UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending: March 31, 2001
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File Number 001-10684
INTERNATIONAL GAME TECHNOLOGY
(Exact name of registrant as specified in charter)
Nevada 88-0173041
(State of Incorporation) (IRS Employer Identification No.)
9295 Prototype Drive, Reno, Nevada 89511
(Address of principal executive offices)
(775) 448-7777
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 28, 2001
Common Stock -----------------------------
par value $.000625 per share 73,986,618
International Game Technology
Table of Contents
Part I - Financial Information
Page
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three and Six Months Ended March 31, 2001 and April 1, 2000....4
Condensed Consolidated Balance Sheets -
March 31, 2001 and September 30, 2000 .........................5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended March 31, 2001 and April 1, 2000..............7
Notes to Condensed Consolidated Financial Statements..............9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......23
Part II - Other Information
Item 1. Legal Proceedings................................................24
Item 2. Changes in Securities............................................24
Item 3. Defaults Upon Senior Securities..................................24
Item 4. Submission of Matters to a Vote of Security Holders..............24
Item 5. Other Information................................................24
Item 6. Exhibits and Reports on Form 8-K.................................25
Signature...................................................................26
Part I - Financial Information
Item 1. Financial Statements
General
The following unaudited condensed consolidated financial statements were
prepared by International Game Technology (referred throughout this document,
together with its consolidated subsidiaries where appropriate, as IGT, Company,
we, our, and us) and include all normal adjustments considered necessary to
present fairly the financial position for the interim periods. These adjustments
are of a normal recurring nature. These financial statements and notes are
presented as permitted by the instructions to Form 10-Q and therefore do not
contain certain information included in our audited consolidated financial
statements and notes for the year ended September 30, 2000. Operating results
for current periods do not necessarily indicate the results that may be expected
for the fiscal year ending September 29, 2001.
You should read these financial statements along with the financial statements,
accounting policies and notes included in our Annual Report on Amended Form
10-K/A for the fiscal year ended September 30, 2000. We believe that the
disclosures in this document are adequate to make the information presented not
misleading. Certain amounts in the unaudited condensed consolidated financial
statements presented for the prior year comparable periods have been
reclassified to be consistent with the presentation used in the current fiscal
periods. In this report and in each of our reports, as amended, beginning with
our Report on Form 10-K for the year ended September 30, 2000, we have
reclassified our presentation of earnings from unconsolidated joint venture
operations. We previously reported earnings from unconsolidated joint ventures,
net of expenses, as a component of gaming operations revenues. In each of our
reports as amended, beginning with our Report on Form 10-K for the year ended
September 30, 2000 and going forward, we will report the net results of our
unconsolidated joint ventures as a separate component of operating income on our
income statement under a separate caption titled Earnings of Unconsolidated
Affiliates. This reclassification has no impact on operating income, net
income, or earnings per share as reflected on our consolidated statements of
income and no impact on our consolidated balance sheets and statements of
cash flows.
The following are trademarks, service marks, and/or federally registered
trademarks of International Game Technology or its wholly-owned subsidiaries:
After Shock, All for One, Big Brother, Diamond Cinema, Dollars Deluxe, Double
Diamond 2000, Dynamite, EZ Pay, EZ Play, Fabulous 50's, Five Play Draw Poker,
Game King, High Rollers, IGT Gaming System, IGS, iGame, iGame Plus, Integrated
Voucher System, IVS, King Kebab, Little Green Men, Megabucks, MegaJackpots,
Monedin Joker, Multi-Denomination, Multi-Hand Poker, Neon Nights, Nickelmania,
Nickels, Nickels Deluxe, Party Time, Pokermania, Popper King, Psycho Cash Beast
Club, Quartermania, Quarters Deluxe, S2000, Revolution, S-Plus, Security
Accounting Management System, SAMS, Slotopoly, Super Nickelmania, Super Vision,
Texas Tea, Triple Play Draw Poker, Triple Play Poker, and Vision Series.
IGT designs, manufactures, produces, operates, uses, and/or otherwise has
permission to exploit certain gaming machines utilizing materials under license
from third-party licensors. More specifically, the games which have been
mentioned in this filing and their related trademark and copyright ownership
information are: "The Addams Family"(TM) is developed under agreement with
Monaco Entertainment Corporation; "Elvis, Elvis Presley, and King of Rock `n'
Roll" are registered trademarks of Elvis Presley Enterprises, Inc.;
"Jeopardy!"(R) is a registered trademark of Jeopardy Productions, Inc.; "Wheel
of Fortune"(R) is a registered trademark of Califon Productions, Inc.; "Regis'
Cash Club" is a game developed in conjunction with Philbin Enterprises;
"$1,000,000 Pyramid "(TM) is a trademark of CPT Holdings, Inc.; "I Dream of
Jeannie" (TM) is a trademark of CPT Holdings, Inc.,; "The Three Stooges"(R), the
characters, names and all related indicia are trademarks of C3 Entertainment,
Inc.; " The Honeymooners"(TM) is a trademark used under license; "Let's Make A
Deal"(R) is a trademark of Let's Make a Deal, is registered in the US and is
pending elsewhere, and is used under license; "Beverly Hillbillies" (TM) is a
trademark of CBS Worldwide Inc.; "Lifestyles of the Rich and Famous"(TM) is a
trademark of Rysher Entertainment, Inc.; "The Munsters" is a trademark of
Universal Studios, licensed by Universal Studios Licensing, Inc.; "American
Bandstand"(R) is a trademark of Dick Clark Productions, Inc.; "Wheel of Gold"
and "Totem Pole" are federally registered trademarks of Anchor Gaming.
