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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of class)
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 / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of January 21, 1998, the aggregate market value of common stock held by
non-affiliates of the registrant, based upon the last reported sale price for
the registrant's Common Stock on Nasdaq National Market on such date, was
$31,336,210.
The number of shares of the registrant's Common Stock outstanding as of
January 21, 1998 was 9,829,592.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of GameTech
International, Inc. to be used in connection with the 1998 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Annual Report on Form 10-K to the extent provided herein. Except as
specifically incorporated by reference herein, the Proxy Statement is not to be
deemed filed as part of this Annual Report on Form 10-K.
[cover page 1 of 1 page]
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PART I
ITEM 1. BUSINESS
GENERAL
GameTech International, Inc. ("GameTech" or the "Company"), a Delaware
corporation, designs, develops and markets interactive electronic bingo
systems. The Company currently markets a fixed-base system with
light-pen-activated monitors and a portable, hand-held system which can be
played anywhere within a bingo hall. Both bingo systems display electronic
bingo card images which have been purchased and played by a player for each
bingo game. The Company's electronic bingo units enable players to play
substantially more bingo simultaneously than they can play on paper cards,
leading to a greater spend per player and higher profit per bingo session for
the bingo hall operator. GameTech installs the electronic bingo systems at no
cost to the operator in exchange for a percentage of the sales generated by
each unit. The Company typically enters into one to three year contracts
pursuant to which the Company receives up to 30% of the revenues generated by
GameTech units or to a lesser extent, charges fixed rates per bingo session.
The Company was founded in 1994 by executives previously involved in the
bingo, slot machine, lottery and high technology software and hardware
industries to pursue their belief that an advanced, interactive, electronic
bingo system would be well received by both bingo hall operators and players.
Management believes that the Company has a competitive advantage resulting from
the experience of its management, its quality electronic bingo systems and its
reputation for superior customer service and support.
GameTech had more than 4,200 fixed-base units and 3,800 hand-held units
operating in Indian and charity bingo halls at October 31, 1997.
Electronic bingo systems like GameTech's allow players to play more
bingo per game than they can by hand, which provides bingo hall operators
with the potential to increase profits commensurately. Nonprofit
organizations sponsor bingo games for fund raising purposes, while Indian
tribes, casinos and government-sponsored entities operate bingo games for
profit. Bingo is a legal enterprise in 46 states (the exceptions are
Arkansas, Hawaii, Tennessee and Utah) and the District of Columbia. As of
October 31, 1997, electronic bingo systems were permitted for charitable
organizations in 26 states, and the Company had units in operation in
charitable bingo halls in five of those states. Under the Indian Gaming
Regulatory Act ("IGRA"), in the 46 states where bingo is legal, electronic
bingo may be played on tribal Indian lands as well. As of October 31, 1997
bingo was played on tribal Indian lands in 28 states and the Company had
units in operation in Indian bingo halls in seven of those states.
GameTech is a 50% owner of the Satellite Bingo Network, LLC ("TSBN"). TSBN
has developed a network which links via satellite participating bingo halls into
one large bingo game, which allows TSBN to offer bigger prizes than those
generally offered by a single bingo hall.
RECENT DEVELOPMENTS
On December 1, 1997, the Company completed the initial public offering of
its common stock, par value $.001 per share (the "Common Stock"). Pursuant to
the offering, the Company and certain stockholders sold an aggregate of
3,710,000 shares of Common Stock. The Common Stock trades on the Nasdaq
National Market under the symbol "GMTC."
TSBN initiated its satellite bingo game on December 1, 1997, and has
incurred losses principally due to 12 of the 23 bingo halls which had agreed
to participate delaying their participation or reneging on their agreements
to participate. TSBN debuted with 11 Indian bingo halls participating. As of
January 21, 1998, 16 Indian halls were participating in the satellite bingo
game. Three additional Indian halls have contracted to participate once they
have obtained the regulatory approval required in their jurisdiction or have
achieved the necessary technical capacity, as the case may be.
Some international market development for GameTech has been delayed. In
December 1997, a typhoon caused extensive damage on Guam, including the hall
that Pacific Islands Entertainment Consultants, LLC ("PIEC"), a joint venture
of which GameTech is a 51%-owner, was planning to lease. PIEC is currently
evaluating alternative sites. The financial crisis in Asia and the
devaluation of the Philippine peso has
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caused the company to which GameTech will be supplying units for a bingo hall
in the Philippines to slow their installations. The Company intends to
proceed with this venture and continues to pursue the opportunity.
GameTech's planned introduction of a linked, progressive bingo game has
been delayed. This is due to the questions regarding the legality of this type
of game raised recently by actions of a U.S. Attorney in Oklahoma with respect
to Multimedia, Inc.'s "MegaMania" game.
While the aforementioned matters delay the realization of revenues
originally projected for 1998, they do not impact GameTech's core operations.
On November 24, 1997 two convertible promissory notes of the Company
with accrued principal and interest of $1,450,111 and $89,240, respectively,
were converted into an aggregate of 1,539,351 shares of Common Stock, which
shares were issued to the holders of the notes.
The Company commenced route operations in Ohio in January 1998.
BUSINESS STRATEGY
The Company's strategic objectives are to increase revenues and earnings by
capitalizing on the increasing acceptance of electronic bingo and to become the
leading provider of electronic bingo units. To reach these objectives, the
Company intends to:
MAINTAIN SUPERIOR CUSTOMER SERVICE. GameTech believes that its dedication
to providing superior customer service and support fosters customer loyalty and
cultivates long-term customer relationships. Approximately half of GameTech's
employees are field technicians on call 24 hours a day to support customers and
respond immediately to servicing calls. Management believes that its dedication
to superior customer service has contributed to the rapid acceptance of
GameTech's products and the Company's ability to attract and retain customers
for the long-term.
INCREASE PENETRATION WITH EXISTING CUSTOMERS. The Company closely tracks
the utilization of its units to maximize revenues. As bingo player acceptance
of electronic bingo units increases and utilization rates grow, management
installs additional electronic bingo units at its customers' bingo halls. At
approximately 80% of the bingo halls where GameTech units have been in operation
for more than six months, the number of units has been increased since the
initial installation.
EXPAND CUSTOMER BASE IN EXISTING MARKETS. Management estimates that
approximately 5% of the more than $5 billion domestic bingo spend is currently
played on electronic bingo units. In the states in which the Company has units
installed in charitable bingo halls and for which data is available, GameTech
units are used by an average of approximately 8% of the charitable halls located
in those states. This low penetration level illustrates GameTech's opportunity
to increase its base of customers in its existing markets.
EXPAND INTO NEW MARKETS DOMESTICALLY. As of October 31, 1997, GameTech
had charitable bingo hall customers in five of the 26 states which currently
allow charitable organizations to conduct electronic bingo, and was actively
pursuing entry into seven additional states. In addition, GameTech had
Indian bingo hall customers in only seven of the 28 states where bingo was
currently played on Indian lands and was actively pursuing Indian bingo hall
customers in seven additional states. As part of its strategy to help expand
the charity electronic bingo market, the Company is pursuing changes to
legislation in several states to permit electronic bingo. In addition, the
Company intends to expand the number of route operations to serve bingo halls
which otherwise would be uneconomical to serve. The route operations would
move the Company's hand-held units between various charity bingo halls on
days that the respective halls hold bingo sessions.
EXPAND INTERNATIONALLY. GameTech is pursuing expansion into the
province of British Columbia, its current opportunity in Canada. The Company
has been requested by the British Columbia Lottery Corporation to participate
in a test of the hand held bingo units in selected charitable bingo halls in
the province of British Columbia. GameTech is also actively evaluating
opportunities to expand into other provinces and countries.
DEVELOP NEW APPLICATIONS. GameTech maintains an ongoing product
development program focused on enhancing its existing products and developing
new products and applications for its technology. In January 1996, GameTech
introduced its first hand-held unit, followed by an improved version in April
1997. In July 1996, the Company introduced its GameTech Gold fixed-base system,
which incorporates picture-in-picture technology that allows bingo players to
watch television while playing bingo. Other opportunities under development,
subject to
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regulatory approval, include progressive bingo games and pari-mutuel bingo
games (during non-session hours), which are anticipated to generate
additional revenue for Indian bingo hall operators by linking fixed-base
units nationwide into a single high-stakes bingo game.
DEVELOP STRATEGIC ALLIANCE/ACQUIRE COMPLEMENTARY COMPANIES. The
Company selectively reviews opportunities to grow through the establishment
of strategic alliances and acquisitions which could extend its presence into
new geographic markets, expand its client base, add new products and/or
provide operating synergies. The Company also intends to pursue joint
operating agreements or joint ventures for additional bingo opportunities,
including, in particular, all-electronic bingo halls.
PRODUCTS
The Company designs its bingo systems to generate maximum appeal to bingo
players. The primary benefits to players of electronic bingo units are the
ability to play up to 600 electronic bingo card images during one bingo game,
significantly more than can be played on paper, to have the system
simultaneously mark the numbers called, thereby reducing player error in missing
or mismarking a number, and to have the system alert the player upon attaining a
BINGO, thereby reducing the chance a player misses winning a prize. In
addition, GameTech's units are designed to enhance the entertainment value of
playing bingo. The Company's units allow the player to customize certain
aspects of the user interface, and recently developed fixed-base units
incorporate picture-in-picture and audio technology. The Company's hand-held
units allow the player to play bingo electronically while sitting in the
player's preferred seat or moving around the bingo hall. The ease of using
GameTech's electronic bingo units makes playing bingo possible for players with
physical disabilities that may prevent them from playing on paper, which
normally involves marking multiple bingo cards by hand with an ink dauber.
Management believes that these aspects of GameTech's electronic bingo systems
make them more appealing to players than paper cards or electronic bingo units
offered by the competition.
The Company currently markets two types of electronic bingo systems: (i) a
fixed-base bingo system and (ii) a portable, hand-held electronic bingo system.
Many bingo hall operators use both fixed-base and hand-held units to satisfy
varying customer preferences.
FIXED-BASE BINGO SYSTEM
The fixed-base bingo system consists of a local area network (the "LAN") of
microcomputers consisting of the master unit, the communications unit, the sales
unit and the player's unit. All units in the fixed-base bingo system use
microcomputer hardware and can be operated with light pens, touch screens or
keyboards. Fixed-base units can be played in automatic mode or in manual mode,
which requires the players to enter the numbers called. Players can switch
between the two modes and, in either case, up to 600 electronic bingo card
images can be marked simultaneously. A complete fixed-base bingo system
consists of the following:
MASTER UNIT. The master unit is a file server that is located on the
caller's stand and runs the LAN. All bingo game data is processed and stored
through this unit.
