<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-23401
GAMETECH INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0612983
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2209 W. 1ST STREET, TEMPE, ARIZONA 85281
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (602) 804-1101
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
On September 10, 1998, the registrant had outstanding 10,058,342 shares
of its Common Stock, par value $.001 per share.
<PAGE>
GAMETECH INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Balance Sheets
July 31, 1998 and October 31, 1997 . . . . . . . . . . . . 3
Statements of Operations
Three Months Ended July 31, 1998 and 1997. . . . . . . . . 4
Nine Months Ended July 31, 1998 and 1997 . . . . . . . . . 4
Statements of Cash Flows
Nine Months Ended July 31, 1998 and 1997 . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 9
Item 3. Market Risk Disclosure . . . . . . . . . . . . . . . . . . . 12
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8 - K . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GAMETECH INTERNATIONAL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and equivalents $16,357 $ 1,020
Short-term investments 10,766 -
Accounts receivable, less allowance for doubtful accounts
of $281 in 1998 and $164 in 1997 1,746 1,151
Deposits 383 108
Other current assets 231 49
Prepaid and deferred income taxes 415 196
------- -------
Total current assets 29,898 2,524
Bingo units, furniture and equipment, net 11,932 9,025
Intangibles, less accumulated amortization of $331 in 1998
and $238 in 1997 445 368
Investment in and advances to affiliate - 526
Other assets, net 1,235 808
------- -------
Total assets $43,510 $13,251
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term borrowings from bank $ - $ 550
Accounts payable 652 403
Other current liabilities 399 727
Current portion of long-term debt obligations 338 1,266
------- -------
Total current liabilities 1,389 2,946
Convertible notes payable to officers, including accrued
interest - 1,526
Long-term debt obligations 599 1,600
Deferred income taxes 368 368
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par value:
5,000,000 shares authorized; 400,000 shares issued and
outstanding in 1997 (none in 1998) - 2,835
Stockholders' equity:
Common stock, $.001 par value: 40,000,000 shares
authorized; 9,988,342 shares issued and outstanding
in 1998 and 4,621,491 in 1997 10 5
Capital in excess of par value 37,116 36
Retained earnings 5,319 3,935
Less: treasury stock, 315,900 shares (1,291) -
------- -------
Total stockholders' equity 41,154 3,976
------- -------
Total liabilities and stockholders' equity $43,510 $13,251
------- -------
------- -------
</TABLE>
See notes to financial statements.
3
<PAGE>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
1998 1997 1998 1997
----------- ---------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 4,093 $ 3,406 $ 11,948 $ 8,892
Operating expenses:
Cost of revenues 1,353 933 3,758 2,244
General and administrative 1,076 542 2,651 1,348
Sales and marketing 677 355 1,827 983
Research and development 184 149 459 385
----------- ---------- ----------- ----------
3,290 1,979 8,695 4,960
----------- ---------- ----------- ----------
Income from operations 803 1,427 3,253 3,932
Equity in net loss of affiliate -- (42) (2,000) (42)
Interest income (expense), net 390 (120) 1,015 (319)
----------- ---------- ----------- ----------
Income before provision for income taxes 1,193 1,265 2,268 3,571
Provision for income taxes 464 501 884 1,416
----------- ---------- ----------- ----------
Net income $ 729 $ 764 $ 1,384 $ 2,155
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Basic net income per share $ 0.07 $ 0.17 $ 0.15 $ 0.49
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Diluted net income per share $ 0.07 $ 0.11 $ 0.13 $ 0.34
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Shares used in the calculation of
net income per share:
Basic 9,901,374 4,434,735 9,332,124 4,442,651
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Diluted 10,862,281 7,121,234 10,676,523 6,632,133
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
See notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
(Dollars in thousands)
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,384 $ 2,155
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,692 979
Accrued interest payable to officers 13 140
Deferred income taxes -- (3)
Equity in net loss of affiliate 2000 42
Changes in operating assets and liabilities:
Accounts receivable, net (595) (568)
Deposits (275) (768)
Prepaid expenses and other current assets (182) (24)
Prepaid and deferred income taxes (219) --
Accounts payable 249 98
Other current liabilities (328) 210
------------ -----------
Net cash provided by operating activities 3,739 2,261
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in short-term investments (10,766) --
Capital expenditures for bingo units, furniture and equipment (4,285) (3,580)
Investment in and advances to affiliate (1,474) (170)
Capitalized software development costs (170) (75)
------------ -----------
Net cash used in investing activities (16,695) (3,825)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings from bank -- 2,580
Payments on short-term notes payable and borrowings from bank (550) (750)
Proceeds from long-term debt -- 403
Payments on long-term debt (2,866) (378)
Payments for buyout of distributorship agreement (363) --
Payment for repurchase of common stock and cancellation of a note -- (250)
payable to an officer
Proceeds from sales of common stock 33,363 8
Payments for repurchase of common stock for treasury (1,291) --
------------ -----------
Net cash provided by financing activities 28,293 1,613
------------ -----------
Net increase in cash and equivalents 15,337 49
Cash and equivalents at beginning of period 1,020 166
------------ -----------
Cash and equivalents at end of period $ 16,357 $ 215
------------ -----------
------------ -----------
</TABLE>
See notes to financial statements.