Condensed Consolidated Statements of Income
Three Months Ended Six Months Ended
--------------------------- ---------------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Revenues
Product sales $ 221,158 $ 118,656 $ 413,508 $ 228,416
Gaming operations 91,587 74,628 169,666 150,519
---------- ---------- --------- ----------
Total revenues 312,745 193,284 583,174 378,935
---------- ---------- --------- ----------
Costs and Expenses
Cost of product sales 134,700 75,283 249,903 143,483
Cost of gaming operations 41,304 32,861 75,360 66,173
Selling, general and administrative 47,247 35,740 86,845 68,709
Depreciation and amortization 4,676 5,252 9,545 10,648
Research and development 15,478 13,318 29,564 26,707
Provision for bad debts 4,553 1,436 10,305 3,275
Impairment of assets and restructuring (600) - (1,100) 1,779
---------- ---------- --------- ----------
Total costs and expenses 247,358 163,890 460,422 320,774
---------- ---------- --------- ----------
Earnings of Unconsolidated Affiliates 34,163 24,769 65,465 45,635
---------- ---------- --------- ----------
Income from Operations 99,550 54,163 188,217 103,796
---------- ---------- --------- ----------
Other Income (Expense)
Interest income 12,072 13,001 24,417 27,105
Interest expense (25,379) (25,621) (50,484) (50,914)
Gain (loss) on the sale of assets 356 (762) 465 (771)
Other (1,590) (2,094) (1,113) 25,725
---------- ---------- ---------- ----------
Other income (expense), net (14,541) (15,476) (26,715) 1,145
---------- ---------- --------- ----------
Income Before Income Taxes 85,009 38,687 161,502 104,941
Provision for Income Taxes 31,453 13,927 59,755 37,779
---------- ---------- --------- ----------
Net Income $ 53,556 $ 24,760 $ 101,747 $ 67,162
========== ========== ========= ==========
Basic Earnings Per Share $ 0.73 $ 0.33 $ 1.39 $ 0.83
========== ========== ========= ==========
Diluted Earnings Per Share $ 0.70 $ 0.33 $ 1.34 $ 0.82
========== ========== ========= ==========
Weighted Average Common Shares Outstanding 73,512 75,247 73,136 80,824
Weighted Average Common and Potential
Shares Outstanding 76,414 76,048 76,009 81,614
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed Consolidated Balance Sheets
March 31, September 30,
2001 2000
------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Current assets
Cash and cash equivalents $ 214,773 $ 244,907
Investment securities at market value 13,357 21,473
Accounts receivable, net of allowances for doubtful
accounts of $17,868 and $13,831 248,152 219,948
Current maturities of long-term notes and contracts
receivable, net of allowances 91,608 76,320
Inventories, net of allowances for obsolescence of
$29,100 and $24,304:
Raw materials 105,715 98,081
Work-in-process 4,117 4,593
Finished goods 76,404 44,315
------------ ------------
Total inventories 186,236 146,989
------------ ------------
Investments to fund liabilities to jackpot winners 28,481 27,939
Deferred income taxes 32,969 29,086
Prepaid expenses and other 59,862 47,564
------------ ------------
Total Current Assets 875,438 814,226
------------ ------------
Long-term notes and contracts receivable, net of
allowances and current maturities 94,763 76,888
------------ ------------
Property, plant and equipment, at cost
Land 19,869 19,889
Buildings 75,940 75,891
Gaming operations equipment 106,376 87,918
Manufacturing machinery and equipment 125,625 121,512
Leasehold improvements 4,871 4,996
------------ ------------
Total 332,681 310,206
Less accumulated depreciation and amortization (153,143) (143,297)
------------- ------------
Property, plant and equipment, net 179,538 166,909
------------ ------------
Investments to fund liabilities to jackpot winners 231,471 229,726
Deferred income taxes 124,595 97,670
Intangible assets 174,026 143,738
Other assets 111,734 94,559
------------ ------------
Total Assets $ 1,791,565 $ 1,623,716
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed Consolidated Balance Sheets
March 31, September 30,
2001 2000
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes payable $ 4,618 $ 4,621
Accounts payable 71,339 76,387
Jackpot liabilities 75,118 55,942
Accrued employee benefit plan liabilities 22,541 31,425
Accrued interest 31,257 31,369
Other accrued liabilities 86,268 59,249
------------ ------------
Total Current Liabilities 291,141 258,993
Long-term notes payable and capital lease obligations,
net of current maturities 992,078 991,507
Long-term jackpot liabilities 256,558 267,985
Other liabilities 18,143 8,646
------------ ------------
Total Liabilities 1,557,920 1,527,131
------------ ------------
Commitments and contingencies - -
Stockholders' equity
Common stock, $.000625 par value; 320,000,000 shares
authorized; 154,932,744 and 153,739,686 shares issued 97 96
Additional paid-in capital 312,785 278,825
Retained earnings 1,144,927 1,043,184
Treasury stock; 81,175,767 and 81,170,767 shares, at cost (1,215,707) (1,215,707)
Accumulated other comprehensive loss (8,457) (9,813)
------------ ------------
Total Stockholders' Equity 233,645 96,585
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,791,565 $ 1,623,716
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed Consolidated Statements of Cash Flows
Six Months Ended
----------------------------
March 31, April 1,
2001 2000
------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $ 101,747 $ 67,162
---------- ----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 27,674 29,216
Amortization of discounts and deferred offering costs 1,304 1,205
Provision for bad debts 10,305 3,275
Provision for inventory obsolescence 12,464 9,247
Gain (loss) on investment securities and fixed assets (465) 771
Common stock awards 1,140 639
(Increase) decrease in assets:
Receivables (46,417) 45,127
Inventories (79,776) (21,190)
Prepaid expenses and other (12,630) (17,118)
Other assets (16,261) (7,111)
Net accrued and deferred income taxes, net of tax
benefit of employee stock plans 3,826 1,114
Decrease in accounts payable and accrued liabilities (2,165) (15,425)
Impairment of assets and restructuring charges (recoveries) (1,100) 1,779
Earnings of unconsolidated affiliates (in excess of) less than
distributions 735 (10,587)
Other (4) (112)
---------- ----------
Total adjustments (101,370) 20,830
---------- ----------
Net cash provided by operating activities 377 87,992
---------- ----------
Cash Flows from Investing Activities
Investment in property, plant and equipment (12,243) (5,736)
Proceeds from sale of property, plant and equipment 729 671
Purchase of investment securities - (9,500)
Proceeds from sale of investment securities 12,379 -
Proceeds from investments to fund liabilities to jackpot
winners 12,849 12,337
Purchase of investments to fund liabilities to jackpot
winners (15,129) (11,962)
Cash advanced on loans receivable (23,541) (18,769)
Cash received on loans receivable 8,668 1,903
Proceeds from sale of other assets - 41,914
Investment in unconsolidated affiliates (80) (55)
Acquisition of businesses (31,177) -
---------- ----------
Net cash provided by (used in) investing activities (47,545) 10,803
---------- ----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed Consolidated Statements of Cash Flows
Six Months Ended
---------------------------------
March 31, April 1,
2001 2000
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Financing Activities
Principal payments on debt (17,987) (3,812)
Proceeds from long-term debt 4,335 2,442
Payments on jackpot liabilities (35,341) (61,526)
Collections from systems to fund jackpot liabilities 43,499 43,906
Proceeds from employee stock plans 19,495 4,562
Purchases of treasury stock - (318,460)
----------- -----------
Net cash provided by (used in) financing activities 14,001 (332,888)
----------- -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 3,033 858
----------- -----------
Net Decrease in Cash and Cash Equivalents (30,134) (233,235)
Cash and Cash Equivalents at:
Beginning of Period 244,907 426,343
----------- -----------
End of Period $ 214,773 $ 193,108
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Notes to Condensed Consolidated Financial Statements
1. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were netted against
current and long-term maturities:
March 31, September 30,
2001 2000
---------------------------------------------------------------------
(Dollars in thousands)
Current $ 17,084 $ 14,607
Long-term 4,590 3,426
---------- ----------
$ 21,674 $ 18,033
========== ==========
2. Concentrations of Credit Risk
The financial instruments that potentially subject IGT to concentrations of
credit risk consist principally of cash and cash equivalents and accounts,
contracts, and notes receivable. IGT maintains cash and cash equivalents with
various financial institutions in amounts which, at times, may be in excess of
the FDIC insurance limits.