COMMUNICATIONS UNIT. The communications unit is also located on the
caller's stand and allows the caller to communicate with each player's unit by
use of a state-of-the-art touch-screen. By simply touching the screen, the
caller enters ball numbers drawn, game number, game patterns and wild numbers.
The communications unit is connected to each player's unit for verification of
the nearly 60,000 unique, non-duplicating electronic bingo card images and
enables the winning electronic bingo card images and paper cards to be displayed
on monitors within the bingo hall. The communications unit stores all data from
the bingo system and contains a modem which allows the Company to access such
data remotely. All files are protected against unauthorized access.
Accordingly, the Company monitors utilization of its units and bills bingo hall
operators without the bingo hall operators' assistance. Data from the system is
also available to bingo hall operators to assist them in managing their halls.
SALES UNIT. The sales unit is a point-of-sale terminal where all customer
purchases are made, typically located near the entrance of a bingo hall. Player
buy-in choices for the session are activated by the cashier using a light pen,
and pricing and totals are calculated automatically. The player is given a
printed receipt with a nine-digit pack number which is itemized by date, session
and number of electronic bingo card images purchased.
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PLAYER'S UNIT. Each player's unit consists of a separate computer,
monitor and light pen. Each player's unit is built into customized wooden
tables with five units per table. Players enter the nine-digit pack numbers
printed on their receipts to receive their electronic bingo card images.
Players can cycle through all of their electronic bingo card images while
play is proceeding. The player's unit marks the numbers called on each
electronic bingo card image being played either automatically or after the
player enters the number called. The unit always displays the player's three
electronic bingo card images that are closest to a BINGO, and the free space
at the center of any electronic bingo card image that is one number away from
BINGO flashes to notify the player. The unit sounds an alert alarm and the
screen flashes when BINGO is achieved.
HAND-HELD BINGO SYSTEMS
Hand-held bingo systems operate similarly to fixed-base systems except
players must manually enter the numbers as they are called and each
electronic bingo card image being played is then simultaneously marked. Each
unit can mark up to 600 electronic bingo card images per game, and players
can play several hand-held units during a bingo session. In a hand-held
system, the master, communication and sales units are similar to, and can be
shared with, those of fixed-base systems. The hand-held unit is completely
portable, resembling a palm-top computer, and can be played anywhere within a
bingo hall. The hand-held unit is capable of recognizing any bingo game
format the bingo hall operator wishes to play and alerts the player both
audibly and visually when BINGO has been achieved. Hand-held units are
battery powered and battery packs are designed to last for 11 hours (most
bingo sessions are four hours or less). Hand-held units are recharged between
bingo sessions on charging carts, each of which handles 27 hand-held units.
THE SATELLITE BINGO NETWORK
TSBN, the Company's 50%-owned joint venture, commenced operations December
1, 1997 and is broadcast from a master control studio at the Gila River Indian
Casino in Chandler, Arizona. The game is currently offered one day a week to the
participating halls. The game is played as follows: depending on the date of
the month (odd or even number), either all of the odd or even numbers on each
paper bingo card are blacked out by the player prior to the start of the game.
The game is then played until all of the remaining numbers on a player's paper
bingo card are blacked out.
For each game, four types of prizes are offered: a main prize for the game,
a consolation prize at each participating bingo hall and a chance for a bonus
prize and super prize. The bonus prize will grow each time the game is played
through the allocation of a percentage of the total prizes and is capped at
$250,000. In order to win the bonus prize, BINGO must be achieved within the
first 10 numbers called. The super prize, $1 million, is won only if BINGO is
reached within the first eight numbers called. Half of the revenues from the
bingo card sales are allocated to the prize fund. The super prize, when won,
will be paid through an insurance policy carried by TSBN.
PRODUCT DEVELOPMENT
GameTech has implemented an ongoing research and development program to
enhance the features and capabilities of its bingo systems and to maintain a
competitive advantage in the marketplace, as well as to extend its product
line to new games and applications. Product development efforts produced the
hand-held system, which was introduced in January 1996 and an improved
version in April 1997.
The Company is continuing development of a point-of-sale system which
will allow vending of both fixed-base and hand-held electronic bingo units,
as well as the sale of paper bingo cards, accessories and refreshments.
Development of the linked, progressive bingo game (Ultra Fast Action Bingo)
also continues.
SALES, MARKETING AND DISTRIBUTION
The Company's marketing strategy is to target larger bingo hall operators
and demonstrate the benefits of GameTech's bingo systems to both the bingo hall
operator and the bingo players. Benefits of GameTech's electronic units for the
players include the ease of marking numbers called, the decreased likelihood of
missing a winning pattern and the ability to play substantially more bingo than
can be played using only paper bingo cards.
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The Company allocates its electronic bingo units based on utilization.
This strategy is designed to maximize revenues from newly placed units. The
Company's superior customer service orientation and quality products are
designed to promote player loyalty and long-term relationships with bingo
hall operators.
The Company's installation package typically includes the following:
- Installation by the Company at no cost to the bingo hall
- Training sessions for bingo hall staff
- Promotional sessions to introduce players to the system
- Advertising package and point of sale materials
- Ongoing maintenance program
The Company operated with an in-house sales force of three people at
October 31, 1997. Sales personnel earn base salaries plus incentive commissions
based on the revenues generated by the units they place. Management estimates
that approximately 25% of GameTech's units installed at October 31, 1997 were
placed by GameTech's in-house sales force. In addition to the sales force, the
Company has exclusive distributors in Mississippi, Oklahoma and Texas, whose
compensation is based on a percentage of the sales generated for the Company
from their respective territories. Distributors are typically selected based
upon their financial stability and experience and are required to make an
exclusive commitment to the Company.
TARGET MARKETS. There are approximately 275 Indian bingo halls and
approximately 37,000 charity-owned bingo locations in the United States. At
October 31, 1997, the Company had approximately 8,000 installed units at 128
locations serving approximately 380 customers, including many charitable
bingo halls where the Company has multiple customers. The bingo halls in
which the Company had fixed-base and hand-held units installed at October 31,
1997 were located in the following nine states: California, Kansas, Michigan,
Mississippi, New Mexico, Oklahoma, Oregon, Texas, and Washington. For the
year ended October 31, 1997 approximately 36% of the Company's revenues were
derived from units installed in Indian bingo halls and the remaining 64% were
from units installed in charity bingo halls. These same revenues were
split approximately 82% from fixed-base units and 18% from hand-held
units.
As of October 31, 1997, GameTech was operating in charitable bingo halls
in five of the 26 states where electronic bingo is currently permitted in
charitable bingo halls, and Indian bingo halls in seven of the 28 states
where bingo is currently played in Indian bingo halls. In January 1998,
GameTech began installing units in Ohio. Further, GameTech is licensed to
serve charitable bingo halls in Kentucky and Virginia and is actively
marketing to Indian bingo halls in Minnesota and Wisconsin. Additional
business in other states, Canada and overseas is being actively pursued.
ADVERTISING AND PROMOTION. The Company places advertisements in selected
gaming magazines and bingo magazines and newsletters and makes presentations at
key trade shows, especially those devoted solely to bingo. The Company also
plans to develop additional advertising and promotional programs to create
awareness and interest in its electronic bingo products among hall operators and
relevant segments of the consumer marketplace. GameTech is also exploring other
cost-effective promotional strategies, including public relations and media
programs.
PRICING ARRANGEMENTS. The Company installs its units at no cost to the
bingo hall operator. The Company generates revenues by "participating" with
bingo hall operators, receiving up to 30% percent (with an average of
approximately 24%) of the gross revenues derived from GameTech's electronic
bingo systems, or, to a lesser extent, by charging a fixed fee per unit per
session. The Company maintains ownership of all software and substantially all
hardware.
MATERIALS AND SUPPLIES
The Company uses a contract manufacturer in Taiwan to supply its hand-held
units. All hardware components for the fixed-base bingo systems are sourced by
the Company from numerous suppliers domestically
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and assembled at its facilities in Arizona and Texas. The Company has not
had any significant quality problems or delays in securing its hand-held
units or the supply of fixed-base system components.
TRADEMARKS AND PATENTS
The Company currently holds no registered trademarks, service marks or
patents and does not believe that the lack of such intellectual property
protection is material to its business.
COMPETITION
The electronic bingo industry is characterized by intense competition based
on, among other things, an electronic bingo system's ability to generate
incremental sales for bingo hall operators through product appeal to players,
ease of use and serviceability, support and training, distribution, name
recognition and price. Management believes that the Company competes primarily
with other companies providing electronic bingo units, including Advanced Gaming
Technology, Inc., Bingo Concepts, Bingo Technology Corporation, Inc., FortuNet,
Inc. and Stuart Entertainment, Inc., and also competes with companies offering
traditional paper bingo cards. The Company, through TSBN, also competes with
Multimedia Games, Inc.'s "Mega Bingo," which has operated a satellite bingo game
in the United States for the past eight years. Certain of the Company's
competitors may have significantly greater financial and technical resources
than the Company, as well as more established customer bases and distribution
channels, which may allow them to move rapidly into the Company's markets and
acquire significant market share. Increased competition may result in price
reductions, reduced operating margins, conversion from lease to sale of the
Company's units, and loss of market share, any of which could materially and
adversely affect the Company's business, operating results or financial
condition. Furthermore, the Company's success may benefit existing competitors
and induce new competitors to enter the market. The Company has attempted to
counter competitive factors by providing superior service and new, innovative
and quality products, but there can be no assurance that the Company will
continue to be a successful competitor in the electronic bingo industry. In
addition, the Company competes with other similar forms of entertainment
including casino gaming and lotteries. Management believes, however, that the
quality of its fixed-base and hand-held bingo systems, combined with superior
service and customer support, differentiate it from its competitors.
RESEARCH AND DEVELOPMENT
In fiscal 1997, the Company spent $547,000 on Company-sponsored research
and development activities, as compared to $477,000 in fiscal 1996 and $329,000
in fiscal 1995.
GOVERNMENT REGULATION
The Company is subject to regulation by authorities in all jurisdictions in
which its electronic bingo units are installed. On tribal Indian lands,
regulation is pursuant to the provisions of IGRA. Otherwise, the regulatory
requirements vary from jurisdiction to jurisdiction and licensing, other
approval or finding of suitability processes with respect to the Company, its
personnel and its products can be lengthy and expensive. Many jurisdictions
have comprehensive licensing, reporting and operating requirements with respect
to the manufacture, sale, use and operation of bingo and bingo-related products,
including electronic bingo equipment. These requirements have a direct impact
on the conduct of the day-to-day operations of the Company. In substantially
all states where charitable bingo is legal, the state imposes limits on prizes
on a per game, per session or annual basis. Many states license or otherwise
regulate suppliers of bingo equipment, and some states prohibit the rental of
bingo equipment while other states regulate whether equipment may be rented at a
fixed or percentage rate. Generally, regulatory authorities may deny
applications for licenses, other approvals or findings of suitability for any
cause they may deem reasonable. There can be no assurance that the Company, its
products or its personnel will receive or be able to maintain any necessary
licenses, other approvals or findings of suitability. The loss of a license in
a particular state will prohibit the Company from realizing revenues in that
state. Any change in law or regulation by a state reducing prize limits,
further regulating suppliers of bingo equipment, prohibiting rental of bingo
equipment or restricting rental rates or the loss of one or more licenses held
by the Company could have an adverse effect on the Company's business.
