INTERNATIONAL GAME TECHNOLOGY 10-K
1998-09-30: Item 1. Business
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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.
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
(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
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Installed Base Machine Sales by IGT
Total IGT 1998 1997
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
Item 1. Business (continued)
The following table presents MegaJackpots information by
jurisdiction at September 30, 1998:
<TABLE>
<CAPTION>
Number of Number of
Jurisdiction Systems Machines
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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")
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
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