Product sales and the resulting receivables are concentrated in specific
legalized gaming regions. We also distribute a portion of our products through
third party distributors resulting in significant distributor receivables.
Accounts, contracts, and notes receivable by region as a percentage of total
receivables at March 31, 2001 were as follows:
Domestic Region
Native American casinos 45%
Nevada 24%
Atlantic City (distributor and other) 6%
Riverboats (greater Mississippi River area) 3%
Other US regions (individually less than 3%) 6%
-----
Total domestic 84%
-----
International Region
Europe 6%
Latin America 5%
Australia 4%
Other international (individually less than 3%) 1%
-----
Total international 16%
-----
Total 100%
=====
Notes to Condensed Consolidated Financial Statements
3 Intangible Assets
Intangible assets consist of the following:
March 31, September 30,
2001 2000
--------------------------------------------------------------------------
(Dollars in thousands)
Intellectual property $ 35,312 $ 1,650
Excess of cost over net assets acquired 147,163 148,631
----------- ----------
182,475 150,281
Less accumulated amortization (8,449) (6,543)
----------- ----------
$ 174,026 $ 143,738
=========== ==========
4. Impairment of Assets and Restructuring Costs
IGT -Australia
In the fourth quarter of fiscal 1999, given the unfavorable operating results,
poor product performance, loss of customer confidence and market share,
personnel turnover and changes in the regulatory environment in Australia, we
determined it necessary to re-evaluate the recoverability of the identifiable
intangible assets and goodwill recorded in connection with IGT-Australia's March
1998 acquisition of Olympic Amusements Pty. Ltd. As a result of our review, we
determined that the total unamortized balance of the identifiable intangible
assets and goodwill was impaired and recorded a charge of $86.8 million. In an
effort to return IGT-Australia to a profitable operation, we also developed a
restructuring plan. In connection with the plan, in the fourth quarter of fiscal
1999 we recorded a total of $6.0 million in restructuring costs, composed of
$4.0 million for inventory obsolescence and $2.0 million for asset and facility
redundancy costs. During fiscal 2000, we recorded additional restructuring
charges of $1.9 million related to employee terminations. As of December 30,
2000 the restructuring plan for IGT-Australia was substantially complete. No
additional charges were recorded in fiscal 2001. While we have been successful
in returning IGT-Australia to profitability, we operate in a highly competitive
and stringent regulatory environment.
IGT-Brazil
In the fourth quarter of fiscal 1999, the government in Brazil rescinded the law
allowing gaming devices in bingo halls throughout this market. At that time, we
recorded impairment charges of $5.3 million relating to our assessment of the
recoverability of our inventories and receivables in Brazil. Payments collected
for receivables previously considered fully impaired totaled $1.1 million in the
half of fiscal 2001 and $1.9 million during all of fiscal 2000.
Notes to Condensed Consolidated Financial Statements
5. Earnings Per Share
The following table shows the reconciliation of basic earnings per share (EPS)
to diluted EPS:
Three Months Ended Six Months Ended
----------------------- --------------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------
(Amounts in thousand, except per share amounts)
Net income $ 53,556 $ 24,760 $ 101,747 $ 67,162
========== ========== ========== ==========
Weighted average common shares outstanding 73,512 75,247 73,136 80,824
Dilutive effect of stock options outstanding 2,902 801 2,873 790
------------- ---------- ---------- ----------
Weighted average common and potential
shares outstanding 76,414 76,048 76,009 81,614
========== ========== ========== ==========
Basic earnings per share $ 0.73 $ 0.33 $ 1.39 $ 0.83
Diluted earnings per share $ 0.70 $ 0.33 $ 1.34 $ 0.82
Number of common shares excluded from
diluted EPS because option exercise price
was greater than average market price 35 862 92 1,278
6. Income Taxes
Our provision for income taxes is based on estimated effective annual income tax
rates. The provision differs from income taxes currently payable because certain
items of income and expense are recognized in different periods for financial
statement and tax return purposes.
7. Comprehensive Income
Items of other comprehensive income include cumulative foreign currency
translation adjustments and net unrealized gains and losses on investment
securities. Our total comprehensive income is as follows:
Three Months Ended Six Months Ended
----------------------- ------------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net income $ 53,556 $ 24,760 $ 101,747 $ 67,162
Net change in other comprehensive income (1,440) (1,304) 1,356 (2,486)
--------- --------- --------- ---------
Comprehensive income $ 52,116 $ 23,456 $ 103,103 $ 64,676
========= ========= ========= =========
8. Supplemental Cash Flows Information
Certain noncash investing and financing activities are not reflected in the
consolidated statements of cash flows.
We manufacture gaming machines which are used on our proprietary systems and are
leased to customers under operating leases. Transfers between inventory and
fixed assets resulted in an increase to property, plant and equipment of $24.4
million during the current period and $5.0 million during the comparable prior
year period.