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INDIAN GAMING
Gaming on Indian lands, including the terms and conditions under which
gaming equipment can be sold or leased to Indian tribes, is or may be subject to
regulation under the laws of the tribes, the laws of the host state and IGRA.
Under IGRA, gaming activities are classified as Class I, II or III. Class I
gaming includes social games played solely for prizes of minimal value or
traditional forms of Indian gaming engaged in as part of, or in connection with,
tribal ceremonies or celebrations. Class II gaming includes bingo and other
card games authorized or not explicitly prohibited and played within the host
state (but not including banking card games such as baccarat or blackjack).
Class III gaming includes all forms of gaming that are not Class I or Class II,
including slot machines, video lottery terminals and casino style games. Indian
tribes may conduct Class II gaming under IGRA without having entered into a
written compact with their host state if the host state permits Class II gaming,
but must enter into a separate written compact with the state in which they are
located in order to conduct Class III gaming activities. The Company is not
aware of any state in which a tribal-state compact seeks to regulate bingo.
Under IGRA, tribes are required to regulate all gaming under ordinances approved
by the Chairman of the NIGC. Such ordinances may impose standards and technical
requirements on gaming hardware and software, and may impose registration,
licensing and background check requirements on gaming equipment suppliers and
their officers, directors, and stockholders.
REGULATION OF ELECTRONIC BINGO SYSTEMS
The Company's electronic bingo products, including its fixed-base and
hand-held units, are more heavily regulated than traditional paper bingo, and
federal, state, tribal and local regulations vary significantly by
jurisdiction.
IGRA defines Class II gaming to include "the game of chance commonly known
as bingo, whether or not electronic, computer or other technologic aids are used
in connection therewith," and defines Class III gaming to include "electronic or
electromechanical facsimiles of any game of chance or slot machines of any
kind." The Company believes that both its fixed-base and hand-held units are
Class II games. In the event that either is classified as a Class III device,
such a designation would reduce the potential market for the devices (because
only Indian gaming halls that had entered into a tribal-state compact that
permits Class III electronic gaming systems would be permitted to use the
device), unless the Company could modify the systems to have them reclassified
as a Class II game. It is difficult to speculate as to what modifications may
be required in the event of such a classification.
TSBN, which was launched on December 1, 1997, is played in Indian bingo
halls. The Company believes TSBN is a Class II game under IGRA. As such, TSBN
is subject to tribal regulation approved by the NIGC and is required to register
or obtain licenses as required by the various Indian tribes operating the Indian
gaming halls participating in TSBN. Pursuant to NIGC regulation, TSBN must be
operated in accordance with applicable federal communications law. TSBN entered
into an agreement with a nationwide telecommunications provider which, as part
of its agreement with TSBN, maintains the necessary Federal Communications
Commission licenses to allow the broadcast of the satellite bingo game.
Electronic bingo in charitable halls is less widely permitted than paper
bingo, largely because many states' laws and regulations were written before
electronic bingo was introduced. Electronic bingo in charitable halls is
currently permitted in at least 26 states, including Alabama, Alaska, Arizona,
California, Georgia, Kansas, Kentucky, Louisiana, Maine, Massachusetts,
Mississippi, Nebraska, Nevada, New Hampshire, New York, North Dakota, Ohio,
Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, Vermont, Virginia,
Washington and Wyoming. Because many state laws and regulations are silent with
respect to electronic bingo, changes in regulatory and enforcement personnel
could impact the continued operation of electronic bingo in some of these
states. In addition, some states require the inspection, approval or
modification of electronic bingo systems before sale or use in those states.
APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS
The Company intends to seek the necessary licenses, approvals and findings
of suitability for the Company, its products and its personnel in other
jurisdictions where significant bingo activities are anticipated. However,
there can be no assurance that such licenses, approvals or findings of
suitability will be obtained and will not be revoked, suspended or conditioned
or that the Company will be able to obtain the necessary approvals for its
future products as they are developed in a timely manner, or at all. If a
license, approval or finding of suitability is required by a regulatory
authority and the Company fails to seek or does not receive the necessary
license or finding of suitability,
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the Company many be prohibited from distributing its products for use in the
respective jurisdiction or may be required to distribute its products through
other licensed entities at a reduced profit to the Company.
EMPLOYEES
As of October 31, 1997, the Company had 60 full time equivalent employees.
The Company and its employees are not subject to collective bargaining
agreements, and the Company believes that its relations with its employees are
good.
ITEM 2. FACILITIES
The Company operates from two leased locations: a 6,500-square-foot
headquarters site in Tempe, Arizona under a lease which expires September 18,
2001 and a 6,500-square-foot regional center in Austin, Texas under a sublease
which expires February 28, 1998. Monthly rent for these facilities is
approximately $3,880 and $2,940, respectively. Assembly of fixed-base systems
and testing and repair of all the Company's products occurs at both locations,
with each serving as a regional hub. In addition, TSBN has a 5,600-square-foot
facility for its operations adjacent to the Company's headquarters in Tempe
under a lease which expires May 31, 2002. Monthly rent for this facility is
approximately $2,925. The Company rents a small research and development
facility for approximately $975 per month in Denver, Colorado under a lease
which expires May 31, 1999. Additional research and development activities are
carried out by three Company employees at their personal residences in San
Diego, California and Las Vegas, Nevada. Such employees have requested that
they be permitted to work from their personal residences. The Company pays no
rent to these employees, but pays certain overhead related to, and believes the
facilities are adequate for, the research and development carried on there.
ITEM 3. 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 court 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, both actions are in the
early stages of litigation, and 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 materiel adverse
effect on the Company.
In October 1997, two actions were commenced against the Company by Apex
Wholesale, Inc. ("Apex") in the U.S. District Court for the 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
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<PAGE>
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. The Company has filed two motions to dismiss for lack of
subject matter jurisdiction and failure to state a claim. Both of these
motions are scheduled to be heard on March 16, 1998.
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
filed two motions to dismiss for failure to state a claim and failure to join a
necessary party. Both of these motions are scheduled to be heard on March 16,
1998. On January 21, 1998, Apex filed a motion for writ of attachment in the
alleged fraudulent transfer action, seeking to attach $400,400 of the Company's
assets arising out of a writ of attachment directed against the property of a
third party, Green Dollars Industrial, Ltd., in an earlier proceeding.
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 until
February 26, 1998 so that ongoing settlement discussions may continue.
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.
The Company's management believes that any pending litigation will not have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is listed for trading and quotation on the Nasdaq National
Market under the symbol "GMTC." Because the Common Stock was not publicly
traded until after the close of the fiscal period covered by this report, high
and low bid information is not applicable.
9
<PAGE>
As of January 21, 1998, there were 83 stockholders of record of the
Company's Common Stock.
The Company has paid no cash dividends to date and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
Company intends to retain its earnings, if any, to finance the expansion of its
business and for other general corporate purposes. Any payment of future
dividends will be at the discretion of the Board of Directors and will depend
upon, among other factors, the Company's earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions with respect to
the payment of dividends and other considerations that the Board of Directors
deems relevant. The Company has a $3 million revolving line of credit with
Wells Fargo Bank, N.A., that restricts payment of dividends without the prior
consent of the bank.
SALES OF UNREGISTERED SECURITIES DURING THE YEAR ENDED OCTOBER 31, 1997
On September 2, 1997, the Company issued and sold 400,000 shares of the
Company's Series A Preferred Stock (the "Series A Shares") in a private
placement for total consideration of $3 million to institutional and individual
investors unaffiliated with the Company in reliance upon Section 4(2) of the
Securities Act as a transaction not involving a public offering. The Series A
Shares automatically converted into an equal number of shares of Common Stock
upon the close of the initial public offering of the Common Stock on December 1,
1997.
On various dates between November 1, 1996 and October 24, 1997, Company
employees exercised options granted in partial compensation for their services
to purchase an aggregate of 402,916 shares of Common Stock in private sales for
an aggregate consideration of $4,029.16 in reliance upon Section 4(2) of the
Securities Act as a transaction not involving a public offering.
On April 27, 1997, an exclusive distributor of the Company exercised
options granted pursuant to a distributorship agreement to purchase 5,000 shares
of Common Stock in a private sale for aggregate consideration of $50.00 in
reliance upon Section 4(2) of the Securities Act as a transaction not involving
any public offering. On January 2, 1997, the same individual was issued 2,500
shares of Common Stock in partial compensation in the aggregate amount of
$2,500.00 for the purchase of a distributorship by the Company in reliance upon
Section 4(2) of the Securities Act as a transaction not involving any public
offering.
On November 18, 1996 the Company issued 3,000 shares of Common Stock to an
officer of the Company as a sign-on bonus in the aggregate amount of $3,000 in
reliance upon Section 4(2) of the Securities Act as a transaction not involving
any public offering.
On January 2 and June 1, 1997, the Company issued 2,000 and 24,500 shares
of Common Stock, respectively, to a stockholder for the conversion of certain
stockholder debt in reliance upon Section 4(2) of the Securities Act as a
transaction not involving any public offering.
On March 1, 1997, the Company issued a convertible promissory note in favor
of a stockholder in the original principal amount of $1,341,200, convertible
into Common Stock at the option of the holder at a $1.00 per share price and due
in full on February 28, 1999. The convertible note was issued in exchange for
previously outstanding notes and interest payable to the holder and was issued
in reliance upon Section 4(2) of the Securities Act as a transaction not
involving any public offering.
Also on March 1, 1997, the Company issued a convertible promissory note in
favor of a stockholder in the original principal amount of $80,954, convertible
into Common Stock at the option of the holder at a $1.00 per share price and due
in full on February 28, 1999. The convertible note was issued in exchange for
previously outstanding notes and interest payable to the holder and was issued
in reliance upon Section 4(2) of the Securities Act as a transaction not
involving any public offering.
OFFERING OF COMMON STOCK AND 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. The Registration Statement
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<PAGE>
registered an aggregate of 4,266,500 shares of Common Stock, representing (i)
3,270,000 shares of Common Stock being offered by the Company (the "Company
Shares"), (ii) an additional 406,500 shares of Common Stock which the
underwriters had the option to purchase from the Company to cover
over-allotments (the "Company Option Shares"), (iii) 440,000 shares of Common
Stock being sold by certain stockholders of the Company (the "Selling
Stockholder Shares"), and (iv) an additional 150,000 shares of Common Stock
which the underwriters had the option to purchase from the selling
stockholders to cover over-allotments (the "Selling Stockholder Option
Shares.")