5
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998
(UNAUDITED)
1. NOTES TO FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three- and
nine-month periods ended July 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending October 31, 1998. For
further information refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
October 31, 1997.
6
<PAGE>
NOTE B. NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, which is
effective for reporting periods ending after December 31, 1997. SFAS No. 128
requires the restatement of prior periods' earnings per share to conform to
the new standard. Presented below is a reconciliation of net income available
to common shareholders and the differences between actual weighted average
shares outstanding, which are used in computing basic earnings per share and
diluted weighted average shares, which are used in computing diluted earnings
per share.
<TABLE>
<CAPTION>
(In thousands, except share and per share amounts)
Three months ended July 31, Nine months ended July 31,
1998 1997 1998 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 729 764 $ 1,389 $ 2,155
----------- --------- ---------- ---------
Numerator for basic earnings per share 729 764 1,389 2,155
Effect of dilutive securities:
After-tax interest on convertible notes payable - 28 8 82
----------- --------- ---------- ---------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions $ 729 $ 792 $ 1,397 $ 2,237
----------- --------- ---------- ---------
----------- --------- ---------- ---------
Denominator:
Denominator for basic earnings per share
Weighted average shares 9,901,374 4,434,735 9,332,124 4,442,651
Effect of dilutive securities:
Stock options 960,907 1,216,918 1,167,645 764,535
Convertible preferred stock - - 43,478 -
Convertible notes payable - 1,469,671 133,275 1,424,947
----------- --------- ---------- ---------
Denominator for diluted earnings per share 10,862,281 7,121,324 10,676,523 6,632,133
----------- --------- ---------- ---------
----------- --------- ---------- ---------
Basic earnings per share $ 0.07 $ 0.17 $ 0.15 $ 0.49
----------- --------- ---------- ---------
----------- --------- ---------- ---------
Diluted earnings per share $ 0.07 $ 0.11 $ 0.13 $ 0.34
----------- --------- ---------- ---------
----------- --------- ---------- ---------
</TABLE>
7
<PAGE>
NOTE C. COMMITMENTS AND CONTINGENCIES
LITIGATION
In November 1996, a patent infringement action alleging infringement of
U.S Patent No. 4,624,462 (the "'462 Patent") and demand for jury trial was
commenced against the Company and five other defendants by FortuNet, Inc. in
the U.S. District Court, Southern District of California. The Company, in
July 1997, won its motion for transfer and severance in this action. In July
1998 the action was dismissed without prejudice.
In March 1996, a patent infringement action and demand for jury trial
was commenced against the Company by Bingo Technology Corporation, Inc.
(formerly Bingo Card Minder Corporation), in the U.S. District Court,
Northern District of California. The complaint alleges that the Company has
infringed, actively induced or contributed to the infringement of U.S. Patent
No. 4,378,940 (the "'940 Patent") by making, using and selling, among other
acts, electronic bingo devices that allegedly infringe upon at least one
claim of the '940 Patent. The '940 Patent was issued in 1983 and will expire
in 2000 and is allegedly infringed by the Company's hand-held bingo units.
The plaintiff seeks a permanent injunction prohibiting the Company from
infringement of the '940 Patent, as well as actual damages, enhanced (treble)
damages, attorneys' fees and costs. A trial date has been set for December
7, 1998.
The Company believes that its products do not infringe any valid claim
of the '940 Patent and intends to continue to defend against this action
vigorously. However, there can be no assurance that favorable outcomes will
be obtained or that if the action were resolved in favor of the plaintiff,
such results would not have a material adverse effect on the Company's
financial position, results of operations or cash flow.