The tax benefit of stock options and the employee stock purchase plan totaled
$13.3 million for the six months ended March 31, 2001 and $400,000 during the
year earlier period.
Notes to Condensed Consolidated Financial Statements
Payments of interest were $49.6 million for the first six months of fiscal 2001
and $49.2 million for the first six months of fiscal 2000. Payments for income
taxes were $57.8 million for the six months ended March 31, 2001 and $59.0
million for the same period last year.
During fiscal 2000, notes receivable increased by $3.9 million as the result of
converting our investment in Access Systems Pty., Ltd. from an equity to a debt
instrument.
9. Contingencies
IGT has been named in and has brought lawsuits in the normal course of business.
We do not expect the outcome of these suits, including the lawsuits described
below, to have a material adverse effect on our financial position or results of
future operations.
Poulos
Along with a number of other public gaming corporations, IGT is a defendant in
three class action lawsuits: one filed in the United States District Court of
Nevada, Southern Division, entitled Larry Schreier v. Caesar's World, Inc., et
al, and two filed in the United States District Court of Florida, Orlando
Division, entitled Poulos v. Caesar's World, Inc., et al. and Ahern v. Caesar's
World, Inc., et al., which have been consolidated into a single action. The
Court granted the defendants' motion to transfer venue of the consolidated
action to Las Vegas. The actions allege that the defendants have engaged in
fraudulent and misleading conduct by inducing people to play video poker
machines and electronic slot machines, based on false beliefs concerning how the
machines operate and the extent to which there is an opportunity to win on a
given play. The amended complaint alleges that the defendants' acts constitute
violations of the Racketeer Influenced and Corrupt Organizations Act, and also
give rise to claims for common law fraud and unjust enrichment, and seeks
compensatory, special, consequential, incidental and punitive damages of several
billion dollars. In December 1997, the Court denied the motions that would have
dismissed the Consolidated Amended Complaint or that would have stayed the
action pending Nevada gaming regulatory action. The defendants filed their
consolidated answer to the Consolidated Amended Complaint on February 11, 1998.
At this time, motions concerning class certification are pending before the
Court.
Acres
In February 1999, the Spin for Cash Wide Area Progressive Joint Venture (Joint
Venture), to which IGT and Anchor Gaming, Inc. (Anchor) are partners, and Anchor
filed an action in US District Court, District of Nevada against Acres Gaming,
Inc. (Acres). IGT is not a party to this action. The complaint alleges, among
other things, infringement of certain secondary event patents owned by Anchor
and licensed to the Joint Venture. In April 1999, Acres responded by filing an
answer and counterclaim against the Joint Venture and Anchor. In addition, in
April 1999, Acres filed an action in Oregon state circuit court against the
Joint Venture and Anchor alleging wrongful use of Acres' intellectual property.
The Oregon state circuit court action has been removed to the US District Court,
District of Oregon, and has been stayed pending the outcome of the Nevada
actions.
Notes to Condensed Consolidated Financial Statements
10. Business Segments
IGT operates principally in two lines of business: the development,
manufacturing, marketing and distribution of gaming products, referred to as
"product sales", and the development, marketing and operation of wide-area
progressive systems and gaming equipment leasing, referred to as "proprietary
gaming". The proprietary gaming segment includes our wholly-owned gaming
operations and our unconsolidated joint venture activities reported as earnings
of unconsolidated affiliates. Gaming operations and joint venture activities are
viewed as a single business segment because the nature of the products in the
joint ventures are the same as the products in our wholly-owned gaming
operations. The same management group monitors all activities of the proprietary
gaming segment. The joint venture is an integral part of our proprietary gaming
segment.
There have been no material changes in the basis of measuring segment profit or
in the amount of identifiable assets for any operating segment since our last
annual report.
The table below presents information as to our operations by these lines of
business as of:
Three Months Ended Six Months Ended
----------------------- -------------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Revenues
Product sales $ 221,158 $ 118,656 $ 413,508 $ 228,416
Proprietary gaming
Gaming operations 91,587 74,628 169,666 150,519
Earnings of unconsolidated affiliates 34,163 24,769 65,465 45,635
----------- ----------- ----------- -----------
Total proprietary gaming 125,750 99,397 235,131 196,154
----------- ----------- ----------- -----------
Total 346,908 218,053 648,639 424,570
Less earnings of unconsolidated affiliates (34,163) (24,769) (65,465) (45,635)
----------- ----------- ----------- -----------
Total revenues $ 312,745 $ 193,284 $ 538,174 $ 378,935
=========== =========== =========== ===========
Operating Profit
Product sales $ 42,268 $ 14,316 $ 80,973 $ 30,200
Proprietary gaming
Gaming operations 34,337 23,861 63,857 47,879
Earnings of unconsolidated affiliates 27,986 19,062 53,716 35,379
----------- ----------- ----------- -----------
Total proprietary gaming 62,323 42,923 117,573 83,258
----------- ----------- ----------- -----------
Total 104,591 57,239 198,546 113,458
Other non-allocated expense (19,582) (18,552) (37,044) (8,517)
----------- ---------- ----------- -----------
Income Before Income Taxes $ 85,009 $ 38,687 $ 161,502 $ 104,941
=========== =========== =========== ===========
11. Acquisitions
In March 2001, we completed the purchase of Silicon Gaming, Inc. (Silicon).
Silicon, previously headquartered in Palo Alto, California, designs and
manufactures a full line of innovative wagering products and holds an extensive
library of game applications. Simultaneous to our purchase, Silicon sold all but
4.9% of its shares in its subsidiary, WagerWorks, Inc. The purchase method of
accounting for business combinations was applied to this acquisition. The
purchase price of $34.0 million was allocated to cash of $2.8 million and net
assets of $31.2 million based on the estimated fair values of tangible and
intangible assets and liabilities at the date of
Notes to Condensed Consolidated Financial Statements
acquisition. There was no excess of the purchase price over the net assets
acquired. The acquisition was funded with cash on hand. Subsequent to the
acquisition, we paid off Silicon's long term debt of $13.4 million. Results of
Silicon subsequent to the closing of the acquisition are included in the results
of operations. Intangible assets acquired from Silicon consist primarily of
patents valued at $33.7 million to be amortized over their useful lives of 15 to
17 years.