The offering date was November 25, 1997. Donaldson, Lufkin & Jenrette
Securities Corporation and Prudential Securities Incorporated were the managing
underwriters. The Company Shares and Selling Stockholder Shares were sold in
the Offering at $11 per share, for an aggregate offering price of $40,810,000.
Proceeds to the Company and the Selling Stockholders after deducting
underwriting discounts and commissions were $33,452,100 and $4,501,200,
respectively.
Neither the Company Option Shares nor the Selling Stockholder Option Shares
were sold. The Offering is now terminated.
The effective date of the Registration Statement occurred after the
ending date of the reporting period. A reasonable estimate of expenses
incurred by the Company from the effective date of the Registration Statement
to date in the current period are: $2,518,000 for underwriting discounts and
commissions and approximately $900,000 for other expenses including
registration and filing fees, printing, accounting and legal expenses, for
total expenses of approximately $3,420,000. No direct or indirect payments
were made to any directors, officers or other affiliates of the Company other
than for reimbursement of expenses incurred on the road show. Net offering
proceeds to the Company after deducting these expenses were approximately
$32,500,000.
Because the effective date of the Registration Statement occurred after the
ending date of the reporting period, no net offering proceeds were used in the
reporting period.
ITEM 6. SELECTED FINANCIAL DATA
The selected statement of operations data for the years ended October
31, 1995, 1996 and 1997 and the selected balance sheet data set forth below
at October 31, 1996 and 1997 have been derived from the Company's financial
statements, which have been audited by Ernst & Young LLP, independent
auditors, and are included elsewhere herein. The selected statement of
operations data for the period from inception (April 18, 1994) through
October 31, 1994 and the selected balance sheet data set forth below at
October 31, 1994 and 1995 have been derived from the Company's audited
financial statements not included herein. The selected financial data set
forth below should be read in conjunction with the Financial Statements and
Notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," appearing elsewhere in this report.
11
<PAGE>
<TABLE>
<CAPTION>
Years Ended October 31,
---------------------------------------------------
1994(a) 1995 1996 1997
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 599 $3,350 $ 5,364 $12,578
Cost of revenues............................................ 253 712 1,615 3,249
------ ------ ------- -------
Gross profit................................................ 346 2,638 3,749 9,329
Operating expenses:
General and administrative............................... 220 693 1,020 1,993
Sales and marketing...................................... 149 552 613 1,419
Research and development................................. 94 329 477 547
------ ------ ------- -------
Total operating expenses............................ 463 1,574 2,110 3,959
------ ------ ------- -------
Income (loss) from operations............................... (117) 1,064 1,639 5,370
Interest expense and other.................................. (58) (194) (275) (450)
Equity in net loss of affiliate............................. -- -- -- (179)
------ ------ ------- -------
Income (loss) before provision for income taxes............. (175) 870 1,364 4,741
Provision for income taxes.................................. -- 278 559 1,880
------ ------ ------- -------
Net income (loss)........................................... $ (175) $ 592 $805 $ 2,861
------ ------ ------- -------
------ ------ ------- -------
Fully diluted net income (loss) per share(b)................ $(0.13) $ 0.10 $ 0.11 $ 0.39
Shares used in the calculation of fully diluted net income
(loss) per share(b) (000s)............................... 2,283 7,115 7,889 7,547
Pro-forma fully diluted net income (loss) per share (d)..... (0.02) 0.07 0.08 0.27
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 25 $ 37 $ 166 $ 1,020
Working capital (deficit)................................... (76) (37) (1,302) (422)
Total assets................................................ 1,330 2,783 5,794 13,251
Total debt(c)............................................... 1,464 1,306 3,398 4,942
Total stockholders' equity (deficit)........................ (175) 980 1,785 3,976
</TABLE>
(a) Represents the period from inception (April 18, 1994) through October 31,
1994. Operations commenced June 1, 1994.
(b) See Note 1 of Notes to Financial Statements included elsewhere herein for
information concerning the computation of fully diluted net income (loss)
per share.
(c) Includes convertible subordinated debt to stockholders (including accrued
interest) of $1,331,383, $1,291,460, $1,530,845, and $1,526,000,on October
31, 1994, 1995, 1996, and 1997, respectively, which was converted into
Common Stock on November 24, 1997.
(d) Gives retroactive effect to the 3,270,000 shares issued in conjunction
with the Company's initial public offering which was completed on
December 1, 1997.
ITEM 7. 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-K.
OVERVIEW
GameTech has grown rapidly, and management believes that the Company has
had a competitive advantage resulting from the experience of its management and
the value it has provided its customers through a combination of quality
electronic bingo units and superior customer service and support. The Company's
recent growth has been driven by the increase in its installed base of bingo
units primarily resulting from the Company's entry into the Texas market in
August 1996 and introduction of an improved hand-held unit in April 1997.
GameTech generates revenues by installing electronic bingo systems in bingo
halls under revenue sharing agreements, or to a lesser extent, at fixed rates
per bingo session. The Company recognizes revenue as its bingo units are
utilized by players. Revenue growth is affected by player acceptance of
electronic bingo as an alternative
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<PAGE>
to paper bingo and the Company's ability to expand operations into new
markets. Fixed-base bingo units generate greater revenue per unit than
hand-held bingo units, but also require greater initial capital investment.
The Company installs its electronic bingo systems at no charge to its
customers and capitalizes the costs. During fiscal 1995, 1996 and 1997, the
Company's capital expenditures were approximately $1.3 million, $3.0 million,
and $6.1 million, respectively, almost all of which represented investments in
bingo equipment. The Company's cost of revenues consists primarily of the
expense of providing customer service, including labor, service-related overhead
and depreciation of the bingo systems installed at customer locations. The
Company records depreciation of bingo equipment over a five-year estimated
useful life using the straight line method of depreciation.
TSBN, the Company's 50%-owned joint venture, was launched on December 1,
1997. TSBN is accounted for under the equity method in the Company's
financial statements. To date, the Company has funded the operating losses
of TSBN and consequently for financial reporting purposes has recorded 100%
of the operating losses to date and will record 100% of TSBN's future
operating losses, if any. TSBN is incurring losses due to a number of large
bingo halls which had agreed to participate delaying their participation.
Additional halls are currently being added with the expectation of stronger
participation in the second quarter.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data for the Company expressed as a percentage of
revenues.
Years Ended October 31,
--------------------------------
1994(a) 1995 1996 1997
STATEMENT OF OPERATIONS DATA:
Revenues................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................... 42.3 21.2 30.1 25.8
----- ----- ----- ----
Gross profit............................... 57.7 78.8 69.9 74.2
Operating expenses:
General and administrative.............. 36.8 20.7 19.0 15.9
Sales and marketing..................... 24.8 16.5 11.5 11.3
Research and development................ 15.7 9.8 8.9 4.3
----- ----- ----- ----
Total operating expenses........... 77.3 47.0 39.4 31.5
----- ----- ----- ----
Income (loss) from operations.............. (19.6) 31.8 30.5 42.7
Interest expense and other................. (9.7) (5.8) (5.1) (3.6)
Equity in net loss of affiliate............ -- -- -- (1.4)
----- ----- ----- ----
Income (loss) before provision for income
taxes.................................... (29.3) 26.0 25.4 37.7
Provision for income taxes................. - 8.3 10.4 15.0
----- ----- ----- ----
Net income (loss).......................... (29.3)% 17.7% 15.0% 22.7%
----- ----- ----- ----
----- ----- ----- ----
- -----------------------
(a) Represents the period from inception (April 18, 1994) through October 31,
1994. Actual operations began June 1, 1994.
YEAR ENDED OCTOBER 31, 1997 COMPARED TO YEAR ENDED OCTOBER 31, 1996
REVENUES. Revenues increased $7.2 million, or 135%, to $12.6 million for
the year ended October 31, 1997 from $5.4 million for the year ended October 31,
1996. This increase in revenues was primarily due to a 155% increase in the
average number of units installed to 4,758 during the year ended October 31,
1997 from 1,865 during the year ended October 31, 1996, partially offset by an
8% decrease in average revenues per unit attributable to the increased
percentage of hand-held units installed, which generate lower average revenue
per unit. Expansion into Texas accounted for $5.5 million of the revenue
increase during the year ended October 31, 1997.
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<PAGE>
COST OF REVENUES. Cost of revenues increased $1.6 million, or 101%, to
$3.2 million for the year ended October 31, 1997, from $1.6 million for the
year ended October 31, 1996. 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 decreased to 25.8% from 30.1% in the prior period.
The decrease was a result of higher utilization of field service personnel
and increased revenues, together with start-up costs of $101,000 for the
expansion into Texas during the year ended October 31, 1996, which were not
immediately offset by increased revenues. The components of the $101,000 in
start-up costs consisted of $42,000 of personnel-related costs and $59,000 in
overhead costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $973,000, or 95.4%, to $2.0 million for the year ended October 31,
1997 from $1.0 million for the year ended October 31, 1996. The significant
components of the $973,000 increase consist of: higher payroll costs of
$236,000 resulting from hiring seven additional personnel to help manage the
Company's growth; increased professional services of $225,000; larger
provisions for bonuses of $70,000, profit sharing of $80,000 and bad debts of
$137,000; amortization of capitalized software costs of $43,000; and increased
insurance costs of $38,000. As a percentage of revenues, general and
administrative expenses decreased to 15.9% from 19.0% in the prior period
primarily due to the increase in revenues and operating leverage in the
Company's operations.
SALES AND MARKETING. Sales and marketing expenses increased $805,000,
or 131%, to $1.4 million for the year ended October 31, 1997 from $614,000
for the year ended October 31, 1996. The increase was primarily due to
larger distributor commissions of $562,000 and costs associated with hiring
an additional salesperson of $124,000.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$69,000, or 14.5%, to $547,000 for the year ended October 31, 1997 from
$477,000 for the year ended October 31, 1996. As a percentage of revenues,
research and development expenses decreased to 4.3% from 8.9% in the prior
period.
INTEREST EXPENSE AND OTHER. Interest expense and other increased
$176,000, or 64.1%, to $450,000 for the year ended October 31, 1997 from
$275,000 for the year ended October 31, 1996. The increase was primarily due
to increased average debt outstanding of $4.9 million for the year ended
October 31, 1997 compared to $2.4 million for the year ended October 31,
1996, partially offset by lower interest rates. The increased debt was used
to finance operations.
