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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 APRIL 30, 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 (I.R.S. Employer
of 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 June 12, 1998 the registrant had outstanding 9,994,592 shares of its
Common Stock, par value $.001 per share.
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GAMETECH INTERNATIONAL, INC.
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Balance Sheets
April 30, 1998 and October 31, 1997 ....................... 3
Statements of Operations
Three Months Ended April 30, 1998 and 1997 ................ 4
Six Months Ended April 30, 1998 and 1997 .................. 4
Statements of Cash Flows
Six Months Ended April 30, 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
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GAMETECH INTERNATIONAL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
April 30, October 31,
1998 1997
-------------------------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and equivalents $28,673 $ 1,020
Accounts receivable, less allowance for doubtful
accounts of $221 in 1998 and $164 in 1997 1,657 1,151
Deposits 413 108
Other current assets 235 49
Prepaid and deferred income taxes 448 196
---------------------------
Total current assets 31,426 2,524
Bingo units, furniture and equipment, net 10,856 9,025
Intangibles, less accumulated amortization of $269 in 1998
and $238 in 1997 432 368
Investment in and advances to affiliate - 526
Other assets 1,300 808
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Total assets $44,014 $13,251
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---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term borrowings from bank $ - $ 550
Accounts payable 507 403
Other current liabilities 409 727
Current portion of long-term debt obligations 338 1,266
------- -------
Total current liabilities 1,254 2,946
Convertible notes payable to officers, including accrued
interest - 1,526
Long-term debt obligations 677 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 37,115 36
Retained earnings 4,590 3,935
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Total stockholders' equity 41,715 3,976
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Total liabilities and stockholders' equity $44,014 $13,251
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</TABLE>
See notes to financial statements.
3
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GAMETECH INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
1998 1997 1998 1997
------------------------- --------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $3,899 $2,998 $ 7,855 $5,486
Operating expenses:
Cost of revenues 1,270 703 2,404 1,311
General and administrative 817 472 1,576 806
Sales and marketing 667 347 1,150 628
Research and development 89 119 275 236
------------------------- --------------------------
2,843 1,641 5,405 2,981
------------------------- --------------------------
Income from operations 1,056 1,357 2,450 2,505
Equity in net loss of affiliate - - (2,000) -
Interest income (expense), net 419 (108) 625 (199)
------------------------- --------------------------
Income before provision for income taxes 1,475 1,249 1,075 2,306
Provision for income taxes 576 490 420 915
------------------------- --------------------------
Net income $ 899 $ 759 $ 655 $1,391
------------------------- --------------------------
------------------------- --------------------------
Basic net income per share $ 0.09 $ 0.17 $ 0.07 $ 0.31
------------------------- --------------------------
------------------------- --------------------------
Diluted net income per share $ 0.08 $ 0.12 $ 0.06 $ 0.23
------------------------- --------------------------
------------------------- --------------------------
Shares used in the calculation of net income
per share:
Basic 9,853,539 4,415,367 9,047,500 4,446,610
------------------------- --------------------------
------------------------- --------------------------
Diluted 11,096,195 6,329,189 10,583,646 6,387,538
------------------------- --------------------------
------------------------- --------------------------
</TABLE>
See notes to financial statements.
4
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GAMETECH INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 655 $ 1,391
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,012 584
Accrued interest payable to officers 13 91
Equity in net loss of affiliate 2,000 -
Changes in operating assets and liabilities:
Accounts receivable, net (506) (466)
Deposits (305) (89)
Prepaid expenses and other current assets (186) (6)
Prepaid and deferred income taxes (252) -
Accounts payable 104 48
Other current liabilities (318) 109
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Net cash provided by operating activities 2,217 1,662
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for bingo units, furniture and equipment (2,626) (2,441)
Investment in and advances to affiliate (1,474) (58)
Capitalized software development costs (126) (75)
---------------------------
Net cash used in investing activities (4,226) (2,574)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings from bank - 1,480
Payments on short-term notes payable and borrowings from bank (550) (2,897)
Proceeds from long-term debt - 3,000
Payments on long-term debt (2,866) (156)
Payments on repurchase of distributorship (285) -
Payment for repurchase of common stock and cancellation of a note
payable to an officer - (250)
Proceeds from sales of common stock 33,363 10
---------------------------
Net cash provided by financing activities 29,662 1,187
---------------------------
Net increase in cash and equivalents 27,653 275
Cash and equivalents at beginning of period 1,020 166
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Cash and equivalents at end of period $28,673 $ 441
---------------------------
---------------------------
</TABLE>
See notes to financial statements.
5
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GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 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
six-month periods ended April 30, 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
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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 April 30, Six months ended April 30,
1998 1997 1998 1997
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $899 $759 $655 $1,391
--------------------------- ---------------------------
Numerator for basic earnings per share 899 759 655 1,391
Effect of dilutive securities:
After-tax interest on convertible notes payable - 28 8 55
--------------------------- ---------------------------
Numerator for diluted earnings per share -
income available to common stockholders after
assumed conversions $899 $787 $663 $1,446
--------------------------- ---------------------------
--------------------------- ---------------------------
Denominator:
Denominator for basic earnings per share
Weighted average shares 9,853,539 4,415,367 9,047,500 4,446,610
Effect of dilutive securities:
Stock options 1,242,656 490,642 1,271,015 538,343
Convertible preferred stock - - 65,218 -
Convertible notes payable - 1,423,180 199,913 1,402,586
--------------------------- ---------------------------
Denominator for diluted earnings per share 11,096,195 6,329,189 10,583,646 6,387,538
--------------------------- ---------------------------
--------------------------- ---------------------------
Basic earnings per share $0.09 $0.17 $0.07 $0.31
--------------------------- ---------------------------
--------------------------- ---------------------------
Diluted earnings per share $0.08 $0.12 $0.06 $0.23
--------------------------- ---------------------------
--------------------------- ---------------------------
</TABLE>
7
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NOTE C. COMMITMENTS AND CONTINGENCIES
LITIGATION
In November 1996, a patent infringement action 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 other
defendants were Advanced Gaming Technology, Inc., American Video Systems,
FortuNet Canada, Inc., Network Gaming, Inc. (f/k/a/ Artificial Intelligence),
and Multimedia Games, Inc. The complaint alleges that the Company, among others,
has infringed, actively induced or contributed to the infringement of U.S.
