<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ______________
COMMISSION FILE NUMBER 000-23401
GAMETECH INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0612983
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2209 W. 1ST STREET, TEMPE, ARIZONA 85281
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (602) 804-1101
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
<TABLE>
<CAPTION>
Class Outstanding at March 13, 1998
----- -----------------------------
<S> <C>
COMMON STOCK, PAR VALUE $.001 PER SHARE 9,847,092
</TABLE>
<PAGE>
GAMETECH INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information: Page No.
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets
January 31, 1998 and October 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations
Three Months Ended January 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows
Three Months Ended January 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Mark Risk Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8 - K . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GAMETECH INTERNATIONAL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1998 1997
------------------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and equivalents $ 29,539 $ 1,020
Accounts receivable, less allowance for
doubtful accounts of $191 in 1998
and $164 in 1997 1,641 1,151
Deposits 752 108
Prepaid expenses and other current assets 125 49
Prepaid income taxes 67 -
Deferred income taxes 196 196
------------------------
Total current assets 32,320 2,524
Bingo units, furniture and equipment, net 9,284 9,025
Intangibles, less accumulated amortization of
$269 in 1998 and $238 in 1997 336 368
Investment in and advances to affiliate - 526
Other assets 156 808
------------------------
Total assets $ 42,096 $ 13,251
------------------------
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term borrowings from bank -- $ 550
Accounts payable 572 403
Accrued payroll and related obligations 192 325
Other accrued liabilities 284 235
Income taxes payable -- 167
Current portion of long-term debt -- 1,266
------------------------
Total current liabilities 1,048 2,946
Convertible notes payable to officers, including
accrued interest -- 1,526
Long-term debt -- 1,600
Deferred income taxes 368 368
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par
value; 5,000,000 shares authorized; 400,000
shares issued and outstanding in 1997 (none in
1998); -- 2,835
Stockholders' equity:
Common stock, $.001 par value;
40,000,000 shares authorized;
9,847,092 shares issued and
outstanding in 1998 and 4,621,491
in 1997 10 5
Capital in excess of par value 36,979 36
Retained earnings 3,691 3,935
------------------------
Total stockholders' equity 40,680 3,976
------------------------
Total liabilities and stockholders' equity $ 42,096 $ 13,251
------------------------
------------------------
</TABLE>
See notes to financial statements.
<PAGE>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF INCOME OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1998 1997
(Unaudited)
<S> <C> <C>
Revenues $ 3,956 $ 2,487
Operating expenses:
Cost of revenues 1,149 608
General and administrative 758 334
Sales and marketing 474 282
Research and development 180 116
----- -----
2,561 1,340
----- -----
Income from operations 1,395 1,147
Equity in net loss of affiliate (2,000) --
Interest expense (42) (102)
Interest income 247 --
Other -- 12
----- -----
Income (loss) before provision for income taxes (400) 1,057
Provision (benefit) for income taxes (156) 425
---- ---
Net income (loss) $ ( 244) $ 632
------- ----
------- ----
Basic net income (loss) per share $ (0.03) $.14
------- ----
------- ----
Diluted net income (loss) per share $ (0.03) $.11
------- ----
------- ----
Shares used in the calculation of net income
per share
Basic 8,241,460 4,477,852
--------- ---------
Diluted 8,241,460 6,445,887
--------- ---------
</TABLE>
See notes to financial statements.
<PAGE>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (244) $ 632
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 481 265
Accrued interest payable to officers 13 45
Equity in net loss of affiliate 2,000 --
Changes in operating assets and liabilities:
Accounts receivable, net (490) (399)
Deposits (644) 53
Prepaid expenses and other current assets (76) 11
Prepaid income taxes (67) --
Accounts payable 169 100
Accrued payroll and related obligations (133) (24)
Other accrued liabilities 49 (29)
Income taxes payable (167) 348
------------------------
Net cash provided by operating activities 891 1,002
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for bingo units, furniture
and equipment (709) (1,071)
Investment in and advances to affiliate (1,474) --
Capitalized software development costs -- (37)
------------------------
Net cash used in investing activities (2,183) (1,108)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings from bank -- 350
Payments on short-term notes payable and
borrowings from bank (550) --
Payments on long-term debt (2,866) --
Payment for repurchase of common stock and
cancellation of a note payable to an officer -- (250)
Proceeds from sales of common stock 33,227 10
------------------------
Net cash provided by financing activities 29,811 110
------------------------
Net increase in cash and equivalents 28,519 4
Cash and equivalents at beginning of year 1,020 166
------------------------
Cash and equivalents at end of year $ 29,539 $ 170
------------------------
------------------------
</TABLE>
See notes to financial statements.