In October 1997, Apex Wholesale, Inc. ("Apex") commenced two actions
against the Company in the U.S. District Court, Southern District of
California. The Company formerly purchased its hand-held units manufactured
by Tidalpower Technologies, Inc. ("Tidalpower") through Apex but terminated
such arrangement in September 1996 and now purchases hand-held units directly
from Tidalpower. The named defendants (in addition to the Company) in this
action are Tidalpower, Green Dollars Industrial Ltd. (a foreign corporation),
Vern D. Blanchard, Richard T. Fedor, Clarence H. Thiesen, Leo Lee (a foreign
national), Doris Tsao (a foreign national), and Morgan Chen (a foreign
national). In one action, Apex is asserting copyright infringement, breach
of contract, breach of fiduciary duty, interference with contract and
prospective economic advantage, and trade secret claims on GameTech's
hand-held bingo units. The complaint alleges that the Company breached
various oral agreements with Apex and then misappropriated, developed and
marketed hand-held bingo units which allegedly were developed through a
cooperative effort of Apex, Vern D. Blanchard, and Jeff Rogers (an
individual). Apex seeks general damages, injunctive relief, exemplary and
punitive damages, attorney's fees, and any other costs the court deems
proper.
In the second action, Apex seeks to avoid an alleged fraudulent
transfer. Apex alleges that the Company, as well as Tidalpower, Green Dollars
Industrial Ltd., Leo Lee, Doris Tsao, and Morgan Chen conspired to avoid a
right to attach order and default judgment entered in favor of Apex against
Green Dollars Industrial Ltd. Apex seeks general damages in the amount of
$400,400, special damages totaling $35,000, exemplary or punitive damages in
the sum of $1,201,200, prejudgment interest, costs of suit and any other
relief the court finds proper.
The Company has answered Apex's amended complaint in the fraudulent
transfer action. In August 1998 the Company won its motion to dismiss four
claims, for breach of fiduciary duty (2 claims) constructive fraud, and
tortious breach of the covenant of good faith and fair dealing, in Apex's
amended complaint in the copyright action. The Company expects to file its
answer to the remaining claims, as well as counterclaims against Apex, in the
copyright action shortly.
The Company intends to vigorously defend itself against the Apex
actions. These actions are in the early stages of litigation and there can be
no assurance that favorable outcomes will be obtained or that if the actions
are resolved in favor of the plaintiff, such results would not have a
material adverse effect on the Company.
8
<PAGE>
On December 1, 1997, a cross-complaint for breach of contract and
declaratory relief was brought against the Company, Richard T. Fedor and Gary
R. Held by Diamond Game Enterprises ("Diamond") in the Superior Court of the
State of California, Los Angeles County. The cross-complaint is a response
to a complaint for recovery of money, and money received, and breach of
contract brought by Richard T. Fedor on September 30, 1997 against Diamond.
Mr. Fedor alleges that Diamond breached the terms of an oral agreement
pursuant to which Mr. Fedor loaned $300,000 to Diamond. In its
cross-complaint, Diamond alleges that the Company breached the terms of an
oral contract by failing to pay a $671,000 balance allegedly owed under an
oral purchase agreement for 134 pull-tab dispensers which were to be
manufactured by Diamond. These actions are in the early stages of litigation
and there can be no assurance that favorable outcomes will be obtained or
that if the actions are resolved in favor of Diamond, such results would not
have a material adverse effect on the Company. All activities in relation to
both the cross-complaint and complaint have been stayed by the mutual
agreement of the parties pending the conclusion of ongoing settlement
discussions.
On February 13, 1998 and March 2, 1998, respectively, purported
securities class action lawsuits were filed in the United States District
Court, District of Arizona, against the Company, Richard T. Fedor, Clarence
H. Thiesen, Gary R. Held, John J. Paulson and Conrad J. Granito, Jr. On April
13, 1998, the district court issued an order consolidating these two actions.
The court's order also provides for the consolidation of any subsequently
filed action that is related to the claims asserted in the consolidated
actions.
On April 16, 1998, a purported securities class action was filed in the
United States District Court, District of Arizona, against the Company,
Donaldson, Lufkin & Jenrette Securities Corporation, Prudential Securities,
Incorporated, Richard T. Fedor, Clarence H. Thiesen, Gary R. Held, Conrad J.
Granito, Jr., John J. Paulson and Paul M. Wehrs. The Company believes that
this action is related to the consolidated actions and, therefore, will be
consolidated with those actions.
Plaintiffs in the pending securities class action lawsuits allege that
the prospectus and registration statement issued in connection with the
Company's November 25, 1997 initial public offering contained material
misstatements and omissions. Plaintiffs, who purport to represent persons who
purchased the Company's common stock pursuant to the November 25, 1997
securities offering, assert claims under Sections 11, 12(2), and 15 of the
Securities Act of 1933.
The Company intends to vigorously defend itself against the securities
class actions. These actions are in the early stages of litigation and there
can be no assurance that favorable outcomes will be obtained or that if the
actions are resolved in favor of the plaintiffs, such results would not have
a material adverse effect on the Company.