Patent No. 4,624,462 (the "'462 Patent") by making, using and selling, among
other acts, electronic bingo devices that allegedly infringe upon at least one
claim of the '462 Patent. The '462 Patent was issued in 1986 and will expire in
2001 and is allegedly infringed by the Company's fixed-base bingo units. The
plaintiff seeks a preliminary and permanent injunction prohibiting the Company
from infringement of the '462 Patent, as well as actual damages, enhanced
(treble) damages, attorneys' fees and any other costs. The Company, in July
1997, won its motion for transfer and severance in this action. The U.S.
District Court, District of Arizona, has set a pre-trial conference date of
February 22, 1999 at which time a trial date will be chosen.
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 preliminary and 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 either the '462 Patent or the '940 Patent and intends to continue to defend
against both actions vigorously. However, there can be no assurance that
favorable outcomes will be obtained or that if either or both actions are
resolved in favor of the plaintiffs, such results would not have a material
adverse effect on the Company's financial position, results of operations or
cash flow.
In October 1997, two actions were commenced against the Company by Apex
Wholesale, Inc. ("Apex") 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 defendants (in addition to the Company) were 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
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. The Company has filed a motion to dismiss on four claims in
Apex's amended complaint in the copyright action. This motion is scheduled to be
heard on August 3, 1998.
8
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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 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 so that ongoing settlement
discussions may continue.
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 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 APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
REVENUES. Revenues increased $901,000, or 30.0%, to $3.9 million for
the three months ended April 30, 1998 from $3.0 million for the three months
ended April 30, 1997. This increase in revenues was primarily due to a 103%
increase in the average number of units installed to 9,582 during the quarter
ended April 30, 1998 from 4,720
9
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during the quarter ended April 30, 1997, partially offset by a 33% decrease
in average revenues per unit attributable to the higher ratio of hand-held
units, which generate lower average revenue per unit in the installed base.
COST OF REVENUES. Cost of revenues increased $567,000, or 80.6%, to
$1.3 million for the three months ended April 30, 1998 from $703,000 for the
three months ended April 30, 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 32.6% from 23.4% in the prior period.
The increase was primarily due to increased depreciation expense of $375,000 in
the three months ended April 30, 1998 resulting from the higher number of
installed units. Personnel costs increased $190,000 in the three months ended
April 30, 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 $345,000, or 73.2%, to $817,000 for the three months ended April 30,
1998 from $472,000 for the three months ended April 30, 1997. As a percentage of
revenues, general and administrative expenses increased to 21.0% from 15.7% in
the prior period. The increase was primarily due to higher personnel costs of
$129,000 resulting from hiring seven additional personnel to help manage the
Company's growth and increased professional services of $160,000.
SALES AND MARKETING. Sales and marketing expenses increased $320,000,
or 92.2%, to $667,000 for the three months ended April 30, 1998 from $347,000
for the three months ended April 30, 1997. The increase was primarily due to
larger distributor commissions of $161,000, and higher personnel costs of
$88,000 resulting from hiring seven additional sales personnel to achieve
continued high growth.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$31,000, or 25.2%, to $89,000 for the three months ended April 30, 1998 from
$119,000 for the three months ended April 30, 1997. The decrease was primarily
due to higher capitalized software development costs of $88,000.
INTEREST (EXPENSE) INCOME. Net interest income increased $527,000, to
$419,000 of income for the three months ended April 30, 1998 from $108,000 of
expense for the three months ended April 30, 1997. The increase in net interest
income was due primarily to the interest on approximately $32.5 million of 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 its
approximate $ 3.4 million in debt with proceeds from the IPO in December 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$86,000 to $576,000 for the three months ended April 30, 1998 from $490,000 for
the three months ended April 30, 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
increased $ 86,000 to $899,000 for the three months ended April 30, 1998 from
$759,000 for the three months ended April 30, 1997.
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1997
REVENUES. Revenues increased $2.4 million, or 43.2%, to $7.9 million
for the six months ended April 30, 1998 from $5.5 million for the six months
ended April 30, 1997. This increase in revenues was primarily due to a 117%
increase in the average number of units installed to 8,820 during the six months
ended April 30, 1998 from 4,070 during the six months ended April 30, 1997,
partially offset by a 34% decrease in average revenues per unit attributable to
the higher ratio of hand-held units, which generate lower average revenue per
unit, in the installed base.
COST OF REVENUES. Cost of revenues increased $1.1 million, or 83.4 %,
to $2.4 million for the six months ended April 30, 1998, from $1.3 million for
the six months ended April 30, 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 30.6% from 23.9% in the prior period.
The increase was primarily due to increased depreciation expense of $396,000 in
the six months ended April 30, 1998 resulting from the higher number of
installed units. Personnel costs increased $341,000 in the six months ended
April 30, 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.
10
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GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $770,000, or 95.6%, to $1.6 million for the six months ended April 30,
1998 from $806,000 for the six months ended April 30, 1997. As a percentage of
revenues, general and administrative expenses increased to 20.1% from 14.7% in
the prior period. The increase was primarily due to higher personnel costs of
$237,000 resulting from hiring eight additional personnel to help manage the
Company's growth and increased professional services of $390,000.
SALES AND MARKETING. Sales and marketing expenses increased $522,000,
or 83.1%, to $1.2 million for the six months ended April 30, 1998 from $628,000
for the six months ended April 30, 1997. The increase was primarily due to
larger distributor commissions of $209,000 and higher personnel costs of
$120,000 resulting from hiring seven additional sales personnel to achieve
continued high growth.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$39,000, or 16.5%, to $275,000 for the six months ended April 30, 1998 from
$236,000 for the six months ended April 30, 1997.
EQUITY IN NET LOSS OF AFFILIATE. Equity in net loss of affiliate of
$2.0 million resulted from losses incurred by the TSBN joint venture for the six
months ended April 30, 1998 and a write off 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 $824,000, to
$625,000 of income for the six months ended April 30, 1998 from $199,000 of
expense for the six months ended April 30, 1997. The increase in net interest
income was due primarily to interest on the approximately $32.5 million of 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
$495,000 to $420,000 for the six months ended April 30, 1998 from $915,000 for
the six months ended April 30, 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 $ 736,000 to $655,000 for the six months ended April 30, 1998 from
$1.4 million for the six months ended April 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company received net proceeds of approximately $32.5 million from
the sale of 3,270,000 shares of Common Stock in its IPO, which closed on
December 1, 1997. At April 30, 1998, the Company had cash and equivalents of
$28.7 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 with Wells Fargo Bank, N. A. ("Wells
Fargo") a $3 million line of credit (the "Revolving Credit Facility"), which has
an interest rate based on the prime rate plus 0.5% or LIBOR plus 2.5%, at the
Company's option on which the outstanding balance at April 30, 1998 was zero.
