/ Maureen T. Imus
Maureen T. Imus
Chief Financial Officer and
Vice President, Finance
Each person whose signature appears below hereby authorizes Maureen
Imus and Brian McKay, or either of them, as attorneys-in-fact to
sign on his behalf, individually, and in each capacity stated below,
and to file all amendments and/or supplements to this Annual Report
on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Charles N. Mathewson Chairman of the Board of December 14, 1998
Charles N. Mathewson Directors and Chief Executive
Officer
/s/ G. Thomas Baker President and Chief Operating December 14, 1998
G. Thomas Baker Officer
/s/ Maureen T. Imus Chief Financial Officer and December 14, 1998
Maureen T. Imus Vice President, Finance
/s/ Albert J. Crosson Director and Vice Chairman of December 14, 1998
Albert J. Crosson the Board of Directors
/s/ John J. Russell Director December 14, 1998
John J. Russell
/s/ Warren L. Nelson Director December 14, 1998
Warren L. Nelson
/s/ Wilbur K. Keating Director December 14, 1998
Wilbur K. Keating
/s/ Frederick B. Rentschler Director December 14, 1998
Frederick B. Rentschler
/s/ Claudine B. Williams Director December 14, 1998
Claudine B. Williams
/s/Rockwell A. Schnabel Director December 14, 1998
Rockwell A. Schnabel
SCHEDULE VIII - Consolidated Valuation and Qualifying Accounts
Balance at Increase (Decrease) Balance
Beginning in at End
of Period Provisions Unrealized Gains of Period
(Dollars in thousands)
Valuation Allowance on
Investment Securities:
Year ended 9/30/96 $4,461 $ - $ 5,261 $9,722
Year ended 9/30/97 $9,722 $ - $(8,457) $1,265
Year ended 9/30/98 $1,265 $ - $ 788 $2,053
Balance at Accounts Balance
Beginning Written at End
of Period Provisions Recoveries Off of Period
(Dollars in thousands)
Allowance for
Doubtful Accounts:
Year ended 9/30/96 $ 5,182 $3,968 $139 $3,608 $ 5,681
Year ended 9/30/97 $ 5,681 $4,597 $236 $4,615 $ 5,899
Year ended 9/30/98 $ 5,899 $ 927 $351 $1,665 $ 5,512
Allowance for
Doubtful Notes and
Contracts Receivable:
Year ended 9/30/96 $13,614 $7,655 $ 46 $1,540 $19,775
Year ended 9/30/97 $19,775 $4,911 $211 $6,668 $18,229
Year ended 9/30/98 $18,229 $3,808 $246 $5,555 $16,728
SCHEDULE VIII - Consolidated Valuation and Qualifying Accounts, (continued)
Balance at Balance
Beginning Income Income at End
of Period Deferred Recognized of Period
(Dollars in thousands)
Income Deferred
under the Installment
Method:
Year ended 9/30/96 $ 30 $ - $ 30 $ -
Year ended 9/30/97 $ - $ - $ - $ -
Year ended 9/30/98 $ - $ - $ - $ -
Balance at Disposed Balance
Beginning of and at End
of Period Provisions Written Off of Period
(Dollars in thousands)
Obsolete Inventory Reserve:
Year ended 9/30/96 $14,902 $12,064 $ 8,801 $18,165
Year ended 9/30/97 $18,165 $11,381 $14,665 $14,881
Year ended 9/30/98 $14,881 $ 9,173 $ 5,480 $18,574
Obsolete Fixed Assets
Reserve:
Year ended 9/30/96 $ 459 $ (132) $ 327 $ -
Year ended 9/30/97 $ - $ - $ - $ -
Year ended 9/30/98 $ - $ - $ - $ -