12. Derivatives and Hedging Activities
IGT adopted Statement of Financial Accounting Standard No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities," on October 1,
2000. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation.
During the six months ended March 31, 2001, IGT entered into forward exchange
contracts to hedge our net exposure, by currency, related to the monetary assets
and liabilities of our operations denominated in non-functional currency. These
forward exchange contracts were not designated as hedging instruments under SFAS
133, and gains and losses were recognized in current earnings.
The adoption of SFAS 133 did not have a material impact on our financial
condition or results of operations.
13. Reclassifications
Certain amounts in the unaudited condensed consolidated financial statements
presented for the prior year comparable periods have been reclassified to be
consistent with the presentation used in the current fiscal periods. In this
report and in each of our reports, as amended, beginning with our Report on Form
10-K for the year ended September 30, 2000, we have reclassified our
presentation of earnings from unconsolidated joint venture operations. We
previously reported earnings from unconsolidated joint ventures, net of
expenses, as a component of gaming operations revenues. In each of our reports
as amended, beginning with our Report on Form 10-K for the year ended September
30, 2000 and going forward, we will report the net results of our unconsolidated
joint ventures as a separate component of operating income on our income
statement under a separate caption titled Earnings of Unconsolidated Affiliates.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended March 31, 2001 Compared to the Three Months Ended April 1,
2000
Net income for the current quarter grew to a new quarterly record of $53.6
million or $0.70 per diluted share compared to net income before one-time items
in the prior year quarter of $25.7 million or $0.34 per diluted share. The prior
year net income of $24.8 million or $0.33 per diluted share included a loss of
$1.4 million ($900,000, net of tax) on the sale of the gaming systems business
unit previously purchased as a part of the acquisition of Olympic Amusements
Pty. Limited in March 1998.
Operating Income
Operating income grew 84% to $99.6 million or 32% of revenues for the quarter
just ended compared to $54.2 million or 28% of revenues in the second quarter of
fiscal 2000. This improvement was due to markedly higher volumes and improved
operating efficiencies, partially offset by higher operating expenses, as
discussed below.
Revenue, Gross Profit Margins and Earnings of Unconsolidated Affiliates
Total revenues for the second quarter of fiscal 2001 grew to $312.7 million
compared to $193.3 million in the second quarter of fiscal 2000, reflecting an
86% increase in product sales revenue and a 23% increase in game operations
revenue. Domestic revenues experienced significant improvement, increasing by
85% over the same quarter one year ago. Gross profit on total revenues for the
current quarter increased 61% to $136.7 million compared to $85.1 million for
the prior year quarter. This positive movement was attributable to increased
profitability in both product sales and gaming operations.
Worldwide, IGT shipped 30,400 gaming machines for product sales of $221.2
million during the current quarter versus 22,700 machines and $118.7 million in
the same quarter last year. Domestic shipments increased 117% to 16,500 units
for the current quarter from 7,600 units in the year earlier quarter. This
increase is due to strong replacement demand and continued growth in the Native
American markets, especially California. Sales to Native American markets
increased to 7,700 units in the current quarter compared to 1,700 units in the
year earlier quarter. The current quarter included 5,700 machines shipped to
various Native American venues in California. Replacement demand is driven by an
aging installed base of gaming machines, the popularity of IGT's new video reel
game offerings, and the appeal of the new ticket-in/ticket-out voucher
technology, which offers an alternative payout and vouchering solution to casino
operators.
International shipments during the current quarter totaled 13,800 or 45% of
total units compared to 15,100 units in the comparable prior year quarter.
IGT-Australia continued its recent improved performance shipping 2,100 machines
in the current quarter, an increase of 110% over the year earlier quarter.
Barcrest sold 9,500 units during the second quarter of fiscal 2001 compared to
11,900 in the same quarter last year. The prior year second quarter was a record
for Barcrest with over 3,300 units sold into the Spanish market.
Gross profit on product sales for the second quarter of fiscal 2001 increased to
$86.5 million or 39% of related revenues compared to $43.4 million or 37% for
the second quarter of fiscal 2000. This margin improvement is attributable to
the increased sales volumes, higher average pricing related to a stronger mix of
new video and voucher products, and a higher proportion of domestic sales in the
total product sales mix.
Revenues from gaming operations for the second quarter improved 23% to $91.6
million compared to $74.6 million in the same quarter last year. The gross
profit on gaming operations, excluding joint ventures, increased 20% to $50.3
million for the current quarter from $41.8 million in the comparable prior year
quarter. The gross profit margins on gaming operations were 55% and 56% of
related
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
revenues in the second quarter of the current and prior fiscal year periods. The
current quarter margin percentage was negatively impacted by lower interest
rates which increased the cost of funding jackpots.
Earnings of unconsolidated affiliates, reported net of expenses for accounting
purposes, grew 38% to $34.2 million from $24.8 million in the comparable prior
year quarter.
The continued growth in the proprietary gaming segment reflects excellent player
acceptance of IGT's new game themes, including the The Addams Family (TM) and
Jeopardy!(R) Video. Another major factor in this growth is the continued rollout
of many of our new and legacy MegaJackpots(TM) game themes into the expanding
California market. The California installed base of MegaJackpots(TM) gaming
machines doubled to nearly 1,200 units during the current quarter. Our joint
venture activities contributed significantly to the growth in the proprietary
gaming segments, with approximately 13,000 Wheel of Fortune(R) and I Dream of
Jeannie(TM) Wheel games installed at the end of the current quarter. The total
installed base of our MegaJackpots(TM) machines, including placement under joint
ventures, totaled 22,600 units at the end of the current quarter compared to
16,800 at the end of the prior year quarter.
Operating Expenses
Current quarter operating expenses totaled $71.4 million or 23% of total
revenues compared to $55.7 million or 29% in the prior year quarter. Selling,
general and administrative expenses increased $11.5 million due to additional
legal and compliance costs, as well as variable commission and incentive costs
related to higher sales volumes. Depreciation and amortization expense, not
included in cost of sales, decreased $576,000 due to fully depreciated assets
still in use. Research and development expenses increased $2.2 million to $15.5
million for the current quarter, primarily due to new game development costs.
Bad debt expense increased $3.1 million over the prior year quarter as a result
of increased sales volumes.