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 August 11, 1998. The Company
repaid borrowings under the Revolving Credit Facility with a portion of the net
proceeds from the IPO. The Company expects to maintain availability under the
Revolving Credit Facility and does not anticipate that it will have difficulty
refinancing or replacing the Revolving Credit Facility should it so desire.
Covenants under this credit facility restrict payment of cash dividends and
interest to holders of convertible notes without prior consent of Wells Fargo.
11
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Operating activities provided $2.2 million of cash for the six months
ended April 30, 1998 compared to $1.0 million for the six months ended April 30,
1997. The increase was due primarily to increased depreciation expense of
$429,000 and a $2.0 million charge to earnings from the discontinuance of
operations and write-off of its investment in TSBN, reduced by lower earnings of
$736,000 and further offset by net increases in accounts receivable, deposits
and prepaids and a decrease in other current liabilities.
Investing activities used $4.2 million in the six months ended April
30,1998 compared to $2.6 million in the six months ended April 30, 1997. The
increase was due to advances of $1.5 million to TSBN.
Financing activities provided cash of $29.7 million in the six months
ended April 30, 1998 compared to $1.2 million for the six months ended April 30,
1997. The $29.7 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Revolving Credit Facility with Wells Fargo is a $3
million line of credit with an interest rate based on the prime rate plus 0.5%
or LIBOR plus 2.5%, at the Company's option. It expires on August 11, 1998.
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. 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.
SENSITIVITY ANALYSIS. Assuming the Company had a $2 million balance
outstanding as of April 30, 1998, the rate of interest calculated using the
prime rate plus 0.5% option would be 9%. The Company's monthly interest payment,
if the rate stayed constant would be $15,000. If the prime rate rose to 13% ,
which assumes a very large increase, the Company's monthly payment would be
$22,500. A more likely increase of 1 or 2%, given the recent trend of decreasing
and relatively low interest rates, would give the Company a monthly payment of
$16,667 or $18,333, 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.
The Company anticipates that it will renew the Revolving Line of Credit
after its term expires.
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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 Sections
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. 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1996, a patent infringement action 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 other
defendants were Advanced Gaming Technology, Inc., American Video Systems,
FortuNet Canada, Inc., Network Gaming, Inc. (f/k/a/ Artificial Intelligence),
and Multimedia Games, Inc. The complaint alleges that the Company, among others,
has infringed, actively induced or contributed to the infringement of U.S.
Patent No. 4,624,462 (the "'462 Patent") by making, using and selling, among
other acts, electronic bingo devices that allegedly infringe upon at least one
claim of the '462 Patent. The '462 Patent was issued in 1986 and will expire in
2001 and is allegedly infringed by the Company's fixed-base bingo units. The
plaintiff seeks a preliminary and permanent injunction prohibiting the Company
from infringement of the '462 Patent, as well as actual damages, enhanced
(treble) damages, attorneys' fees and any other costs. The Company, in July
1997, won its motion for transfer and severance in this action. The U.S.
District Court, District of Arizona, has set a pre-trial conference date of
February 22, 1999 at which time a trial date will be chosen.
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 preliminary and 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 either the '462 Patent or the '940 Patent and intends to continue to defend
against both actions vigorously. However, there can be no assurance that
favorable outcomes will be obtained or that if either or both actions are
resolved in favor of the plaintiffs, such results would not have a material
adverse effect on the Company's financial position, results of operations or
cash flow.
In October 1997, two actions were commenced against the Company by Apex
Wholesale, Inc. ("Apex") 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 defendants (in addition to the Company) were 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
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. The Company has filed a motion to dismiss on four claims in
Apex's amended complaint in the copyright action. This motion is scheduled to be
heard on August 3, 1998.
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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 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 so that ongoing settlement
discussions may continue.
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 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
APRIL 30, 1998
On various dates during the three months ended April 30, 1998, Company
employees exercised stock options granted in partial compensation for their
services to purchase an aggregate of 141,250 shares of Common Stock in private
sales for an aggregate consideration of $135,812.50 in reliance upon Section
4(2) of the Securities Act as a transaction not involving a public offering.
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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.
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 $28.5 million for temporary
investments in short-term securities of the net offering proceeds.
None of these payments have been direct or indirect payments to
directors, officers or other affiliates of the Company.
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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:
See Attached Exhibit Index
b) Reports on Form 8-K:
On March 16, 1998, the Company filed a Form 8-K announcing the
appointment of Todd S. Myhre to the position of Chief Executive
Officer.
On April 17, 1998, the Company filed a Form 8-K announcing the
appointment of Douglas M. Hayes and Frederick C. Lane to the Board
of Directors for GameTech International, Inc.
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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.
SIGNATURE TITLE DATE
/s/ JOHN J. PAULSON 6/15/98
- ---------------------- -----------
John J. Paulson Chief Financial Officer / Treasurer
(Authorized Officer and Principal
Financial Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER
3.1 Certificate of Incorporation of the Company, as amended (1)
3.2 Amended and Restated Bylaws of the Company (1)
4.1 GameTech International, Inc. Incentive Stock Plan (1)
4.2 Specimen Common Stock certificate (1)
10.1 Employment Agreement between GameTech International, Inc. and
Todd S. Myhre (2)
27.1 Financial Data Schedule (2)
- -------------------------------------------------------------------------------
(1) Incorporated Herein by Reference to Registration Statement
No. 333-34967
(2) Filed with this Report
19
<PAGE>
GAMETECH INTERNATIONAL, INC.
EMPLOYMENT
AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
at Tempe, Arizona on this 9TH day of FEBRUARY, 1998 by and between GameTech
International Inc., a Delaware corporation ("GTI" or the "Company"), and Todd
Myhre ("Executive").