Many aspects of the Company's business involve substantial risks of
liability. In the normal course of its business, the Company may be named
as defendant or co-defendant in lawsuits involving primarily claims for
damages.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THREE MONTHS ENDED JULY 31, 1997
REVENUES. Revenues increased $687,000, or 20.2%, to $4.1 million for
the three months ended July 31, 1998 from $3.4 million for the three months
ended July 31, 1997. This increase in revenues was primarily due to a 99.1%
increase in the average number of units installed to 11,000 during the three
months ended July 31, 1998 from 5,525 during the three months ended July 31,
1997. The impact of the large increase in number of units was partially
offset by a competitive price adjustment and the higher ratio of hand-held,
which generate lower average revenue per unit, versus fixed-base units in
the installed base.
9
<PAGE>
COST OF REVENUES. Cost of revenues increased $420,000, or 45.0%, to
$1.4 million for the three months ended July 31, 1998 from $933,000 for the
three months ended July 31, 1997. The increase in cost of revenues was
primarily due to the greater average number of units installed. As a
percentage of revenues, cost of revenues increased to 33.1% from 27.4% in the
prior period. The increase was primarily due to increased depreciation
expense of $229,000 in the three months ended July 31, 1998 resulting from
the higher number of installed units. Personnel costs increased $140,000 in
the three months ended July 31, 1998 due to hiring additional personnel to
enable the Company to service its customers and to facilitate the Company's
growth in installations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $534,000, or 98.5%, to $1.1 million for the three months ended July
31, 1998 from $542,000 for the three months ended July 31, 1997. As a
percentage of revenues, general and administrative expenses increased to
26.3% from 15.9% in the prior period. The increase was primarily due to
increased legal fees of $371,000.
SALES AND MARKETING. Sales and marketing expenses increased $322,000,
or 90.7%, to $677,000 for the three months ended July 31, 1998 from $355,000
for the three months ended July 31, 1997. The increase was primarily due to
larger distributor commissions of $91,000, and higher personnel costs of
$144,000 resulting from hiring eight additional sales personnel to increase
the number of installed units and service the resultantly increased customer
base.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$35,000, or 23.5%, to $184,000 for the three months ended July 31, 1998 from
$149,000 for the three months ended July 31, 1997.
INTEREST (EXPENSE) INCOME. Net interest income increased $510,000, to
$390,000 of income for the three months ended July 31, 1998 from $120,000 of
expense for the three months ended July 31, 1997. The increase in net
interest income was due primarily to the interest on approximately $27.1
million of short-term investments and the Company having paid off its
approximate $ 3.4 million in debt with proceeds from the IPO in December 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased
$37,000 to $464,000 for the three months ended July 31, 1998 from $501,000
for the three months ended July 31, 1997. The Company's effective income tax
rate remained constant at approximately 40% in each period.
NET INCOME. As a result of the factors discussed above, net income
decreased $35,000 to $729,000 for the three months ended July 31, 1998 from
$764,000 for the three months ended July 31, 1997.
NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1997
REVENUES. Revenues increased $3.1 million, or 34.3%, to $11.9 million
for the nine months ended July 31, 1998 from $8.9 million for the nine months
ended July 31, 1997. This increase in revenues was primarily due to a 110%
increase in the average number of units installed to 9,231 during the nine
months ended July 31, 1998 from 4,386 during the nine months ended July 31,
1997. The impact of the large increase in number of units was partially
offset by competitive price adjustments and the higher ratio of hand-held,
which generate lower average revenue per unit, versus fixed-base units in
the installed base.
COST OF REVENUES. Cost of revenues increased $1.5 million, or 67.5 %,
to $3.8 million for the nine months ended July 31, 1998, from $2.2 million
for the nine months ended July 31, 1997. The increase in cost of revenues
was primarily due to the greater average number of units installed. As a
percentage of revenues, cost of revenues increased to 31.5% from 25.2% in the
prior period. The increase was primarily due to increased depreciation
expense of $626,000 in the nine months ended July 31, 1998 resulting from the
higher number of installed units. Personnel costs increased $485,000 in the
nine months ended July 31, 1998 due to the hiring of additional personnel to
enable the Company to service its customers and to facilitate the Company's
growth in installations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $1.3 million, or 96.7%, to $2.6 million for the nine months ended
July 31, 1998 from $1.3 million for the nine months ended July 31, 1997. As a
percentage of revenues, general and administrative expenses increased to
22.2% from 15.2% in the prior period. The increase was primarily due to
higher personnel costs of $259,000 resulting from hiring additional personnel
to help manage the Company's growth and increased legal fees of $731,000.