Other Income and Expense
Other income and expense for the current quarter resulted in net expense of
$14.5 million compared to $15.5 million in the prior year quarter. Operation of
our progressive gaming systems results in interest income from both the
investment of 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 similar and increase at
approximately the same rate based on the growth in total jackpot winners.
Our consolidated tax rate increased to 37% from 36% in the year earlier quarter.
We expect this tax rate to be in effect for the full fiscal year 2001.
Business Segments Operating Profit (See Note 10 of Notes to Condensed
Consolidated Financial Statements)
IGT's operating profit by business segment
reflects an appropriate allocation of operating expenses, interest income, and
interest expense. Gaming operations and earnings from our joint venture
activities are included in the proprietary gaming segment.
Product sales operating profit for the quarter just ended improved to $42.3
million or 19% of related revenues compared to $14.3 million or 12% in the prior
year quarter, predominantly as the result of increased sales volumes, partially
offset by higher operating expenses as discussed above.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
In the second quarter of fiscal 2001, operating profit of the proprietary gaming
segment totaled $62.3 million, an increase of $19.4 million or 45% over the same
quarter last year. This improvement resulted from the growth of the installed
base and excellent player acceptance of our new proprietary games, partially
offset by lower interest rates which increased the cost of funding jackpots.
Six Months Ended March 31, 2001 Compared to the Six Months Ended April 1, 2000
Net income for the first half of fiscal 2001 grew to $101.7 million or a record
$1.34 per diluted share compared to income before one-time items in the prior
year period of $52.0 million or $0.64 per diluted share. Several one-time items
affected the prior year results. In the second quarter of fiscal 2000, we
recognized a loss of $1.4 million ($900,000, net of tax) on the sale of the
gaming systems business unit previously purchased as a part of the acquisition
of Olympic Amusements Pty. Limited in March 1998. Net income for the first six
months of fiscal 2000 benefited from receipt of a legal settlement of $27.0
million ($17.3 million net of tax), partially offset by restructuring charges of
$1.8 million ($1.2 million, net of tax) related to our Australian operations.
Including these one-time items, net income was $67.2 million or $0.82 per
diluted share for the first half of fiscal 2000.
Operating Income
For the six months just ended, operating income grew 81% to $188.2 million or
32% of revenues compared to $103.8 million or 27% of revenues in the first six
months of fiscal 2000. This improvement was due to markedly higher volumes and
improved operating efficiencies, partially offset by higher operating expenses,
as discussed below.
Revenues, Gross Profit Margins and Earnings from Unconsolidated Affiliates
Total revenues for the first six months of fiscal 2001 grew 54% to $583.2
million compared to $378.9 million in the first six months of fiscal 2000,
reflecting a 81% increase in product sales revenue and a 13% increase in gaming
operations revenue. Both domestic and international revenues experienced marked
improvements over the same period one year ago. International revenues improved
13% and domestic revenues increased by 69%. Gross profit on total revenues for
the first six months of fiscal 2001 increased 52% to $257.9 million compared to
$169.3 million for the first six months of fiscal 2000. This improvement was
attributable to growth in profitability year-over-year for both product sales
and gaming operations.
Worldwide, IGT shipped 60,400 gaming machines for record product sales of $413.5
million during the current six months versus 42,300 machines and $228.4 million
in the comparable prior year period. Domestic shipments increased 97% to 31,500
units for the first half of fiscal 2001 from 16,000 units in the same period
last year. This increase is due to strong growth in replacement sales, as well
as the continued expansion in the Native American markets, particularly
California. Sales to Native American markets grew to 12,000 units during the six
months just ended from 2,500 machines in the year earlier period. The current
period included 9,100 machines shipped to the California Native American market.
Replacement demand is driven by an aging installed base of gaming machines, the
popularity of IGT's new video reel game offerings, and the appeal of the new
ticket-in/ticket-out voucher technology, which offers an alternative payout and
vouchering solution to casino operators. At the end of the current period, over
15,000 EZ-Play(TM) machines were operating on voucher systems.
International shipments, comprising 48% of total units sold during the current
six months, increased to 28,900 units from 26,300 units in the comparable prior
year period. This increase was primarily related to Australia's improved
performance, shipping 5,400 units in the current six month period compared to
2,766 units in the first six months of fiscal 2000.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The gross profit margin on product sales grew to $163.6 million or 40% of
related revenue in the current six month period from $84.9 million or 37% for
the first six months of fiscal 2000. This margin improvement is due to increased
sales volumes, higher average pricing related to a stronger mix of new video and
voucher products, and a higher proportion of domestic sales in the total product
sales mix.
Revenues from gaming operations for the first six months of fiscal 2001 grew 13%
to $169.7 million compared to $150.5 million in the same prior year period. The
gross profit on gaming operations increased to $94.3 million or 56% of related
revenue for the six months ended March 31, 2001 from $84.3 million or 56% in the
year earlier period.
Earnings of unconsolidated affiliates, reported net of expenses for accounting
purposes, grew 43% to $65.5 million in the six months just ended from $45.6
million in the comparable prior year period.
The excellent player acceptance of IGT's exclusive new progressive game themes
The Addams Family (TM) and Jeopardy!(R) Video contributed significantly to the
growth in the proprietary gaming segment. Another major factor in the growth of
this segment is the continued rollout of many of our MegaJackpots(TM) games into
the expanding California market. At the end of this current period, the
installed base of MegaJackpots(TM) machines in the California market was nearly
1,200 units. Our joint venture activities contributed significantly with
approximately 13,000 Wheel of Fortune(R) and I Dream of Jeannie(TM) Wheel games
installed at the end of the current period. The installed base of our
proprietary machines, including placement under joint ventures, totaled 22,600
units at the end of the current period versus 16,800 one year earlier.
Operating Expenses
Current year-to-date operating expenses totaled $135.2 million or 23% of total
revenues compared to $111.1 million or 29% in the comparable prior year period.
Selling, general and administrative expenses increased $18.1 million due to
additional legal and compliance costs, as well as variable commission and
incentive costs related to higher sales volumes. Depreciation and amortization
expense, not included in cost of sales, decreased $1.1 million due to fully
depreciated assets still in use. Research and development expenses increased
$2.9 million to $29.6 million for the current six months, primarily due to new
game development costs. Bad debt expense increased $7.0 million over the prior
year period as the result of increased sales volumes, as well as specific
reserves recorded related to Latin American receivables.