EQUITY IN NET LOSS OF AFFILIATE. Equity in net loss of affiliate of
$179,000 results from losses incurred by the TSBN joint venture for the year
ended October 31, 1997. Since the Company has financed this venture, it has
recorded 100% of the losses, consisting of start-up expenses, rather than the
50% share which would arise from its ownership.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $1.3
million, or 236%, to $1.9 million for the year ended October 31, 1997 from
$559,000 for the year ended October 31, 1996 primarily due to an increase in
pre-tax income. The Company's effective income tax rate remained at
approximately 40% in each year.
NET INCOME. As a result of the factors discussed above, net income
increased $2.1 million, or 256%, to $2.9 million for the year ended October
31, 1997 from $805,000 for the year ended October 31, 1996.
YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER 31, 1995
REVENUES. Revenues increased $2.0 million, or 60.1%, to $5.4 million
for the year ended October 31, 1996 from $3.4 million for the year ended
October 31, 1995. The increase in revenues was primarily due to a 127%
increase in the average number of units in service to 1,865 during 1996 from
821 in 1995, partially offset by a decrease in average revenues per unit
resulting from the increased percentage of hand-held units installed, which
generate lower average revenue per unit.
COST OF REVENUES. Cost of revenues increased $903,000, or 127%, to $1.6
million for the year ended October 31, 1996 from $712,000 for the year ended
October 31, 1995. The increase in cost of revenues was primarily due to the
increased number of units installed and start-up costs in Texas. As a
percentage of revenues, cost of revenues increased to 30.1% from 21.2% in the
prior period, primarily due to an increase in depreciation of $317,000, or
5.9% of revenue, due to the increased number of installed units and start-up
costs for the expansion into Texas of $203,000, or 3.8% of revenue, which
were not immediately offset by increased revenues. The
14
<PAGE>
components of the $203,000 in start-up costs consisted of $85,000 of
personnel-related costs and $118,000 in overhead costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $327,000, or 47.2%, to $1.0 million for the year ended October 31,
1996 from $693,000 for the year ended October 31, 1995. The significant
components of the $327,000 increase consist of: increased professional
services of $123,000; higher payroll resulting from hiring one additional
person of $31,000; and larger provisions for bonuses of $51,000, bad debts of
$43,000 and profit sharing of $22,000. As a percentage of revenues, general
and administrative expenses decreased to 19.0% from 20.7% in the prior period
primarily due to the increase in revenues and operating leverage in the
Company's operations.
SALES AND MARKETING. Sales and marketing expenses increased $62,000, or
11.2%, to $614,000 for the year ended October 31, 1996 from $552,000 for the
year ended October 31, 1995. The increase was primarily due to higher
payroll resulting from hiring an additional salesperson of $31,000 and larger
distributor commissions of $23,000 attributable to the higher level of
revenues. As a percentage of revenues, sales and marketing expenses decreased
to 11.5% from 16.5% in the prior period primarily due to the increase in
revenues and operating leverage in the Company's operations.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$148,000, or 45.1%, to $477,000 for the year ended October 31, 1996 from
$329,000 for the year ended October 31, 1995. The increase was primarily due
to additional products under development in 1996 as compared to 1995. As a
percentage of revenues, research and development expenses decreased to 8.9%
from 9.8% in the prior period as a result of the increase in revenues.
INTEREST EXPENSE AND OTHER. Interest expense and other increased
$81,000, or 41.9%, to $275,000 for the year ended October 31, 1996 from
$194,000 for the year ended October 31, 1995. The increase was primarily due
to the increased average debt outstanding of $2.4 million in 1996 compared to
$1.4 million in 1995, partially offset by lower interest rates. The
increased debt was used to finance operations.
PROVISION FOR INCOME TAXES. Provision for income taxes increased
$281,000, or 101%, to $559,000 for the year ended October 31, 1996 from
$278,000 for the year ended October 31, 1995. The increase was primarily due
to an increase in pre-tax income partially offset by the use of net operating
loss carryforwards of approximately $170,000 utilized in computing the
provision for income taxes for 1995.
NET INCOME. As a result of the factors discussed above, net income
increased $213,000, or 35.9%, to $805,000 for the year ended October 31, 1996
from $592,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
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. The principal sources of the Company's liquidity have
been cash flow from operations, borrowing under the Company's Term Loan and
Revolving Credit Facility, the issuance to officers of 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. GameTech currently has with Wells Fargo Bank,
N.A. ("Wells Fargo") a $3 million term loan (the "Term Loan"), which has an
interest rate of 8.9% per annum, and 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. The Revolving
Credit Facility expires on April 11, 1998 and the Term Loan expires on April
11, 2000. The Company repaid borrowings under both the Term Loan and
Revolving Credit Facility with a portion of the net proceeds of approximately
$32.5 million from the sale of 3,270,000 shares of Common Stock, which closed
on December 1, 1997. 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 these credit facilities restrict payment of cash
dividends and interest to holders of convertible notes without prior consent
of Wells Fargo.
Operating activities provided $5.0 million of cash in the year ended
October 31, 1997 compared to $1.3 million in the year ended October 31, 1996.
The increase was primarily due to higher net income of $2.1 million,
increased depreciation and amortization of $830,000 and increased accounts
payable of $582,000, partially offset by
15
<PAGE>
increased accounts receivable of $303,000. In 1996, operating activities
provided net cash of $1.3 million as compared to $1.1 million in 1995. The
increase was primarily due to higher net income and depreciation and
amortization of $317,000, partially offset by increased accounts receivable
of $124,000, and lower accounts payable of $493,000.
Investing activities used $7.0 million of cash in the year ended October
31, 1997 compared to a use of $3.1 million of cash in the year ended October
31, 1996. The increase was primarily due to a $3.1 million increase in
capital expenditures for bingo units and other fixed assets and investment in
and advances to a joint venture of $705,000. In 1996, investing activities
used cash of $3.1 million as compared to $1.3 million in 1995. The increase
was primarily due to a $1.7 million increase in capital expenditures for
bingo units and other fixed assets.
Financing activities provided cash of $2.9 million in the year ended
October 31, 1997 compared to $1.9 million in the year ended October 31, 1996.
The increase resulted primarily from the sale of the Series A shares for net
proceeds of $2.8 million, partially offset by a decrease in net proceeds of
short-term and long-term bank borrowings of $928,000 and deferred IPO costs
of $652,000. In 1996, financing activities provided cash of $1.9 million as
compared to $209,000 in 1995. The increase was primarily due to a net $1.9
million increase in short-term borrowings, partially offset by a reduction in
the amount of convertible notes issued to stockholders of $240,000.
The Company believes that cash flow from operations and the net proceeds
to the company from the offering, together with funds available under the
Revolving Credit Facility, will be sufficient to support its operations and
provide for budgeted capital expenditures of approximately $8.0 million and
liquidity requirements through fiscal 1998. However, the Company's long term
liquidity requirements will depend on many factors, including, but not
limited to the rate at which the Company expands its business, whether
internally or through acquisitions and strategic alliances. In addition,
strategic opportunities the Company may pursue, including without limitation
TSBN, will require it to fund its portion of operating expenses of such
ventures, and may further require it to advance additional amounts should any
partners in such ventures be unable to meet unanticipated capital calls or
similar funding events. To date, the Company has funded the operating losses
of TSBN and consequently for financial reporting purposes will record 100% of
TSBN's future operating losses, if any. To the extent that the funds
generated from the sources described above are insufficient to fund the
Company's activities in the long term, the Company will be required to raise
additional funds through public or private financings. No assurance can be
given that additional financing will be available or that, if it is
available, it will be on terms acceptable to the Company.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard No. 123 (SFAS 123), ACCOUNTING FOR
STOCK BASED COMPENSATION. SFAS 123 provides an alternative to Accounting
Principles Board's Opinion No. 25 (APB 25) and is effective for fiscal years
beginning after December 15, 1995. The Company continues to account for its
stock options in accordance with APB 25. SFAS 123 did not have a material
impact on the Company's financial position or results of operations.
In February 1997, the FASB issued Statement No. 128, EARNINGS PER SHARE,
which is required for both interim and annual periods ending after December
15, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of primary and fully diluted earnings per
share is not expected to be material.
INFLATION AND GENERAL ECONOMIC CONDITION
Although the Company cannot accurately anticipate the effect of
inflation on its operations, the Company does not believe that inflation has
had, or is likely in the foreseeable future to have, a material effect on its
results of operations or financial condition.
YEAR 2000
Based on the Company's evaluation of its information and operating
systems, management does not believe the Company will incur any material
costs relating to the year 2000 issue.
16
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 April 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 January 21, 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. It is too early to predict whether, if the line is
renewed, the interest rate terms will remain the same or will be
renegotiated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are as set forth in the
"INDEX TO FINANCIAL STATEMENTS" on page F-1.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
For information required under Items 10, 11, 12 and 13 see the Company's
definitive Proxy Statement relating to the Annual Meeting of Stockholders, which
sections are herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements.
The financial statements of the Company are set forth beginning on
page F-1.
(2) Financial Statement Schedules.
Schedule II - Valuation and qualifying accounts is set forth on
page F-20. All other schedules have been omitted because they are
not applicable or because the information is included elsewhere in
the Financial Statements or the notes thereto.
(b) Reports on Form 8-K filed during the last quarter of fiscal 1997.
None
(c) Exhibits are set forth in the "Exhibit Index" on page 20.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
17
<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
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.
18
<PAGE>
GAMETECH INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . . . . F-2
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . F-7
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
GameTech International, Inc.
We have audited the accompanying balance sheets of GameTech International, Inc.
as of October 31, 1996 and 1997 and the related statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit) and
cash flows for each of the three years in the period ended October 31, 1997.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis or our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GameTech International, Inc. at
October 31, 1996 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Sacramento, California
December 5, 1997
F-2
<PAGE>
GAMETECH INTERNATIONAL, INC.