10
<PAGE>
SALES AND MARKETING. Sales and marketing expenses increased $844,000,
or 85.9%, to $1.8 million for the nine months ended July 31, 1998 from
$983,000 for the nine months ended July 31, 1997. The increase was primarily
due to larger distributor commissions of $381,000 and higher personnel costs
of $288,000 resulting from hiring eight additional sales personnel to
increase the number of installed units and service the resultantly increased
customer base.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$74,000, or 19.2%, to $459,000 for the nine months ended July 31, 1998 from
$385,000 for the nine months ended July 31, 1997.
EQUITY IN NET LOSS OF AFFILIATE. Equity in net loss of affiliate of
$2.0 million resulted from losses incurred by The Satellite Bingo Network ("
TSBN") joint venture for the nine months ended July 31, 1998 and a write off
of the Company's investment and advances to the joint venture with the
discontinuance of the TSBN operations in February 1998. Since the Company
financed this venture, it recorded 100% of the losses rather than its 50%
ownership percentage.
INTEREST (EXPENSE) INCOME. Net interest income increased $1.3 million,
to $1.0 million of income for the nine months ended July 31, 1998 from
$319,000 of expense for the nine months ended July 31, 1997. The increase in
net interest income was due primarily to interest on the net proceeds from
the Company's initial public offering (IPO) on December 1, 1997 which was
invested in interest bearing investments. The Company paid off approximately
$ 3.4 million in debt with proceeds from the IPO in December 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased
$532,000 to $884,000 for the nine months ended July 31, 1998 from $1.4
million for the nine months ended July 31, 1997 primarily due to the loss
from TSBN's discontinuance. The Company's effective income tax rate remained
constant at approximately 40% in each period.
NET INCOME. As a result of the factors discussed above, net income
decreased $ 771,000 to $1.4 million for the nine months ended July 31, 1998
from $2.2 million for the nine months ended July 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company received net proceeds of approximately $32.5 million from
the sale of 3,270,000 shares of its Common Stock in its IPO, which closed on
December 1, 1997. At July 31, 1998, the Company had cash and equivalents and
short-term investments totaling $27.1 million. The Company used approximately
$3.4 million of the net proceeds to pay off long-term debt and short-term
borrowings in December 1997.
The Company has primarily used its cash flow to purchase additional
bingo units to install in customers' bingo halls and to meet its ordinary
operating expenses. GameTech currently has a $10.0 million line of credit
(the "Revolving Credit Facility") with Wells Fargo Bank, N. A. ("Wells
Fargo"), which has an interest rate based on the prime rate or LIBOR plus
2.0%, at the Company's option, on which there was no outstanding balance at
July 31, 1998. The principal sources of the Company's liquidity prior to the
IPO were: cash flow from operations; borrowing under the Revolving Credit
Facility and a term loan with Wells Fargo (the "Term Loan"), which was repaid
with a portion of the net proceeds from the IPO; the issuance to officers of
promissory notes convertible into Common Stock and sales of Common Stock. In
addition, on September 2, 1997, the Company issued and sold 400,000 shares of
Series A Preferred Stock for net proceeds of $2.8 million. All outstanding
shares of Series A Preferred Stock were converted into Common Stock at the
close of the IPO.
The Revolving Credit Facility expires on March 31, 2000. Covenants under
this credit facility restrict the Company's payment of cash dividends, as
well as other customary covenants.
Operating activities provided $3.7 million of cash for the nine months
ended July 31, 1998 compared to $2.3 million for the nine months ended July
31, 1997. The increase was primarily the net result of $771,000 in lower
earnings being offset by the effect of a $713,000 increase in depreciation
expense, a $2.0 million charge to earnings from the discontinuance of
operations and write-off of the Company's investment in TSBN and other
adjustments of $464,000.
11
<PAGE>
Investing activities used $5.9 million in the nine months ended July 31,
1998 compared to $3.8 million in the nine months ended July 31, 1997. The
increase was due to increased capital expenditures of $705,000 and increased
advances of $1.3 million to TSBN.
Financing activities provided cash of $28.3 million in the nine months
ended July 31, 1998 compared to $1.6 million for the nine months ended July
31, 1997. The $28.3 million represents the net proceeds from the IPO less the
repayment of the Company's debt under the Revolving Credit Facility and the
Term Loan, the repurchase of $1.3 million of treasury stock, and $363,000 of
payments made on the buyout of a distributorship agreement.