Other Income and Expense
Other income and expense, net, for the current six month period resulted in
expense of $26.7 million compared to income of $1.1 million in the same period
last year. The prior year period benefited from a $27.0 million legal
settlement. Operation of our progressive gaming systems results in interest
income from both the investment of 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 similar and
increase at approximately the same rate based on the growth in total jackpot
winners.
Our consolidated tax rate increased to 37% from 36% in the year earlier period.
We expect this tax rate to be in effect for the full fiscal year 2001.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Business Segments Operating Profit (See Note 10 of Notes to Condensed
Consolidated Financial Statements)
IGT's operating profit by business segment reflects an appropriate allocation of
operating expenses, interest income, and interest expense. Gaming operations and
earnings from our joint venture activities are included in the proprietary
gaming segment.
Product sales operating profit for the six months just ended grew to $81.0
million or 20% of related revenues compared to $30.2 million or 13% in the prior
year period. This improvement is primarily due to an increase in sales volumes,
partially offset by higher operating expenses as discussed above.
Operating profit for the proprietary gaming segment in the first six months of
fiscal 2001 totaled $117.6 million, an increase of $34.3 million or 41% over the
same period last year. This improvement resulted from the growth of the
installed base and excellent player acceptance of our new MegaJackpot(TM) games,
partially offset by lower interest rates which increase the cost of funding
jackpots.
Financial Condition, Liquidity and Capital Resources
Capital Resources
IGT's sources of capital include, but are not limited to, cash flows from
operations, the issuance of public or private placement debt, bank borrowings,
and the issuance of equity securities. We believe that our available short-term
and long-term capital resources are sufficient to fund our capital expenditure
and operating capital requirements, scheduled debt payments, interest and income
tax obligations, strategic investments, acquisitions, and share repurchases.
Credit Facilities
Our domestic and foreign borrowing facilities totaled $264.4 million at March
31, 2001. Of this amount, $4.0 million was drawn, $2.8 million was reserved for
letters of credit, and the remaining $257.6 million was available for future
borrowings. We are required to comply with certain covenants contained in these
agreements which, among other things, limit financial commitments we may make
without the written consent of the lenders and require the maintenance of
certain financial ratios. At March 31, 2001, we were in compliance with all
applicable covenants.
Summary of Cash Activities
In the first six months of fiscal 2001, IGT's cash decreased $30.1 million due
to net cash used in investing activities, partially offset by net cash provided
by operating and financing activities. The primary uses of cash consisted of
$31.2 million for the acquisition of Silicon Gaming, Inc. (Silicon) in March
2001 and $12.2 million invested in property, plant and equipment.
Our proprietary MegaJackpots(TM) progressive systems provide cash through
collections from systems to fund jackpot liabilities and from maturities of US
government securities purchased to fund jackpot liabilities. Cash is used to
make payments to jackpot winners or to purchase investments to fund liabilities
to jackpot winners. These activities provided cash of $5.9 million in the first
six months of fiscal 2001 and used cash of $17.2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
million in the comparable prior year period. Fluctuations in net cash flows from
systems represent differences between the growth in liabilities for jackpots and
the actual payments to the winners during the period, based on the timing of the
jackpot cycles and the volume of play across all of our MegaJackpots(TM)
progressive systems.
Operating Activities: Cash provided by operating activities in the first six
months of fiscal 2001 totaled $377,000 compared to the prior year period of
$88.0 million. The most significant fluctuations related to sales volumes and
timing in receivables, inventories, prepaid expenses, accounts payable and
accrued liabilities, and accrued income taxes. The fluctuation in the earning of
unconsolidated affiliates is due to the timing of cash distributions.
Investing Activities: The primary use of investing cash for the current period
related to the acquisition of Silicon. See Note 11 of Notes to Condensed
Consolidated Financial Statements. Use of cash from investing activities also
included purchases of property, plant, and equipment totaling $12.2 million in
the current six month period compared to $5.7 million in the prior year period.
This fluctuation is primarily due to asset additions as a result of increased
operations. Investing cash provided in the prior period was primarily due to
proceeds from the sale of the Miss Marquette riverboat held for sale as part of
the Sodak acquisition.
Financing Activities: The primary sources of cash in financing activities in the
current period were collections from systems and proceeds from employee stock
plans. The primary use of cash in financing activities in the prior year period
related to stock repurchases.
Stock Repurchase Plan
Our Board of Directors originally authorized IGT's stock repurchase plan in
October 1990. As of April 28, 2001, the remaining share repurchase
authorization, as amended, totaled 10.8 million additional shares. No
significant additional shares have been repurchased during the first seven
months of fiscal 2001.
Recently Issued Accounting Standards
On June 30, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. IGT
adopted SFAS 133 on October 1, 2000 and it has not had a material impact on our
financial condition or results of operations. See Note 12 of Notes to Condensed
Consolidated Financial Statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 clarifies existing accounting principles related to revenue recognition in
financial statements and is effective for the fourth quarter of our fiscal year
2001. We believe that the adoption of this statement will not have a material
impact on our financial condition or results of operations.
Euro Currency Conversions
On January 1, 1999, 11 of 15 member countries of the European Union fixed
conversion rates between their existing currencies and one common currency - the
"euro". Conversion to the euro eliminated currency exchange rate risk between
the member countries. The euro trades on currency exchanges and may be used in
business transactions. Beginning in January 2002, new euro-denominated bills and
coins will be issued and the former currencies will be withdrawn from
circulation.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Our operating subsidiaries affected by the euro conversion have established
plans to address the issues raised by the euro currency conversion. These issues
include: the need to adapt financial systems and business processes; changes
required to equipment, such as coin validators and note acceptors, to
accommodate euro-denominated transactions in our current products; and the
impact of one common currency on pricing. We do not expect material system and
equipment conversion costs related exclusively to the euro. Due to numerous
uncertainties, we cannot reasonably estimate the long-term effects that one
common currency will have on pricing and the resulting impact, if any, on our
financial condition or results of operations.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information, which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies. These
forward-looking statements are identified by their use of terms and phrases such
as "anticipate", "believe", "could", "estimate", "expect", "intend", "may",
"plan", "predict", "project", "will" and similar terms and phrases, including
references to assumptions.