Whereas:
a. The Company desires to employ Executive, and;
b. Executive is a PART TIME EMPLOYEE for the Company until and including
MARCH 15, 1998, at which point Executive, on MARCH 16, 1998, will
become CHIEF EXECUTIVE OFFICER of the Company. Executive is a PART
TIME EMPLOYEE for the above referenced 35 DAY period in order to
familiarize himself with Company operations and procedures as well as
to attend to his relocation to the Phoenix, Arizona metropolitan area,
and;
c. The Company and Executive wish pursuant to this Agreement to set forth
their full and complete understandings in respect to the
above-mentioned employment relationship, replacing any and all
previous understandings and agreements, while incorporating by
reference the terms and conditions stated in the Offer Sheet formally
executed by GameTech and Executive on February 9, 1998. Said Offer
Sheet is herein attached as Exhibit "A".
NOW, THEREFORE, in consideration of the provisions hereinafter
described, Company and Executive agree as follows:
1. DUTIES OF EXECUTIVE
During the FIRST 35 DAYS of this Agreement, Executive shall be
employed by the Company as a PART TIME EMPLOYEE, as of March 16, 1998, and
for the remainder of the term of this Agreement, Executive shall be employed
by the Company as its CHIEF EXECUTIVE OFFICER and in that capacity shall
perform all functions and duties consistent with such position on behalf of
the Company in an efficient, trustworthy and professional manner, as
reasonably required by the board of directors of the Company or the board of
directors governing any successor entity to the Company (the "Board").
While he is CHIEF EXECUTIVE OFFICER of the Company, Executive
agrees to devote substantially all of his working time and energy to the
performance of his duties under this Agreement so long as his employment
under this Agreement is continued by the Company.
Notwithstanding the above, Executive shall be entitled to
reasonable absences for administrative meetings and to pursue other outside
activities. Executive also shall be permitted to serve as a member of the
Board of Directors of other organizations, subject to approval by the Board,
on a case by case basis. Such approval shall be granted if it can be
reasonably demonstrated that such service does not involve a competitor of
the Company or its Enterprises
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<PAGE>
and does not materially interfere with effective performance of Executive's
duties under this Agreement.
2. TERM OF AGREEMENT
Unless terminated sooner in accordance with the provisions of this
Agreement, the Company shall employ Executive and Executive accepts such
employment under the conditions set forth herein for a THREE (3) YEAR AND 35
DAY term (the "Term") beginning on the effective date of this Agreement and
ending upon the close of business on MARCH 16, 2001. Notwithstanding the
foregoing, if this Agreement is not terminated in accordance with the
provisions herein on or before the expiration of its initial Term, such Term
shall continue, and the Agreement shall continue in force for successive TWO
(2) year periods unless, at least ninety (90) days prior to the expiration of
the initial Term of the Agreement, or ninety (90) days prior to the
expiration of any subsequent TWO (2) year Term, either Executive or the
Company gives the other party written notice of its intent to terminate the
Agreement at the end of such Term.
3. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth in this Paragraph 3:
a. "ANNUAL BASE SALARY" or "BASE SALARY" shall mean the annual base
salary rate in effect for Executive from time to time during the Term
of this Agreement in accordance with the provisions of Paragraph 4.a.
of this Agreement.
b. "ANNUAL BONUS" or "BONUS" shall mean a cash payment available
annually (or as otherwise provided for in this document) to Executive
in addition to Base Salary as determined in accordance with Paragraph
4.b. of this Agreement.
c. "CAUSE" shall mean (i) Executive's conviction for any felony involving
moral turpitude; or (ii) any conduct by Executive which is materially
injurious to the Company or its Enterprises (Such cause for conduct
shall exist if Executive is guilty of dishonesty, gross neglect of
duty hereunder, or other act or omission which impairs Company's
ability to conduct its ordinary business in its usual manner), or
(iii) Executive fails to abide by any part of Company reasonable
behavior guidelines. Such cause will be determined upon a meeting of
the Company's Board of Directors.
d. "CHANGE OF CONTROL" shall mean any of the following events: (i) the
Company consolidates with, or merges with or into, another entity or
sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of the Company's assets to any entity, or any
entity consolidates with, or merges with or into, the Company and the
Company is not the surviving Corporation; (ii) the liquidation or
dissolution of the Company; (iii) during any consecutive two year
period, individuals who at
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the beginning of such period constituted the Board (together with any
new directors whose election by such Board or whose nomination for
election by the stockholders of the Company was approved by a vote
of the majority of the directors then still in office who were
either directors at the beginning of such period or whose election
or nomination was previously so approved) cease for any reason to
constitute a majority of the Board then in office; or (iv) any
person or group (as such terms are defined in Section 13(d) and
14(d) under the Securities Exchange Act of 1934 (the "Exchange
Act")) is or becomes the beneficial owner (as defined in Rules
13(d)-3 and 13(d)-5 under the Exchange Act, except that a person
will be deemed to have beneficial ownership of all securities that
such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time)
directly or indirectly of more than thirty PERCENT (30%) of the
total voting power entitled to vote in the election of the Board;
PROVIDED, however, that such person or group shall not include any
person or group that is the beneficial owner of more than 5% of
the total voting power as of the date of this Agreement.
e. "COMPENSATION COMMITTEE" means the Compensation Committee of the Board
of Directors.
f. "CONSTRUCTIVE TERMINATION" shall mean Executive's voluntary
Termination of Service within twelve (12) months following a Change of
Control or within ninety (90) days following the occurrence of one or
more of the following events, except if such event is approved in
writing by Executive prior to its occurrence:
(i) A failure by the Company to abide by any part of this
Agreement that is not remedied within thirty (30) business
days after receiving written notification by Executive of
such failure;
(ii) A material reduction in Executive's title or
responsibilities;
(iii) Relocation of Executive's primary place of work to an area
other than the location of the Company's principal
executive offices;
(iv) A failure by the Chairman of the Board to abide by any
part of Company reasonable behavior guidelines.
g. "DISABILITY" shall be deemed to have occurred if Executive makes
application for or is otherwise eligible for disability benefits under
any Company-sponsored long-term disability program covering Executive,
and Executive qualifies for such benefits. In the absence of a
Company-sponsored long-term disability program covering Executive,
Executive shall be presumed to be totally and
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<PAGE>
permanently disabled if so determined by the Company's Board following
the Board's review of two independent medical opinions satisfactory to
the Board certifying that Executive will be permanently unable to
perform his normal duties as a result of a physical or mental
condition.