The Company believes that cash flow from operations and the net proceeds
to the Company from the IPO, together with funds available under the
Revolving Credit Facility, will be sufficient to support its operations and
provide for budgeted capital expenditures and liquidity requirements for the
next twelve months.
YEAR 2000 RISKS
Year 2000 compliance concerns the ability of certain computerized
information systems to properly recognize date-sensitive information as the
year 2000 approaches. Systems that do not recognize such information could
generate erroneous data or cause systems to fail. The Company is at risk
both for its own Year 2000 compliance and for the Year 2000 compliance of
those with whom it does business.
The Year 2000 compliance assessments of the Company's information and
operating systems are in progress. The Company is also investigating the
Year 2000 compliance efforts of suppliers and other third party entities with
whom the Company does business and has material relationships, with a goal of
preventing the Company's operations from being adversely affected by
significant compliance problems of others. The Company intends that all
material Year 2000 issues identified will be corrected by the end of 1999.
The total amount of costs to be incurred by the Company to address Year 2000
issues cannot be reasonably estimated at this time. While the actual effects
of the Year 2000 issue on the Company may be different from the current
assessment, the Company does not believe that the Year 2000 issues will have
a material effect on its business, operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Revolving Credit Facility with Wells Fargo is a $10
million line of credit with an interest rate based on the prime rate or LIBOR
plus 2.0%, at the Company's option. The line of credit expires on March 31,
2000.
Because the interest rate on the Revolving Credit Facility is variable,
the Company's cash flow may be affected by increases in interest rates, in
that the Company would be required to pay more interest in the event that
both the prime and LIBOR interest rates increase. Management does not,
however, believe that any risk inherent in the variable-rate nature of the
loan is likely to have a material effect on the Company's interest expense or
available cash. The Company currently maintains a zero balance on the
Revolving Credit Facility (at the end of the fiscal 1997 period, the
outstanding balance was approximately $550,000). Even if the Company were to
draw down on the line prior to its expiration and an unpredicted increase in
both alternate rates occurred, it would not be likely to have a material
effect on the Company's interest expense or available cash.
SENSITIVITY ANALYSIS. Assuming the Company had a $2 million balance
outstanding as of July 31, 1998, the rate of interest calculated using the
prime rate option would be 8.5%. The Company's monthly interest payment, if
the rate stayed constant would be $14,167. If the prime rate rose to 13%,
which assumes an unusually large increase, the Company's monthly payment
would be $21,667. A more likely increase of 1 or 2%, given the recent trend
of decreasing and relatively low interest rates, would result in a monthly
payment of $15,833 or $17,500, respectively. The Company does not believe the
risk resulting from such fluctuations is material nor that the payment
required would have a material effect on cash flow.
12
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This document includes various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events. Statements
containing expressions such as "believes," "anticipates" or "expects" used in
the Company's press releases and periodic reports on Forms 10-K and 10-Q
filed with the Commission are intended to identify forward-looking
statements. All forward-looking statements involve risks and uncertainties,
many of which are beyond the Company's control. Although the Company
believes its expectations are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurances that actual results will not materially differ from expected
results. The Company cautions that these and similar statements included in
this report are further qualified by important factors that could cause
actual results to differ materially from those in the forward-looking
statements. Such factors could include, without limitation, the following:
increased competition in existing markets; a decline in the public
participation in bingo; the limitation, conditioning or suspension of any of
the Company's bingo permits or licenses; increases in or new taxes imposed on
bingo revenues or bingo devices; a finding of unsuitability by regulatory
officers with respect to the Company's officers, directors or key employees;
loss or retirement of key executives; adverse economic or regulatory
conditions in the Company's key markets; adverse results of significant
litigation matters. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date thereof. The
Company undertakes no obligation to publicly release any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1996, a patent infringement action alleging infringement of
U.S Patent No. 4,624,462 (the "'462 Patent") and demand for jury trial was
commenced against the Company and five other defendants by FortuNet, Inc. in
the U.S. District Court, Southern District of California. The Company, in
July 1997, won its motion for transfer and severance in this action. In July
1998 the action was dismissed without prejudice.
In March 1996, a patent infringement action and demand for jury trial
was commenced against the Company by Bingo Technology Corporation, Inc.
(formerly Bingo Card Minder Corporation), in the U.S. District Court,
Northern District of California. The complaint alleges that the Company has
infringed, actively induced or contributed to the infringement of U.S. Patent
No. 4,378,940 (the "'940 Patent") by making, using and selling, among other
acts, electronic bingo devices that allegedly infringe upon at least one
claim of the '940 Patent. The '940 Patent was issued in 1983 and will expire
in 2000 and is allegedly infringed by the Company's hand-held bingo units.