Such forward-looking statements and IGT's operations, financial condition and
results of operations involve known and unknown risks and uncertainties. Such
risks and factors include, but are not limited to, the following:
o a decline in demand for IGT's gaming products or reduction in the
growth rate of new and existing markets;
o delays of scheduled openings of newly constructed or planned casinos;
o the effect of changes in economic conditions;
o a decline in public acceptance of gaming;
o unfavorable public referendums or anti-gaming legislation;
o unfavorable legislation affecting or directed at manufacturers or
operators of gaming products and systems;
o delays in approvals from regulatory agencies;
o political and economic instability in developing markets for IGT's
products;
o a decline in the demand for replacement machines;
o a decrease in the desire of established casinos to upgrade machines in
response to added competition from newly constructed casinos;
o a decline in the appeal of IGT's gaming products or an increase in the
popularity of existing or new games of competitors;
o acceptance of new technology by our customers;
o changes in interest rates causing a reduction of investment income or
in market interest rate sensitive investments;
o loss or retirement of our key executives or other key employees;
o approval of pending patent applications of parties unrelated to IGT
that restrict our ability to compete effectively with products that are
the subject of such pending patents or infringement upon existing
patents;
o the effect of regulatory and governmental actions, including regulatory
or governmental actions challenging our compliance with applicable
gaming regulations;
o unfavorable determinations or challenges of suitability by gaming
regulatory authorities with respect to our officers, directors or key
employees;
o the limitation, conditioning, suspension or revocation of any of our
gaming licenses;
o fluctuations in foreign exchange rates, tariffs and other barriers;
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
o adverse changes in the credit worthiness of parties with whom IGT has
forward currency exchange contracts;
o the loss of sublessors of leased properties no longer used by IGT;
o with respect to legal actions pending against IGT, the discovery of
facts not presently known to IGT or determinations by judges, juries
or other finders of fact which do not accord with IGT's evaluation of
the possible liability or outcome of existing litigation.
We do not undertake to update our forward-looking statements to reflect future
events or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Under established procedures and controls, IGT 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 IGT 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
We routinely use forward exchange contracts to hedge our net exposures, by
currency, related to the monetary assets and liabilities of our operations
denominated in non-functional currency. The primary business objective of this
hedging program is to minimize the gains and losses resulting from exchange rate
changes. At March 31, 2001, we had net foreign currency exposure of $48.0
million, of which $44.2 million was hedged with currency forward contracts. At
September 30, 2000, we had net foreign currency exposure of $58.0 million hedged
with $63.5 million in currency forward contracts. In addition, from time to
time, we may enter into forward exchange contracts to establish with certainty
the US dollar amount of future firm commitments denominated in a foreign
currency. There were no firm commitment hedges at the end of the current or
prior year periods.
Given our foreign exchange position, a 10% adverse change in foreign exchange
rates upon which these foreign exchange contracts are based would result in
exchange gains and losses. In all material aspects, these exchange gains and
losses would be fully offset by exchange gains and losses on the underlying net
monetary exposures for which the contracts are designated as hedges. We do not
expect material exchange rate gains and losses from unhedged foreign currency
exposures.
As currency exchange rates change, translation of the income statements of our
international businesses into US dollars affects year-over-year comparability of
operating results. IGT does not generally hedge translation risks because cash
flows from international operations are generally reinvested locally.
Changes in the currency exchange rates that would have the largest impact on
translating our international operating results include the Australian dollar,
the British pound and the Japanese yen. We estimate that a 10% change in foreign
exchange rates would impact reported operating results by approximately $1.0
million in both the current and prior year-to-date periods. 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
IGT's results of operations are exposed to fluctuations in bank lending rates
and the cost of US government securities used to fund liabilities to jackpot
winners. We record expense for future jackpots based on these rates which are
impacted by market interest rates and other economic conditions. Therefore, the
gross profit on our proprietary gaming segment decreases when interest rates
decline. We estimated that a 10% decline in interest rates would have impacted
gaming operations gross profit by $1.4 million and earnings of unconsolidated
affiliated by $0.9 million in the current six month period versus $0.9 million
and $0.6 million in the comparable prior year period. IGT currently does not
manage this exposure with derivative financial instruments.
Our outstanding Senior Notes carry interest at fixed rates. If interest rates
increased by 10%, we estimated the fair market value of these notes would have
decreased approximately $35.7 million at March 31, 2001 and $40.1 million at
September 30, 2000.
Part II - Other Information
Item 1. Legal Proceedings
(See Note 9 of Notes to Condensed Consolidated Financial Statements)
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On March 5, 2001, the Company held its annual meeting of
stockholders.
(b) The following directors were elected to serve until the next annual
meeting: G. Thomas Baker, Robert A. Bittman, Albert J. Crosson,
Wilbur K. Keating, Charles N. Mathewson, Robert Miller,
Frederick B. Rentschler and Rockwell A. Schnabel. These directors
constitute all of the directors of the Company. Voting at the
meeting was as follows:
Number of Number of
Shares Voted Shares Withheld
For
---------------- ---------------
G. Thomas Baker 67,748,900 717,852
Robert A. Bittman 67,703,806 762,946
Albert J. Crosson 67,707,844 758,908
Wilbur K. Keating 68,110,521 356,231
Charles N. Mathewson 67,712,284 754,468
Robert Miller 68,126,917 339,835
Frederick B. Rentschler 68,147,118 319,634
Rockwell A. Schnabel 54,729,043 13,737,709
(c) Stockholders approved amendments by the Board on December 5,
2000 to the Company's 1993 Stock Option Plan (Plan) to delete
the 50,000 share limitation of the non-employee director
option grant program. Number of shares voted for the amendment
totaled 59.9 million, with 8.6 million shares withheld.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.15 International Game Technology 1993 Stock Option Plan,
Amended and Restated as of August 27, 1996, Composite
Plan Document Incorporating Amendments 1998-I,
1998-II and 2000-I.
10.16 Employment agreement with Maureen Mullarkey, Senior
Vice President and Chief Financial Officer dated
January 12, 2001.
(b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 3, 2001
INTERNATIONAL GAME TECHNOLOGY
By: /s/ Maureen Mullarkey
-------------------------
Maureen Mullarkey
Senior Vice President and
Chief Financial Officer