h. "ENTERPRISE" shall mean any joint venture, business pursuant to a
joint operating agreement, or other alliance or affiliated business of
the Company, including but not limited to The Satellite Bingo Network,
LLC.
i. "EXECUTIVE'S SPOUSE" shall mean Executive's spouse upon the execution
of this Agreement, except as otherwise designated herein. (All spousal
pension benefits under this Agreement shall be non-transferable should
Executive remarry.)
j. "FISCAL YEAR" shall mean the twelve-month period beginning November 1,
unless the Company, with the approval of the Internal Revenue Service,
shall establish a different fiscal year.
k. "LONG-TERM INCENTIVE PLAN" shall mean any stock option plan or any
other form of equity (real or phantom) or other long-term incentive
plan introduced by the Company.
l. "SERVICE" shall mean Executive's full-time or substantially full-time
employment with the Company, or any affiliated organization, including
any leave of absence approved by the Board.
m. "TERMINATION OF SERVICE" shall mean Executive's termination of Service
for any reason whatsoever, including death.
4. EXECUTIVE'S RIGHTS WHILE EMPLOYED BY THE COMPANY
a. BASE SALARY
Beginning on the effective date of this Agreement and during the FIRST
35 DAYS OF THIS AGREEMENT, Executive shall be paid a salary of
TWO-THOUSAND ($2,000.00) dollars, during the remainder of the
Term, the minimum Annual Base Salary payable to Executive shall be
ONE HUNDRED AND EIGHTY THOUSAND dollars ($180,000.00). Such Base
Salary shall be paid in equal semi-monthly installments on the
Company's normal payroll dates. Executive's Base Salary shall be
reviewed annually by the Compensation Committee if any, otherwise
by the Board, and may be increased but not decreased from time to
time based on prevailing market conditions, performance of the
Executive and other considerations.
4
<PAGE>
b. ANNUAL BONUS
All fiscal year bonus amounts will be determined by and awarded in
the sole discretion of the Compensation Committee if any, otherwise by
the Board commensurate with Executive's performance and the overall
performance of the Company; or pursuant to a plan which may be adopted
by the Company making payment of bonuses contingent upon achievement
of goals and objectives set by the Board for the fiscal period.
c. LONG-TERM INCENTIVES
Executive shall participate in any Long-Term Incentive Plan that may
be designed specifically for Executive or provided to other executives
of the Company during the Term. (Grants to Executive under such
Long-Term Incentive Plan shall be no less favorable to Executive in
amount and other key design features, including vesting restrictions,
with any other plans provided to any other executive at the Company.)
d. FRINGE BENEFITS AND OTHER
The Company shall provide Executive with the following:
(i) Such benefits and perquisites, including but not limited to
disability income, deferred compensation or any form of savings
or retirement plan, and an automobile allowance as may from
time to time be provided to other executives of the Company.
Such benefits and perquisites shall exclude fees paid for Board
or Board Committee service, which are hereby included in
Executive's Base Salary. Benefits and perquisites shall be
provided at the same proportional cost to Executive as that
paid by other executives of the Company who participate in such
programs;
(ii) Reasonable vacation each year during the Term not less than
THIRTY (30) days. Executive is allowed to accrue a maximum of
SIXTY (60) full days of unused vacation/sick leave time. Said
vacation shall not reduce Executive's compensation under this
Agreement;
(iii) Payment of premiums on professional liability insurance for
Executive;
(iv) Payment of dues for such professional societies and
associations of which Executive is a member that benefit the
Company;
(v) Nothing in this Agreement shall be construed as limiting or
restricting any benefit to Executive under any pension,
profit-sharing
5
<PAGE>
or similar retirement plan, or under any group life or
group health or accident or other plan of the Company, for the
benefit of its employees generally or a group of them, now or
hereafter in existence.
(vi) It shall be at the Board's discretion to grant any other fringe
benefits to Executive.
5. EXECUTIVE'S RIGHTS UPON TERMINATION OF SERVICE
a. FOR REASON OF VOLUNTARY RESIGNATION CONSTITUTING CONSTRUCTIVE
TERMINATION OR TERMINATION BY THE COMPANY WITHOUT CAUSE
In the event of Executive's Termination of Service for reason of (i)
voluntary resignation by Executive constituting Constructive
Termination, (ii) Executive's Termination of Service by the Company
without Cause or (iii) Executive's Termination of Service for any
reason except those specifically described in paragraphs 5.b through
5.f herein, Executive (or if Executive dies while benefits remain due
under this Agreement, Executive's beneficiaries as designated in
accordance with the provisions of Paragraph 9 herein) shall be
entitled to receive the following upon such Termination of Service:
(i) Payment immediately upon Executive's Termination of Service of
any previously unpaid Base Salary and any Bonus granted and
previously unpaid or the pro-rata portion of any Bonus earned
by Executive pursuant to any plan (if necessary, the Company
may pay such Bonus when all bonuses for that Fiscal Year are
calculated and paid) through the date of Executive's
Termination of Service;
(ii) Immediate vesting of any stock options or other rights
previously provided to Executive under any Company Long-Term
Incentive Plan, with ten (10) years from the date of grant in
which to exercise stock options; provided, however, that any
incentive stock options not exercised prior to the date that is
ninety (90) days following the date of termination shall
thereafter convert into non-qualified stock options;
(iii) Payment of a lump sum amount equal to TWO (2) years of
Executive's Base Salary.
In the event of a Change of Control, Executive shall be also be entitled to
the protections outlined in Paragraph 7 herein.
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<PAGE>
b. FOR REASON OF EXPIRATION OF THE TERM OF THIS AGREEMENT
In the event of Executive's Termination of Service for reason of
expiration of the Term of this Agreement pursuant to Paragraph 2
thereof, Executive (or if Executive dies while benefits remain due
under this Agreement, Executive's beneficiaries as designated in
accordance with the provisions of Paragraph 9 thereof) shall be
entitled to receive the following upon such Termination of Service:
(i) Payment immediately upon Executive's Termination of Service of
any previously unpaid Base Salary and any Bonus granted and
previously unpaid or the pro-rata portion of any Bonus earned
by Executive pursuant to any plan (if necessary, the Company
may pay such Bonus when all bonuses for that Fiscal Year are
calculated and paid) through the date of Executive's
Termination of Service;
(ii) Immediate vesting of any stock options or other rights
previously provided to Executive under any Company Long-Term
Incentive Plan, with ONE (1) year from the date of termination
in which to exercise stock options; provided, however, that any
incentive stock options not exercised prior to the date that is
ninety (90) days following the date of termination shall
thereafter convert into non-qualified stock options;
(iii) Payment of any Disability or other benefits provided to
Executive by the Company in accordance with the terms and
conditions of such benefits and this Agreement.