The plaintiff seeks a permanent injunction prohibiting the Company from
infringement of the '940 Patent, as well as actual damages, enhanced (treble)
damages, attorneys' fees and costs. A trial date has been set for December
7, 1998.
The Company believes that its products do not infringe any valid claim
of the '940 Patent and intends to continue to defend against this action
vigorously. However, there can be no assurance that favorable outcomes will
be obtained or that if the action were resolved in favor of the plaintiff,
such results would not have a material adverse effect on the Company's
financial position, results of operations or cash flow.
In October 1997, Apex Wholesale, Inc. ("Apex") commenced two actions
against the Company in the U.S. District Court, Southern District of
California. The Company formerly purchased its hand-held units manufactured
by Tidalpower Technologies, Inc. ("Tidalpower") through Apex but terminated
such arrangement in September 1996 and now purchases hand-held units directly
from Tidalpower. The named defendants (in addition to the Company) in this
action are Tidalpower, Green Dollars Industrial Ltd. (a foreign corporation),
Vern D. Blanchard, Richard T. Fedor, Clarence H. Thiesen, Leo Lee (a foreign
national), Doris Tsao (a foreign national), and Morgan Chen (a foreign
national). In one action, Apex is asserting copyright infringement, breach
of contract, breach of fiduciary duty, interference with contract and
prospective economic advantage, and trade secret claims on GameTech's
hand-held bingo units. The complaint alleges that the Company breached
various oral agreements with Apex and then misappropriated, developed and
marketed hand-held bingo units which allegedly were developed through a
cooperative effort of Apex, Vern D. Blanchard, and Jeff Rogers (an
individual). Apex seeks general damages, injunctive relief, exemplary and
punitive damages, attorney's fees, and any other costs the court deems
proper.
In the second action, Apex seeks to avoid an alleged fraudulent
transfer. Apex alleges that the Company, as well as Tidalpower, Green Dollars
Industrial Ltd., Leo Lee, Doris Tsao, and Morgan Chen conspired to avoid a
right to attach order and default judgment entered in favor of Apex against
Green Dollars Industrial Ltd. Apex seeks general damages in the amount of
$400,400, special damages totaling $35,000, exemplary or punitive damages in
the sum of $1,201,200, prejudgment interest, costs of suit and any other
relief the court finds proper.
The Company has answered Apex's amended complaint in the fraudulent
transfer action. In August 1998 the Company won its motion to dismiss four
claims, for breach of fiduciary duty (2 claims) constructive fraud, and
tortious breach of the covenant of good faith and fair dealing, in Apex's
amended complaint in the copyright action. The Company expects to file its
answer to the remaining claims, as well as counterclaims against Apex, in the
copyright action shortly.
The Company intends to vigorously defend itself against the Apex
actions. These actions are in the early stages of litigation and there can be
no assurance that favorable outcomes will be obtained or that if the actions
are resolved in favor of the plaintiff, such results would not have a
material adverse effect on the Company.
On December 1, 1997, a cross-complaint for breach of contract and
declaratory relief was brought against the Company, Richard T. Fedor and Gary
R. Held by Diamond Game Enterprises ("Diamond") in the Superior
14
<PAGE>
Court of the State of California, Los Angeles County. The cross-complaint is
a response to a complaint for recovery of money, and money received, and
breach of contract brought by Richard T. Fedor on September 30, 1997 against
Diamond. Mr. Fedor alleges that Diamond breached the terms of an oral
agreement pursuant to which Mr. Fedor loaned $300,000 to Diamond. In its
cross-complaint, Diamond alleges that the Company breached the terms of an
oral contract by failing to pay a $671,000 balance allegedly owed under an
oral purchase agreement for 134 pull-tab dispensers which were to be
manufactured by Diamond. These actions are in the early stages of litigation
and there can be no assurance that favorable outcomes will be obtained or
that if the actions are resolved in favor of Diamond, such results would not
have a material adverse effect on the Company. All activities in relation to
both the cross-complaint and complaint have been stayed by the mutual
agreement of the parties pending the conclusion of ongoing settlement
discussions.
On February 13, 1998 and March 2, 1998, respectively, purported
securities class action lawsuits were filed in the United States District
Court, District of Arizona, against the Company, Richard T. Fedor, Clarence
H. Thiesen, Gary R. Held, John J. Paulson and Conrad J. Granito, Jr. On April
13, 1998, the district court issued an order consolidating these two actions.
The court's order also provides for the consolidation of any subsequently
filed action that is related to the claims asserted in the consolidated
actions.
