2. | VARIABLE INTERESTS AND AFFILIATES |
Variable Interest Entities
New Jersey Trusts
New Jersey regulation requires that annuitized WAP jackpot payments to winners be administered through an individual trust set up for each WAP system. These trusts are VIEs and IGT is the primary consolidating beneficiary, because these VIE trusts are designed for the sole purpose of administering jackpot payments for IGT WAP winners and IGT guarantees all liabilities of the trusts. The assets of these consolidated VIEs can only be used to settle trust obligations and have been segregated on our balance sheet.
The consolidation of these VIEs primarily increases jackpot liabilities and related assets, as well as interest income and equivalent offsetting interest expense. Consolidated VIE trust assets and equivalent liabilities totaled $48.6 million at September 30, 2013 and $58.9 million at September 30, 2012.
Latin America Distributor
In March 2012, we contracted with a third party distributor in Latin America to sell IGT products. The distributor is a VIE as it is unable to finance its activities without additional support from IGT; however, the distributor was not consolidated because IGT does not have contractual or implied control. Under the agreement, our maximum exposure at September 30, 2013 consisted of $0.5 million in note financing provided for operating costs and contract financing under a revolving line of credit of $13.0 million for IGT product purchases.
Revenues recognized related to this distributor totaled $11.1 million for the year ended September 30, 2013, and $4.4 million for the year ended September 30, 2012. Contracts and notes receivable due from this distributor totaled $11.3 million at September 30, 2013 ($8.6 million current and $2.7 million non-current).
Investments in Unconsolidated Affiliates
In May 2007, we entered into a strategic business arrangement with CLS, a public company listed on the Growth Enterprise Market of the Hong Kong Exchange, to explore opportunities in the China lottery market. As part of this arrangement, we invested $72.0 million in CLS unsecured convertible notes due May 31, 2015 and $33.6 million for approximately 5% of the outstanding ordinary shares of CLS.
In connection with changes in our China strategy in 2010, the notes were restructured for an immediate payment of $39.8 million and a new non-interest bearing convertible note of HK$166.3 million ($21.4 million), resulting in an impairment loss of $20.5 million. The new note was paid in two installments of $12.2 million in September 2011and $9.2 million in May 2012. The outstanding shares of CLS were sold in 2011 for net proceeds of $16.5 million and a gain of $4.3 million, after 2008 losses recognized of $21.4 million.