(iv) Payment of a lump sum amount equal to ONE (1) year of
Executive's Annual Base Salary.
c. FOR REASON OF DISABILITY
In the Event of Executive's Termination of Service for reason of
Disability, Executive (or if Executive dies while benefits remain due
under this Agreement, Executive's beneficiaries as designated in
accordance with the provisions of Paragraph 9 hereof) shall be
entitled to receive the following upon such Termination of Service:
(i) Payment immediately upon Executive's Termination of Service of
any previously unpaid Base Salary and any Bonus granted and
previously unpaid or the pro-rata portion of any Bonus earned
by Executive pursuant to any plan (if necessary, the Company
may pay such Bonus when all bonuses for that Fiscal Year are
calculated and paid) through the date of Executive's
Termination of Service;
(ii) Immediate vesting of any stock options or other rights
previously provided to Executive under any Company Long-Term
Incentive
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<PAGE>
Plan with ONE (1) year from the date of termination in which to
exercise stock options; provided, however, that any incentive
stock options not exercised prior to the date that is ninety
(90) days following the date of termination shall thereafter
convert into non-qualified stock options;
(iii) Payment of any Disability or other benefits provided to
Executive by the Company in accordance with the terms and
conditions of such benefits and this Agreement;
(iv) Payment of a lump sum amount equal to the remaining Term of
Executive's Base Salary.
d. FOR REASON OF DEATH
In the Event of Executive's Termination of Service for Reason of
Death, Executive's beneficiaries as designated in accordance with the
provisions of Paragraph 9 hereof shall be entitled to receive the
following upon such Termination of Service:
(i) Payment immediately upon Executive's Termination of Service of
any previously unpaid Base Salary and any Bonus granted and
previously unpaid or the pro-rata portion of any Bonus earned
by Executive pursuant to any plan (if necessary, the Company
may pay such Bonus when all bonuses for that Fiscal Year are
calculated and paid) through the date of Executive's
Termination of Service;
(ii) Immediate vesting of any stock options or other rights
previously provided to Executive under any Company Long-Term
Incentive Plan with one (1) year from the date of termination
in which to exercise stock options; provided, however, that any
incentive stock options not exercised prior to the date that is
ninety (90) days following the date of termination shall
thereafter convert into non-qualified stock options;
(iii) Payment of any other benefits provided by the Company in
accordance with the terms and conditions of such benefits and
this Agreement.
(iv) Payment of a lump sum amount equal to the remaining Term of
Executive's Base Salary. (Payment to be made to Executive's
Estate.)
e. FOR REASON OF VOLUNTARY RESIGNATION NOT CONSTITUTING CONSTRUCTIVE
TERMINATION
In the event of Executive's Termination of Service for reason of
voluntary resignation by Executive not constituting Constructive
Termination,
8
<PAGE>
Executive shall be entitled to receive the following upon such
Termination of Service:
(i) Payment immediately upon Executive's Termination of Service of
any previously unpaid Base Salary and any Bonus granted and
previously unpaid or the pro-rata portion of any Bonus earned
by Executive pursuant to any plan (if necessary, the Company
may pay such Bonus when all bonuses for that Fiscal Year are
calculated and paid) through the date of Executive's
Termination of Service;
(ii) Performance of Company obligations with respect to Executive's
exercise of any stock options or other rights previously
granted to Executive under any Company Long-Term Incentive Plan
provided such options or other rights have vested as of the
date of the termination of Executive's service in accordance
with any agreement between the Company and Executive covering
such options or other rights;
(iii) Executive shall have one (1) year from the date of termination
in which to exercise vested stock options; provided, however,
that any incentive stock options not exercised prior to the
date that is ninety (90) days following the date of termination
shall thereafter convert into non-qualified stock options;
(iv) Payment of any Disability or other benefits provided to
Executive by the Company in accordance with the terms and
conditions of such benefits and this Agreement.
f. FOR REASON OF CAUSE
In the Event of Executive's Termination of Service for reason of
Cause, the Company's obligations to Executive shall be limited to:
(i) Payment immediately upon Executive's Termination of Service of
any previously unpaid Base Salary;
(ii) Performance of Company obligations with respect to Executive's
exercise of any stock options or other rights previously
granted to Executive under any Company Long-Term Incentive Plan
provided such options or other rights have vested as of the
date of the termination of executive's service in accordance
with any agreement between the Company and Executive covering
such options or other rights; Executive shall have 30 days
after termination in which to exercise any vested options.
6. MITIGATION AND OFFSET REQUIREMENTS
Executive shall not be required to mitigate the amount of any benefit
provided for in this Agreement by actively seeking alternative employment
during the period in which such
9
<PAGE>
benefits are paid. In addition, except as provided for in Paragraph 8
hereof, Executive shall not be required to offset any such benefits
provided for in this Agreement by amounts earned as a result of
Executive's employment or self-employment during the period in which
Executive is entitled to receive such benefits.
7. ADDITIONAL RIGHTS UPON A CHANGE OF CONTROL
In addition to Executive's rights to effect a Constructive Termination of
Service within twelve (12) months upon a Change of Control, the Term of
this Agreement shall be automatically extended for TWENTY-FOUR (24) months
following the effective date of any Change of Control.
8. BREACH OF CONFIDENTIALITY OR ENTERING INTO A DIRECT COMPETITION
a. DURING THE AGREEMENT PERIOD
During the period in which this Agreement remains in force and while
Executive is entitled to receive any benefits under this Agreement,
Executive shall not, without prior written consent of the Board or
pursuant to and consistent with the order of any court, legislative
body or regulatory agency, (a) engage directly or indirectly
(including by way of example only, as a principal, partner,
venturer, employee or agent) nor have any direct or indirect
interest, in any business which competes with the Company or its
Enterprises in any material way, (b) disclose to any third party,
either directly or indirectly, any non-public information regarding
the Company's or its Enterprises' business, customers, financial
condition, strategies or operations the disclosure of which could
possibly harm the Company or its Enterprises in any material way.