On April 16, 1998, a purported securities class action was filed in the
United States District Court, District of Arizona, against the Company,
Donaldson, Lufkin & Jenrette Securities Corporation, Prudential Securities,
Incorporated, Richard T. Fedor, Clarence H. Thiesen, Gary R. Held, Conrad J.
Granito, Jr., John J. Paulson and Paul M. Wehrs. The Company believes that
this action is related to the consolidated actions and, therefore, will be
consolidated with those actions.
Plaintiffs in the pending securities class action lawsuits allege that
the prospectus and registration statement issued in connection with the
Company's November 25, 1997 initial public offering contained material
misstatements and omissions. Plaintiffs, who purport to represent persons who
purchased the Company's common stock pursuant to the November 25, 1997
securities offering, assert claims under Sections 11, 12(2), and 15 of the
Securities Act of 1933.
The Company intends to vigorously defend itself against the securities
class actions. These actions are in the early stages of litigation and there
can be no assurance that favorable outcomes will be obtained or that if the
actions are resolved in favor of the plaintiffs, such results would not have
a material adverse effect on the Company.
Many aspects of the Company's business involve substantial risks of
liability. In the normal course of its business, the Company may be named
as defendant or co-defendant in lawsuits involving primarily claims for
damages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
SALES OF UNREGISTERED SECURITIES DURING THE THREE MONTHS ENDED JULY 31,
1998
On various dates during the three months ended July 31, 1998, certain
Company employees exercised stock options granted in partial compensation for
their services, resulting in the issuance of an aggregate of 68,750 shares of
Common Stock for an aggregate consideration of $1,625. Each of these
issuances was deemed to be exempt from registration under the Securities Act
of 1933, as amended (the "Act"), pursuant to the exemption from registration
set forth in Rule 701 promulgated under the Act. All of such offers and
sales were made pursuant to written agreements relating to the compensation
of such employees, copies of which were provided to them. The aggregate
amount of shares offered and sold in reliance on Rule 701 as of September 10,
1998 does not exceed the thresholds set forth in paragraph (b) (5) thereof.
USE OF PROCEEDS
On November 24, 1997, the Securities and Exchange Commission (the
"Commission") declared the Company's Registration Statement on Form S-1 (the
"Registration Statement") effective. The Commission file number assigned to
the Registration Statement is 333-34967. The Company filed the Registration
Statement in connection with the offering (the "Offering") of 3,710,000
shares of its Common Stock.
15
<PAGE>
From the effective date of the Registration Statement to the end of the
reporting period the Company has used none of the net offering proceeds for
construction of plant, building and facilities; for the purchase of real
estate; or for the acquisition of other businesses. The Company has used
$3.4 million for the repayment of indebtedness and $1.3 million for the
repurchase of treasury stock.
None of these payments have been direct or indirect payments to directors,
officers or other affiliates of the Company.
16
<PAGE>
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6.Exhibits and Reports on Form 8-K
a) Exhibits:
27.1 Financial Data Schedule
b) Reports on Form 8-K:
There were no reports on Form 8-K during the quarter ended July 31,
1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John J. Paulson September 14, 1998
- -------------------- ------------------
John J. Paulson Chief Financial Officer/Treasurer
(Authorized Officer and Principal
Financial Officer)
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF GAME TECH INTERNATIONAL, INC. ("THE COMPANY") AS OF JULY 31, 1998 AND
THE STATEMENTS OF OPERATIONS OF THE COMPANY FOR THE THREE AND NINE MONTHS ENDED
JULY 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998
<PERIOD-START> MAY-01-1998 NOV-01-1997
<PERIOD-END> JUL-31-1998 JUL-31-1998
<CASH> 16,357 0
<SECURITIES> 10,766 0
<RECEIVABLES> 2,027 0
<ALLOWANCES> 281 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 29,898 0
<PP&E> 15,484 0
<DEPRECIATION> 3,552 0
<TOTAL-ASSETS> 43,510 0
<CURRENT-LIABILITIES> 1,389 0
<BONDS> 0 0
0 0
0 0
<COMMON> 10 0
<OTHER-SE> 41,144 0
<TOTAL-LIABILITY-AND-EQUITY> 43,510 0
<SALES> 0 0
<TOTAL-REVENUES> 4,093 11,948
<CGS> 0 0
<TOTAL-COSTS> 1,353 3,758
<OTHER-EXPENSES> 184 459
<LOSS-PROVISION> 60 120
<INTEREST-EXPENSE> 0 42
<INCOME-PRETAX> 1,193 2,268
<INCOME-TAX> 464 884
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 729 1,384
<EPS-PRIMARY> 0.07 0.15
<EPS-DILUTED> 0.07 0.13
</TABLE>