BALANCE SHEETS
OCTOBER 31,
1996 1997
-------------------------
ASSETS:
Current assets:
Cash and equivalents $ 166,119 $ 1,019,524
Accounts receivable, less allowance for doubtful
accounts of $102,000 in 1996 and $164,000 in 1997 546,356 1,151,108
Deposits 276,622 108,042
Prepaid expenses and other current assets 32,572 48,702
Deferred income taxes 83,652 196,325
-------------------------
Total current assets 1,105,321 2,523,701
Bingo units, furniture and equipment, net 4,294,337 9,024,887
Intangibles, less accumulated amortization of
$136,000 in 1996 and $238,000 in 1997 394,364 367,398
Investment in and advances to affiliate - 526,365
Other assets - 808,306
-------------------------
Total assets $5,794,022 $13,250,657
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term borrowings from bank $1,866,793 $ 550,000
Accounts payable 52,532 402,772
Accrued payroll and related obligations 150,273 324,716
Other accrued liabilities 35,166 235,385
Income taxes payable 134,216 166,534
Current portion of convertible notes payable to
officers, including accrued interest 168,183 -
Current portion of long-term debt - 1,266,523
-------------------------
Total current liabilities 2,407,163 2,945,930
Convertible notes payable to officers, including
accrued interest 1,362,662 1,526,001
Long-term debt - 1,599,658
Deferred income taxes 238,859 368,412
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 1996);
aggregate liquidation preference of $3,000,000 at
October 31, 1997 - 2,834,998
Stockholders' equity:
Common stock, $.001 par value; 40,000,000 shares
authorized; 5,181,575 shares issued and
outstanding in 1996 and 4,621,491 in 1997 5,182 4,622
Capital in excess of par value 558,510 35,639
Retained earnings 1,221,646 3,935,397
-------------------------
Total stockholders' equity 1,785,338 3,975,658
-------------------------
Total liabilities and stockholders' equity $ 5,794,022 $13,250,657
-------------------------
-------------------------
SEE ACCOMPANYING NOTES
F-3
<PAGE>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31,
---------------------------------------
1995 1996 1997
---------------------------------------
Revenues $ 3,349,611 $ 5,364,017 $12,577,821
Operating expenses:
Cost of revenues 711,603 1,614,562 3,248,657
General and administrative 693,049 1,019,919 1,993,064
Sales and marketing 551,844 613,503 1,418,676
Research and development 329,104 477,482 546,860
---------------------------------------
2,285,600 3,725,466 7,207,257
---------------------------------------
Income from operations 1,064,011 1,638,551 5,370,564
Interest expense (195,890) (279,032) (478,387)
Equity in net loss of affiliate - - (178,815)
Other income, net 2,315 4,430 27,696
---------------------------------------
Income before provision for income
taxes 870,436 1,363,949 4,741,058
Provision for income taxes 278,114 559,217 1,880,000
---------------------------------------
Net income $ 592,322 $ 804,732 $ 2,861,058
---------------------------------------
---------------------------------------
Primary net income per share $ .10 $ .12 $ .47
---------------------------------------
---------------------------------------
Fully diluted net income per share $ .10 $ .11 $ .39
---------------------------------------
---------------------------------------
Shares used in the calculation of net
income per share:
Primary 5,767,260 6,464,131 6,088,525
---------------------------------------
---------------------------------------
Fully diluted 7,115,326 7,888,854 7,546,920
---------------------------------------
---------------------------------------
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------------------------------
REDEEMABLE
CONVERTIBLE CAPITAL IN RETAINED
PREFERRED STOCK COMMON STOCK EXCESS OF EARNINGS
--------------- -------------------------
SHARES AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT) TOTAL
------------------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at October 31, 1994 - $ - - $ - $ - $ (175,408) $ (175,408)
Issuance of founders' stock - - 4,570,000 4,570 18,530 - 23,100
Conversion of convertible
notes payable into common
stock - - 439,875 440 439,435 - 439,875
Issuance of common stock for
cash - - 100,000 100 99,900 - 100,000
Net income - - - - - 592,322 592,322
------------------------ ----------------------------------------------------------------------
Balances at October 31, 1995 - - 5,109,875 5,110 557,865 416,914 979,889
Issuance of common stock
upon exercise of stock
options at $.01 per share - - 71,700 72 645 - 717
Net income - - - - - 804,732 804,732
------------------------ ----------------------------------------------------------------------
Balances at October 31, 1996 - - 5,181,575 5,182 558,510 1,221,646 1,785,338
Repurchase and cancellation
of common stock - - (1,000,000) (1,000) (558,510) (147,307) (706,817)
Common stock issued in
exchange for services - - 5,500 5 5,495 - 5,500
Issuance of common stock
upon exercise of stock
options at $.01 per share - - 407,916 408 3,671 - 4,079
Conversion of convertible
notes payable into common
stock - - 26,500 27 26,473 - 26,500
Sale of redeemable
convertible preferred
stock for cash, net of
issuance costs of
approximately $165,000 400,000 2,834,998 - - - - -
Net income - - - - - 2,861,058 2,861,058
------------------------ ----------------------------------------------------------------------
Balances at October 31, 1997 400,000 $ 2,834,998 4,621,491 $ 4,622 $ 35,639 $3,935,397 $3,975,658
------------------------ ----------------------------------------------------------------------
------------------------ ----------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31,
-------------------------------------
1995 1996 1997
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 592,322 $ 804,732 $ 2,861,058
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 282,433 599,458 1,428,571
Accrued interest payable to officers 195,890 164,363 189,839
Deferred income taxes 109,207 46,000 16,880
Equity in net loss of affiliate - - 178,815
Changes in operating assets
and liabilities:
Accounts receivable, net (177,469) (301,642) (604,752)
Deposits (258,200) (18,422) 168,580
Prepaid expenses and other current
assets (37,041) 9,853 (16,130)
Accounts payable
Accrued payroll and related 261,433 (232,008) 350,240
obligations 35,950 114,323 174,443
Other accrued liabilities 20,329 (3,359) 200,219
Income taxes payable 28,907 105,309 32,318
-------------------------------------
Net cash provided by operating
activities 1,053,761 1,288,607 4,980,081
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for bingo units,
furniture and equipment (1,251,001) (2,965,612) (6,057,574)
Investment in and advances to affiliate - - (705,180)
Change in other assets - - (156,326)
Capitalized software development costs - (122,235) (74,581)
-------------------------------------
Net cash used in investing activities (1,251,001) (3,087,847) (6,993,661)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings from
bank 14,200 2,360,493 3,330,000
Payments on short-term notes payable and
borrowings from bank (132,222) (507,900) (2,050,000)
Proceeds from borrowings on convertible
notes payable to officers 339,967 100,000 -
Payments on convertible notes payable to
officers (114,405) (24,978) -
Proceeds from issuance of long-term debt - - 403,207
Payments on long-term debt - - (758,819)
Payment for repurchase of common stock
and cancellation of a note payable to
an officer - - (250,000)
Proceeds from sale of redeemable
convertible preferred stock - - 2,834,998
Proceeds from sales of common stock 101,600 717 9,579
Deferred offering costs - - (651,980)
-------------------------------------
Net cash provided by financing
activities 209,140 1,928,332 2,866,985
-------------------------------------
Net increase in cash and equivalents 11,900 129,092 853,405
Cash and equivalents at beginning
of year 25,127 37,027 166,119
-------------------------------------
Cash and equivalents at end of year $ 37,027 $ 166,119 $ 1,019,524
-------------------------------------
-------------------------------------
Supplemental disclosure of cash flow
information:
Cash paid for interest $ - $ 109,000 $ 275,000
Cash paid for income taxes $ 140,000 $ 410,000 $ 1,831,000
Supplemental schedule of non-cash
transactions:
Conversion of convertible notes
payable to common stock $ 461,375 $ - $ 26,500
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GameTech International, Inc. (the "Company") was incorporated in Delaware
on April 18, 1994. The Company manufactures and leases electronic bingo units
under long-term or month-to-month arrangements. The Company's fiscal year ends
on October 31.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BINGO UNITS, FURNITURE AND EQUIPMENT
Bingo units, furniture and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful lives of the assets.
The estimated useful lives are as follows:
Bingo units - 5 years
Office furniture and equipment - 5-7 years
Leasehold improvements - 5 years
SUPPLIER
Certain of the Company's bingo units are purchased from only one supplier.
Any interruption in this supply source could impact the Company's ability to
meet customer demand and in turn adversely affect future operating results.
INTANGIBLES
The excess of cost over fair value of net assets of businesses acquired is
amortized on a straight-line basis over seven years. Also included in
intangibles, is capitalized software development costs of approximately $122,000
and $197,000 at October 31, 1996 and 1997, respectively, which are being
amortized on a straight-line basis over three years beginning when the developed
products were available for general release. Amortization of capitalized
software development costs during the year ended October 31, 1997 amounted to
approximately $43,000 (none previously).
F-7
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
INVESTMENT IN JOINT VENTURE
The Company has a 50% interest in The Satellite Bingo Network, LLC.
("TSBN") which is accounted for using the equity method. TSBN was formed on
April 8, 1997. The Company's initial investment in TSBN was $50,000. The Company
has recorded through October 31, 1997, approximately $179,000 as their share of
TSBN's operating losses which represents 50% of the first $100,000 in losses and
100% of the losses in excess of $100,000. The Company to-date has funded the
operating losses of TSBN and consequently will record 100% of TSBN's future
operating losses, if any. In addition, through October 31, 1997, the Company had
advanced TSBN approximately $655,000 to fund its planning and development costs
and the purchase of fixed assets.
LONG-LIVED ASSETS
The Company has adopted the provisions of the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of ("SFAS 121"). SFAS 121 requires impairment losses to be recognized for
long-lived assets and identifiable intangibles used in operations when
indicators of impairment are present and the estimated undiscounted cash flows
are not sufficient to recover the assets' carrying amount. The impairment loss
is measured by comparing the fair value of the asset to its carrying amount. The
excess of cost over fair value of net assets of businesses acquired is included
in impairment evaluations when events or circumstances exist that indicate the
carrying amount of the acquired assets may not be recoverable.
FINANCIAL INSTRUMENTS
The carrying values of the Company's short-term borrowings from banks
(Note 3), long-term debt (Notes 3 and 7) and convertible notes payable to
officers (Note 4) approximate their fair values at October 31, 1996 and 1997,
based on current incremental borrowing rates for similar types of borrowing
arrangements.
REVENUE RECOGNITION, SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Revenues are based on either a percentage of gaming revenues earned per
bingo unit at customer locations or a fixed rate per bingo session as defined in
the contract.
The Company's customer base currently consists of bingo halls on tribal
Indian lands and charity bingo operations located throughout the United States.
The Company generally does not require collateral. Management believes that
adequate allowances for credit losses have been provided.
During the year ended October 31, 1995, two customers comprised 21% and 17%
of total revenues. During the years ended October 31, 1996 and 1997 no single
customer comprised more than 10% of total revenues.
F-8
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs during the
years ended October 31, 1995, 1996 and 1997 were not material.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for its stock options (Note 7) in accordance with the
provisions of the Accounting Principles Board's Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." Under APB 25, because the exercise
price of the Company's employee stock options generally equal the fair value of
the underlying stock on the date of grant, no compensation expense is
recognized. Pro forma information regarding net income and net income per share
is required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," (SFAS No. 123), which also requires that the
information be determined as if the Company had accounted for its employee stock
options granted subsequent to October 31, 1995 under the fair value method of
SFAS No. 123. The fair value of these options were estimated at the date of
grant using the Minimum Value Method with a risk-free interest rate of 6% for
both 1996 and 1997. The weighted average expected life of the options was
approximately four and three years in 1996 and 1997, respectively. The Minimum
Value Method of calculating an options fair value is available to the Company
since, during the years ended October 31, 1996 and 1997, the Company was not
public. For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
effect of applying SFAS No. 123 Minimum Value Method to the Company's employee
stock option grants results in pro forma net income and net income per share
that are not materially different from amounts reported. Because SFAS No. 123 is
applicable only to options granted subsequent to October 31, 1995, its pro forma
effect will not be fully realized until 1999.