Clause (a) above shall not apply to any investment by Executive in
the stock of a publicly-traded corporation, provided such investment
constitutes less than five percent (5%) of such corporation's voting
shares. In the event that, Executive violates clauses (a) or (b)
above, Executive's rights to any benefits under this Agreement shall
immediately terminate.
b. UPON TERMINATION OF AGREEMENT
It is understood and agreed that the nature of the methods employed
in Company's business are such that Executive will be placed in a
close business and personal relationship with the customers of
Company. Thus, for a period of TWO (2) year(s) immediately
following the termination of Executive's employment (or retirement
by Executive), for any reason whatsoever, so long as Company
continues to carry on the same or similar business, said Executive
shall not, for any reason whatsoever, directly or indirectly, for
him or on behalf of, or in conjunction with, any other person,
persons, company, partnership, corporation or business entity:
(i) call upon, divert, influence or solicit or attempt to call
upon, divert, influence or solicit any customer or customers of
Company;
10
<PAGE>
(ii) divulge the names and addresses or any information concerning
any customer of Company;
(iii) own, manage, operate, control, be employed by, participate in
or be connected in any manner with the ownership, management,
operation or control of the same, similar, or related line
of business as that carried on by Company within a radius of
twenty-five (25) miles from any then existing or proposed
office of Company; and
(iv) make any public statement or announcement, or permit anyone
else to make any public statement or announcement that
Executive was formerly employed by or connected with Company.
The covenants set forth herein shall not include any period(s) of
violation of any covenant or any period(s) of time required for
litigation to enforce any covenant. If the provisions set forth are
determined to be too broad to be enforceable at law, then the area
and/or length of time shall be reduced to such area and time and
that shall be enforceable.
9. DESIGNATION OF BENEFICIARIES
Executive shall have the right at any time to designate any
person(s) or trust(s) as beneficiaries to whom any benefits payable under
this Agreement shall be made in the event of Executive's death prior to the
distribution of all benefits due Executive under this Agreement. Each
beneficiary designation shall be effective only when filed in writing with
the Company during Executive's lifetime. If Executive designates more than
one beneficiary, distributions of cash payments shall be made in equal
proportions to each beneficiary unless otherwise provided for in Executive's
beneficiary designation.
The filing of a new beneficiary designation shall cancel all
designations previously filed. Any finalized marriage or divorce (other than
common law marriage) of Executive subsequent to the date of filing a
beneficiary designation shall revoke such designation unless (a) in the case
of divorce, the previous spouse was not designated as beneficiary, and (b) in
the case of marriage, Executive's new spouse had previously been designated
as beneficiary. Executive's Spouse shall join in any designation of a
beneficiary other than Executive's Spouse.
If Executive fails to designate a beneficiary as provided for
above, or if the beneficiary designation is revoked by marriage, divorce or
otherwise without execution of a new designation, or if the beneficiary
designated by Executive dies prior to distribution of the benefits due
Executive under this Agreement, the Board of Directors of the Company shall
direct the distribution of any benefits due under this Agreement to
Executive's estate.
10. SUCCESSORS
Except as provided for in Paragraph 9 above, the rights and duties
of a party hereunder shall not be assignable by that party PROVIDED, HOWEVER,
that this Agreement shall be binding upon and shall inure to the benefit of
any successor of the Company, and any such successor shall be deemed
substituted for the Company under the terms of this Agreement. The term
successor as used
11
<PAGE>
herein shall include any person, firm, corporation or other business entity
which at any time, by merger, purchase or otherwise, acquires substantially
all of the assets or business of the Company.
11. ATTORNEYS' FEES
a. SUBSEQUENT TO ANY CHANGE OF CONTROL
Subsequent to any Change of Control, in any action at law or in
equity brought by either party hereto to enforce any of the
provisions or rights under this Agreement, the Company, in addition
to bearing its own expenses, shall pay to Executive all costs,
expenses and reasonable attorneys' fees incurred therein by
Executive (including without limitation such costs, expenses and
fees on any appeals), and if Executive shall recover judgment in any
such action or proceeding, such costs, expenses and attorneys' fees
shall be included as part of such judgment.
b. PRIOR TO ANY CHANGE OF CONTROL
Prior to any Change of Control, in any action at law or in equity to
enforce any of the provisions or rights under this Agreement, the
unsuccessful party to such litigation, as determined by the Court in
a final judgment or decree, shall pay the successful party or
parties all costs, expenses and reasonable attorneys' fees incurred
therein by such party or parties (including without limitation such
costs, expenses and fees on any appeals), and if such successful
party or parties shall recover judgment in such action or
proceeding, such costs, expenses and attorneys' fees shall be
included as part of such judgment.
Notwithstanding the foregoing provisions, in no event prior to a
Change of Control shall the successful party or parties be entitled to
recover an amount from the unsuccessful party or parties for costs, expenses
and attorneys' fees that exceeds the costs, expenses and attorneys' fees
incurred by the unsuccessful party in connection with the action or
proceeding.
12. ARBITRATION
Company and Executive agree with each other that any claim of
Executive arising out of or relating to this Agreement or the breach of this
Agreement or Executive's employment by Company, including, without
limitation, any claim for compensation due, wrongful termination and any
claim alleging discrimination or harassment in any form shall be resolved by
binding arbitration, except for claims in which injunctive relief is sought
and obtained. The arbitration shall be administered by the American
Arbitration Association under its Commercial Arbitration Rules at the
American Arbitration Association Office nearest Executive's place of
employment. The award entered by the arbitrator shall be final and binding
in all respects and judgment thereon may be entered in any Court having
jurisdiction.
13. ENTIRE AGREEMENT
With respect to the matters specified herein, this Agreement
(including the Offer Sheet attached hereto as Exhibit A) contains the entire
agreement between the Company and Executive and supersedes all prior written
agreements, understandings and commitments between the Company and
12
<PAGE>
Executive. No amendments to this Agreement may be made except through a
written document signed by the Executive and approved in writing by the
Company's Board.