NET INCOME PER SHARE OF COMMON STOCK
The Company's net income per share is based upon the weighted average
number of shares of common stock outstanding including dilutive common
equivalent shares from stock options using the treasury stock method. In
addition, the number of shares used in the calculation of fully diluted net
income per share also includes the weighted average common equivalent shares
outstanding as if the convertible notes payable to officers were converted to
common stock on their original dates of issue after giving effect to the
elimination of interest expense. Pursuant to SAB No. 83, shares of common stock
issued, and shares issuable from stock options granted by the Company, during
the twelve months immediately preceding the Company's assumed initial public
offering date at prices below the assumed initial public offering price (using
the treasury stock method and the assumed initial public offering price of
$12.00 per share), have been included in the number of shares used in the
calculation of historical net income per share as if they were outstanding for
all years presented. Furthermore, pursuant to SEC staff policy, common
equivalent shares from convertible preferred stock that was automatically
converted upon the completion of the Company's initial public offering are
included (using the if-converted method) from the original date of issuance.
F-9
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required for both interim and annual
periods ending after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded. The
impact of Statement No. 128 on the calculation of primary and fully diluted
earnings per share is not expected to be material.
SUPPLEMENTARY NET INCOME PER SHARE DATA
In connection with the Company's initial public offering (Note 7), the
Company used a portion of the net proceeds to repay short-term borrowings from
banks and long-term debt. In addition, in November 1997, the convertible notes
payable to officers were converted into shares of common stock (Note 4). The
following reflects supplementary net income per share data as if the
transactions as described occurred on November 1, 1996, and the shares used in
the calculation of supplementary net income per share reflect only the increase
in the number of shares necessary on a net proceeds of offering basis to repay
the short-term borrowings and long-term debt:
YEAR ENDED
OCTOBER 31,
1997
------------
Supplementary primary net income $ 3,143,069
------------
------------
Supplementary primary net income per share $ .40
------------
------------
Shares used in the calculation of supplementary
primary net income per share 7,888,516
------------
------------
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
highly liquid investments with original maturities of three months or less to
be cash equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation.
F-10
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
2. BINGO UNITS, FURNITURE AND EQUIPMENT
Bingo units, furniture and equipment consist of the following:
OCTOBER 31,
1996 1997
-------------------------
Installed bingo units $ 4,128,640 $ 8,324,179
Bingo units on-hand 490,860 1,791,959
Raw materials and bingo units in-progress 164,141 534,563
Office furniture and equipment 278,835 446,636
Leasehold improvements 40,017 62,730
-------------------------
5,102,493 11,160,067
Less accumulated depreciation and amortization 808,156 2,135,180
-------------------------
$ 4,294,337 $ 9,024,887
-------------------------
-------------------------
"Bingo units on-hand" are transferred to "Installed bingo units" when
installed at a customer location, at which time a provision for depreciation is
applied.
Depreciation expense during the years ended October 31, 1995, 1996 and 1997
amounted to approximately $224,000, $541,000, and $1,327,000, respectively.
3. CREDIT AGREEMENTS
On April 11, 1997, the Company obtained a revolving line-of-credit (the
"Line") and a $3,000,000 term loan (the "Term Loan") from a bank. The maximum
amount available under the terms of the Line is $3,000,000 and borrowings bear
interest based on the prime rate plus .5% or LIBOR plus 2.5% at the Company's
option. Interest is payable monthly and the Line expires on April 11, 1998. The
Term Loan bears interest at a fixed rate of 8.9%, due in equal monthly
installments of principal and interest through the maturity date of April 11,
2000 and it includes provisions for pre-payment penalties. The Term Loan was
used to pay-off amounts outstanding under a previous credit agreement totaling
approximately $2.6 million. Both the Line and the Term Loan are secured by
substantially all of the Company's assets. The Line and the Term Loan contain
certain restrictive covenants, which among other things require that specified
financial balances and ratios be maintained, restricts the payment of dividends
and prohibit the incurrence of additional indebtedness. At October 31, 1997,
$550,000 was outstanding under the Line at an interest rate of 9.0% and
$2,553,681 was outstanding under the Term Loan.
In connection with the Company's initial public offering (Note 7), the
Company used a portion of the net proceeds to pay-off amounts outstanding under
the Term Loan and pay-down amounts outstanding under the Line.
F-11
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
4. CONVERTIBLE NOTES PAYABLE TO OFFICERS
Convertible notes payable to officers are unsecured borrowings bearing
interest at prime plus 4.25% (aggregating 12.75% at October 31, 1997). Principal
and interest of $1,526,001 are due in February 1999. Unpaid principal and
interest are convertible into the Company's common stock at the lesser of $1.00
per share or the lowest price offered to any individual or investor group.
Interest expense recorded on notes payable to officers amounted to approximately
$198,000, $164,000 and $190,000 during the years ended October 31, 1995, 1996
and 1997, respectively. Included along with the principal amount of convertible
notes payable to officers on the accompanying balance sheets is accrued interest
of approximately $276,000 (current portion of $45,000) and $421,000 (no current
portion) at October 31, 1996 and 1997, respectively.
As required under the terms of the Term Loan (Note 3) no principal payments
may be made on certain of the convertible notes payable to officers
(approximately $905,000 principal amount outstanding at October 31, 1997) until
all amounts payable under the Term Loan have been paid in full.
In November 1997, the officers converted the principal amounts of their
convertible notes payable plus accrued interest (aggregating $1,539,351) into
1,539,351 shares of common stock.
5. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases administrative and manufacturing facilities under
non-cancelable operating leases. Rent expense during the years ended October 31,
1995, 1996 and 1997 amounted to approximately $32,000, $89,000 and $118,000,
respectively.
Future minimum lease payments under these leases, by year, as of
October 31, 1997 are as follows:
1998 $ 81,000
1999 67,000
2000 55,000
2001 43,000
---------
$ 246,000
---------
---------
In addition to the above, the Company has guaranteed certain operating
leases of TSBN (Note 1) with monthly rental commitments aggregating
approximately $3,000 through May 2002.
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
F-12
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
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 court 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, both actions are in the early stages
of litigation, and 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 impact on the
Company's financial position, results of operations or cash flows.
In October 1997, two actions were commenced against the Company by Apex
Wholesale, Inc. ("Apex") in the U.S. District Court for the Southern District of
California. The Company formerly purchased its hand-held units manufactured by
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
F-13
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
deems proper. The Company has filed two motions to dismiss for lack of subject
matter jurisdiction and failure to state a claim. Both of these motions are
scheduled to be held on March 16, 1998.
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 filed
two motions to dismiss for failure to state a claim and failure to join a
necessary party. Both of these motions are scheduled to be heard on March 16,
1998. On January 21, 1998, Apex filed a motion for writ of attachment in the
alleged fraudulent transfer action, seeking to attach $400,400 of the Company's
assets arising out of a writ of attachment directed against the property of a
third party, Green Dollars Industrial, Ltd. in an earlier proceeding.
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 impact on the Company's financial position, results of operations or
cash flows.
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, for money had, 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.
The 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
impact on the Company's financial position, results of operations or cash flows.
All activities in relation to both the cross-complaint and complaint have been
stayed by the mutual agreement of the parties until February 27, 1998 so that
ongoing settlement discussions may continue.
In addition, in the normal course of business, the Company may be named as
defendant or co-defendant in lawsuits involving primarily claims for damages.
The Company's management believes that any such pending lawsuits will not have a
material adverse impact on the Company's financial position, results of
operations or cash flows.
F-14
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In September 1997, the Company received proceeds of approximately
$2,835,000 (net of issuance costs of approximately $165,000) from the sale of
400,000 shares of redeemable convertible preferred stock (the "Preferred
Stock"). Each share of Preferred Stock is convertible, at the holder's option,
into common stock on a one-for-one basis subject to certain antidilution
adjustments. Each share shall automatically be converted into common stock
immediately upon the closing of a registered public offering of the Company's
common stock with aggregate proceeds to the Company of at least $20,000,000
(Note 7). The preferred stockholders are entitled to one vote for each share of
common stock into which such shares can be converted.
The preferred stockholders are also entitled to liquidation preferences
equal to the initial purchase price per share ($7.50) plus any declared and
unpaid dividends. In addition, at any time after December 31, 2001, the Company
shall, upon the request of the holders of a majority of the Preferred Stock then
outstanding, redeem the Preferred Stock at the liquidation preference for cash.
Concurrent with the completion of the Company's initial public offering
(Note 7), the Preferred Stock was automatically converted into 400,000 shares of
its common stock.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
During fiscal 1995, the Company issued 2,260,000 shares of common stock
which included provisions that the shares would be subject to repurchase by the
Company at the original purchase price over specified periods in the event that
the stockholder no longer participated in the management of the Company. At
October 31, 1997 no shares were any longer subject to repurchase by the Company.
Of the 35,378,509 shares of common stock authorized but unissued at
October 31, 1997, the following shares were reserved for issuance:
Stock options 2,255,384
Convertible notes payable to officers 1,526,001
Redeemable convertible preferred stock 400,000
-----------
4,181,385
-----------
-----------
STOCK OPTIONS
In August 1997, the Company's Board of Directors adopted a stock option
plan under which all officers, employees, directors and consultants may
participate (the "1997 Plan"). Options granted under the 1997 Plan may either be
incentive stock options ("ISO's") or non-qualified stock options ("NSO's") and
they will generally have a term of 10 years from the date of grant and will vest
over periods determined at the date of grant. The exercise prices of the
F-15
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
ISO's will be at 100% or 110% of the fair market value of the Company's common
stock on the date of grant as provided for in the 1997 Plan. The exercise prices
of the NSO's are determined by the board of directors. In connection with the
adoption of the 1997 Plan, the board of directors approved the reservation of
2,000,000 shares of common stock for issuance under the 1997 Plan and included
options granted during the twelve months immediately preceding the adoption of
the 1997 Plan as grants thereunder. At October 31, 1997, options to purchase
905,250 of common stock were exercisable at exercise prices ranging from $.16 to
$1.10 per share under the 1997 Plan. In addition, at October 31, 1997, 808,000
of common stock were available for future grants under the 1997 Plan.
The Company also had options outstanding at October 31, 1997, to purchase
255,384 shares of common stock at exercise prices ranging from $.01 to $.16 per
share that were granted prior to the adoption of, and not considered grants
under the 1997 Plan. Of these options 27,500 were exercisable at October 31,
1997, at exercise prices ranging from $.01 to $.16 per share.