14. VALIDITY
In the event that any provision of this Agreement is held to be
invalid, void or unenforceable, the same shall not affect, in any respect
whatsoever, the validity of any other provision of this Agreement.
15. PARAGRAPHS AND OTHER HEADINGS
Paragraphs and other headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretations of this Agreement.
16. NOTICE
Any notice or demand required or permitted to be given under this
Agreement shall be made in writing and shall be deemed effective upon the
personal delivery thereof if delivered or, if mailed, forty-eight (48) hours
after having been deposited in the United States mail, postage prepaid, and
addressed, in the case of the Company, to the attention of the Board of
Directors at the Company's then principal place of business, presently 2209
West 1st Street, Tempe, Arizona 85281 and, in the case of Executive, to 10115
PARKWOOD DR. #2, CUPERTINO, CALIFORNIA 95014. Either party may change the
address to which such notices are to be addressed to it by giving the other
party notice in the manner herein set forth.
17. RIGHT OF EMPLOYMENT
Nothing stated or implied by this Agreement shall prevent the
Company from terminating the Service of Executive at any time nor prevent
Executive from voluntarily terminating Service at any time.
18. WITHHOLDING TAXES AND OTHER DEDUCTIONS
To the extent required by law, the Company shall withhold from any
payments due Executive under this Agreement any applicable federal, state or
local taxes and such other deductions as are prescribed by law or Company
policy.
19. APPLICABLE LAW
To the full extent controllable by stipulation of the Company and
Executive, this Amendment shall be interpreted and enforced under Arizona law.
13
<PAGE>
IN WITNESS WHEROF, the Company has caused this Agreement to be
executed by its duly authorized representative(s) and Executive has affixed his
signature as of the date first written above.
EXECUTIVE COMPANY
/s/ Todd S. Myhre GameTech International, Inc.
- ------------------------
Todd Myhre
By: /s/ Richard T. Fedor
------------------------------
Name: Richard T. Fedor
----------------------------
Title: Chairman & CEO
---------------------------
14
<PAGE>
EXHIBIT A
<PAGE>
GAMETECH INTERNATIONAL
2208 W. 1st Street
Suite 113-114
[GTI LOGO] Tempe, AZ 85287-7245
Office: (802) 604-1101
Fax: (602) 804-1403
Mr. Todd Myhre February 9, 1998
10115 Parkwood Drive, #2
Cupertino, California 95014
Dear Todd:
Todd, enjoyed our continuous discussions and on behalf of the founders and
directors of GameTech we would like to offer you the position of Chief Executive
Officer with all functions reporting to the Chief Executive Officer. Here's a
summary of what we discussed for the employment package.
- Title - From February 9, 1998 until March 15, 1998, you will be a Part
Time Employee for the Company in order familiarize yourself with
Company operations and to attend to your relocation to the Phoenix,
Arizona metropolitan area. As of March 16, 1998 you will be Chief
Executive Officer with all functions reporting to the CEO. As of
March 16, 1998 you will also be a member of the GameTech Board of
Directors. I have already talked to the senior staff emphasizing that
everyone will be accountable to the new CEO and that person will be
responsible for performance, salary and bonus recommendations.
- Base wage $180,000 per year.
- Moving relocation up to $5,000.
- Relocation support for a rental apartment up to $2,500 per month for
up to six months or use of a corporate apartment.
- Auto allowance of $750 per month plus a company gas credit card.
- All medical/dental, vacation/discretionary time off (four weeks)
profit sharing and bonus programs. You will participate in all
programs the senior executives are currently participating in. We will
formalize some of these plans this year and base them on performance
and contributions.
- You will receive 600,000 shares of stock options at $6 (six) per share
based on the closing price of February 9, 1998, vested as follows:
50,000 shares fully vested at the start of full time employment
and signing of employment contract.
50,000 shares fully vested at the end of six months.
133,000 shares fully vested at the end of one year.
133,000 shares fully vested at the end of year two.
234,000 shares fully vested at end of year three.
<PAGE>
- I am currently looking at bridge financing for the officers to
exercise options you will also participate in this upon initiation of
program as long as you remain an officer of GameTech.
- You will participate in the senior management performance bonus and
stock option program. Your inputs will be sought prior to formalizing
this program.
- In addition we will issue the above options based on GameTech's
qualified and non-qualified stock option program. This will have
favorable tax consequences for the yearly $100,000 worth of stock in
the qualified program.
- A formal written contract will be drafted and both of us will comment
and review accordingly.
- This offer and contract is subject to legal review by your attorney
and GameTech's attorney.
Todd, I feel we both have tremendous amount to contribute and together with
the management team you will have the opportunity to continue to enhance the
success the company has experienced over the last 3 1/2 years.
Looking forward to hearing from you.
Best regards,
/s/ RICHARD T. FEDOR
- ----------------------------------
Richard T. Fedor
Chairman & Chief Executive Officer
<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
APRIL 30, 1998 AND THE STATEMENTS OF OPERATIONS OF THE COMPANY FOR THE
THREE AND SIX MONTHS ENDED APRIL 30, 1998 AND IS QUALIIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998
<PERIOD-START> FEB-01-1998 NOV-01-1997
<PERIOD-END> APR-30-1998 APR-30-1998
<CASH> 28,673 0
<SECURITIES> 0 0
<RECEIVABLES> 1,878 0
<ALLOWANCES> 221 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 31,426 0
<PP&E> 13,824 0
<DEPRECIATION> 2,968 0
<TOTAL-ASSETS> 44,014 0
<CURRENT-LIABILITIES> 1,253 0
<BONDS> 0 0
0 0
0 0
<COMMON> 10 0
<OTHER-SE> 41,705 0
<TOTAL-LIABILITY-AND-EQUITY> 44,014 0
<SALES> 0 0
<TOTAL-REVENUES> 3,899 7,855
<CGS> 0 0
<TOTAL-COSTS> 1,270 2,404
<OTHER-EXPENSES> 89 275
<LOSS-PROVISION> 30 60
<INTEREST-EXPENSE> 0 42
<INCOME-PRETAX> 1,475 1,075
<INCOME-TAX> 576 420
<INCOME-CONTINUING> 0 0
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<NET-INCOME> 899 655
<EPS-PRIMARY> 0.09 0.07
<EPS-DILUTED> 0.08 0.06
</TABLE>