A summary of the Company's stock option activity, and related information
during the years ended October 31, 1996 and 1997 is presented below:
YEARS ENDED OCTOBER 31,
1996 1997
--------------------------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE SHARES EXERCISE
(OPTIONS) PRICE (OPTIONS) PRICE
--------------------------------------------
Outstanding at beginning of year 675,000 $ .01 678,300 $ .02
Granted 75,000 $ .09 1,182,000 $ 1.02
Forfeited - $ - (5,000) $ .01
Exercised (71,700) $ .01 (407,916) $ .01
-------- ----------
Outstanding at end of year 678,300 $ .02 1,447,384 $ .84
--------------------------------------------
--------------------------------------------
Exercisable at end of year 240,000 $ .02 932,750 $ .99
--------------------------------------------
--------------------------------------------
Weighted average fair value of
options granted during the year $.16 $1.00
------ -------
------ -------
F-16
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
October 31, 1997:
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
--------------- ----------- ---------- ---------- --------- ----------
$.01 225,384 7.2 $ .01 12,500 $ .01
$.16 40,000 8.7 $ .16 21,250 $ .16
$1.00-$1.10 1,182,000 5.8 $ 1.02 899,000 $ 1.03
----------- ---------
1,447,384 $ .84 932,750 $ .99
----------- ---------
----------- ---------
The range of exercise prices of stock options outstanding and their weighted
average remaining contractual life at October 31, 1997, were $.01 to $1.10 per
share and 6.1 years, respectively.
STOCK REPURCHASE AGREEMENT
On November 22, 1996, the Company entered into an agreement with one of its
stockholders to repurchase 1,000,000 shares of the Company's common stock (the
"Agreement"). Of the 1,000,000 shares repurchased, 250,000 were subject to
repurchase under the terms of the original purchase agreement. The shares
repurchased by the Company have been canceled. The Agreement provided for the
Company to pay a total of $875,000 for the stock and forgiveness of a note and
accrued interest payable to the stockholder totaling approximately $168,000 (the
"Payment"). The Payment was comprised of a cash payment of $250,000 and issuance
of a new note payable in the principal amount of $625,000 (the "Note"). The Note
bears interest at 5.65% and is payable in four semi-annual installments of
$156,250 plus accrued interest beginning March 1, 1997. At October 31, 1997,
$312,500 was outstanding under the Note. The Agreement limits the amount of any
prepayments on certain convertible notes payable to officers (Note 4) while
there are any amounts owing under the Agreement. Subsequent to October 31, 1997
the Company paid-off all amounts outstanding under the Agreement.
INITIAL PUBLIC OFFERING
On December 1, 1997, the Company completed an initial public offering of
3,710,000 shares of its common stock, including 440,000 shares offered by
certain stockholders of the Company, at a price of $11.00 per share. Such
offering resulted in cash proceeds to the Company, net of underwriting discounts
and offering expenses of approximately $32,500,000.
F-17
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES
The income tax provisions consist of the following:
YEARS ENDED OCTOBER 31,
----------------------------------------------------
1995 1996 1997
----------------------------------------------------
Current:
Federal $ 137,143 $ 431,092 $ 1,530,226
State 31,764 82,125 332,894
Deferred:
Federal 90,562 34,472 14,774
State 18,645 11,528 2,106
----------------------------------------------------
$ 278,114 $ 559,217 $ 1,880,000
----------------------------------------------------
----------------------------------------------------
The 1995 income tax provision is net of an operating loss carryforward
utilization of approximately $170,000.
The significant components of the Company's deferred income tax assets and
liabilities at October 31, 1996 and 1997 are as follows:
1997
CURRENT NON-CURRENT
---------------------------------
Deferred income tax assets:
Accounts receivable reserves $ 66,931 $ -
Amortization - 60,310
Accrued expenses 58,630 -
Vacation accrual 51,250 -
Others 19,514 -
---------------------------------
Total deferred income tax assets 196,325 60,310
Deferred income tax liability:
Depreciation - (428,722)
---------------------------------
Net deferred income tax asset (liability) $ 196,325 $ (368,412)
---------------------------------
---------------------------------
F-18
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED STATEMENTS
1996
CURRENT NON-CURRENT
----------------------------
Deferred income tax assets:
Accounts receivable reserves $ 37,122 $ -
Amortization - 29,841
Vacation accrual 20,500 -
Others 26,030 -
----------------------------
Total deferred income tax assets 83,652 29,841
Deferred income tax liability:
Depreciation - (268,700)
----------------------------
Net deferred income tax asset (liability) $ 83,652 $ (238,859)
----------------------------
----------------------------
The differences between the Company's provision for income taxes as
presented in the accompanying statements of operations and provision for income
taxes computed at the federal statutory rate is comprised of the items shown in
the following table as a percentage of pre-tax earnings:
YEARS ENDED OCTOBER 31,
---------------------------
1995 1996 1997
---------------------------
Income tax provision at the statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 6.0% 7.0% 4.7
Net operating loss benefit (8.0)% - -
Other, net - - 1.0
---------------------------
32.0% 41.0% 39.7%
---------------------------
---------------------------
F-19
<PAGE>
GAMETECH INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO (WRITE-OFFS, BALANCE
BEGINNING COSTS AND OTHER NET OF AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS COLLECTIONS) OF PERIOD
- ----------------------------------- ----------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended October 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ - $ 24,426 $ - $ - $ 24,426
Year ended October 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 24,426 $ 78,196 $ - $ (1,080) $ 101,542
Year ended October 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 101,542 $ 215,600 $ - $ (153,295) $ 163,847
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GAMETECH INTERNATIONAL, INC.
By: /s/ CLARENCE H. THIESEN
-----------------------
Clarence H. Thiesen
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/ RICHARD T. FEDOR
- ------------------------- Chairman of the Board, Chief January 29, 1998
Richard T. Fedor Executive Officer and Director
/s/ CLARENCE H. THIESEN
- -------------------------- Chief Financial Officer and Director January 29, 1998
Clarence H. Thiesen
/s/ GARY R. HELD
- -------------------------- Vice President--Sales & Marketing January 29, 1998
Gary R. Held and Director
/s/ JOHN J. PAULSON
- -------------------------- Treasurer January 29, 1998
John J. Paulson
</TABLE>
<PAGE>
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 GameTech International, Inc. Incentive Stock Plan (1)
10.2 Lease Agreement between Russ Jeter and GameTech International,
Inc. (1)
10.3 Lease Agreement between Russ Jeter and TSBN, LLC (1)
10.4 Lease Agreement between North Point Associates Limited
Partnership and GameTech International, Inc. (1)
10.5 Joint Venture and Limited Liability Company Agreement by and
between GameTech International, Inc. and the Satellite Bingo
Network (1)
10.6 Distribution Agreement between GameTech International, Inc. and
Trend Gaming Systems (1)
10.7 Distribution Agreement between M&M Operators and GameTech
International, Inc. (1)
10.8 Revolving Line of Credit Note of GameTech International, Inc.
dated April 11, 1997 in the principal amount of $3,000,000
payable to Wells Fargo Bank, N.A. (1)
10.9 Form of Video Bingo System Placement Agreement (1)
10.10 Sublease Agreement between Trend Gaming Systems, LLC and
GameTech International, Inc. (1)
10.11 Amended Employment Agreement between GameTech International,
Inc. and Richard T. Fedor (1)
10.12 Amended Employment Agreement between GameTech International,
Inc. and Clarence H. Thiesen (1)
10.13 Amended Employment Agreement between GameTech International,
Inc. and Gary R. Held (1)
10.14 Amended Employment Agreement between GameTech International,
Inc. and Conrad J. Granito (1)
11.1 Statement re Computation of Earnings Per Share (2)
27.1 Financial Data Schedule (2)
- ---------------------
(1) Incorporated Herein by Reference to Registration Statement No. 333-34967
(2) Filed with this Report
<PAGE>
GAMETECH INTERNATIONAL, INC.
EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
PRIMARY:
Weighted average common shares
outstanding during the period
and common equivalent shares 4,420,646 5,117,517 5,078,564
Shares related to SAB No. 83 1,346,614 1,346,614 1,009,961
---------- ---------- ----------
Total shares used in primary net
income per share 5,767,260 6,464,131 6,088,525
---------- ---------- ----------
---------- ---------- ----------
Net income $ 592,322 $ 804,732 $2,861,058
---------- ---------- ----------
---------- ---------- ----------
Primary net income per share $ .10 $ .12 $ .47
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTARY PRIMARY:
Total primary shares from above 6,088,525
Shares necessary to repay debt
on a net proceeds of offering basis 341,596
Incremental shares attributable to
conversion of notes payable to officers
on their original dates of issue 1,458,395
----------
Total shares used in supplementary
primary net income per share 7,888,516
----------
----------
Net income $2,861,058
After-tax interest on debt to be
repaid with offering proceeds 170,006
After tax interest on notes payable
to officers 112,005
----------
Supplementary primary net income $3,143,069
----------
----------
Supplementary primary net income per share $ .40
----------
----------
FULLY DILUTED:
Total primary shares from above 5,767,260 6,464,131 6,088,525
Incremental shares attributable
to conversion of notes payable
to officers on their original
dates of issue 1,348,066 1,424,723 1,458,395
---------- ---------- ----------
Total shares used in fully
diluted net income per share 7,115,326 7,888,854 7,546,920
---------- ---------- ----------
---------- ---------- ----------
Net income $ 592,322 $ 804,732 $2,861,058
After tax interest on notes
payable to officers 117,006 96,975 112,005
---------- ---------- ----------
Fully diluted net income $ 709,328 $ 901,707 $2,973,063
---------- ---------- ----------
---------- ---------- ----------
Fully diluted net income per share $ .10 $ .11 $ .39
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET OF GAMETECH INTERNATIONAL INC. (THE "COMPANY") AS OF OCTOBER
31, 1997 AND THE STATEMENT OF OPERATIONS OF THE COMPANY FOR THE YEAR ENDED
OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 1,019,524
<SECURITIES> 0
<RECEIVABLES> 1,315,108
<ALLOWANCES> 164,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,523,701
<PP&E> 11,160,067
<DEPRECIATION> 2,135,180
<TOTAL-ASSETS> 13,250,657
<CURRENT-LIABILITIES> 2,945,930
<BONDS> 0
2,834,998
0
<COMMON> 4,622
<OTHER-SE> 3,971,036
<TOTAL-LIABILITY-AND-EQUITY> 13,250,657
<SALES> 0
<TOTAL-REVENUES> 12,577,821
<CGS> 0
<TOTAL-COSTS> 3,248,657
<OTHER-EXPENSES> 546,860
<LOSS-PROVISION> 215,600
<INTEREST-EXPENSE> 478,387
<INCOME-PRETAX> 4,741,058
<INCOME-TAX> 1,880,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,861,058
<EPS-PRIMARY> .47
<EPS-DILUTED> .39
</TABLE>