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
(UNAUDITED)
1. NOTES TO FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION
The balance sheet as of October 31, 1997 has been derived from the
audited financial statements at that date. The accompanying financial
statements as of January 31, 1998 and for the three months ended January 31,
1998 and 1997 have been prepared by the Company without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principals have been condensed or omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments
considered necessary for a fair presentation of the Company's financial
condition, results of operations and cash flows have been included. The
results of operations for the three months ended January 31, 1998 should not
be considered indicative of results for the fiscal year ending October 31,
1998. These financial statements should be read in conjunction with the
financial statements, and notes thereto, included in the Company's Annual
Report on Form 10-K for the year ended October 31, 1997.
<PAGE>
NOTE B. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss) per share of common stock is computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, which is effective
for reporting periods ending after December 31, 1997. SFAS No. 128 requires the
restatement of prior periods earnings (loss) per share to conform to the new
standard. Presented below is reconciliation of net income (loss) available to
common shareholders and the differences between actual weighted average shares
outstanding, which are used in computing basic earnings per share and diluted
weighted average shares, which are used in computing diluted earnings per share.
<TABLE>
<CAPTION>
(In thousands, except share and per share amounts)
Three months ended January 31,
Numerator: 1998 1997
---- ----
<S> <C> <C>
Net income (loss) $ (244) $ 632
---------------------------------------
Numerator for basic earnings per share (244) 632
Effect of dilutive securities:
After-tax interest on
convertible notes payable 8 27
---------------------------------------
Numerator for diluted earnings per share $ (236) $ 659
---------------------------------------
---------------------------------------
Denominator:
Denominator for basic
Weighted average shares 8,241,460 4,477,852
Effect of dilutive securities:
Stock options 1,299,373 586,044
Convertible preferred stock 130,434
Convertible notes payable 399,829 1,381,991
---------------------------------------
Denominator for diluted earnings per share 10,071,096 6,445,887
---------------------------------------
---------------------------------------
Basic earnings per share $ (0.03) $ 0.14
---------------------------------------
---------------------------------------
Diluted earnings per share(1) $ (0.02) $ 0.10
---------------------------------------
---------------------------------------
</TABLE>
(1) The computed per share amount assuming full dilution for the 1998 period
is antidilutive: therefore the basic per share amount for this period is also
presented as the diluted amount on the face of the accompanying statement of
operations.
<PAGE>
NOTE C. COMMITMENTS AND CONTINGENCIES
LITIGATION
In November 1996, a patent infringement action and demand for jury trial
was commenced against the Company and five other defendants by FortuNet, Inc. in
the U.S. District Court, Southern District of California. The other defendants
were Advanced Gaming Technology, Inc., American Video Systems, FortuNet Canada,
Inc., Network Gaming, Inc. (f/k/a/ Artificial Intelligence), and Multimedia
Games, Inc. The complaint alleges that the Company, among others, has
infringed, actively induced or contributed to the infringement of U.S. Patent
No. 4,624,462 (the "'462 Patent") by making, using and selling, among other
acts, electronic bingo devices that allegedly infringe upon at least one claim
of the '462 Patent. The '462 Patent was issued in 1986 and will expire in 2001
and is allegedly infringed by the Company's fixed-base bingo units. The
plaintiff seeks a preliminary and permanent injunction prohibiting the Company
from infringement of the '462 Patent, as well as actual damages, enhanced
(treble) damages, attorneys' fees and any other costs. The Company, in July
1997, won its motion for transfer and severance in this action. The U.S.
District Court, for the District of Arizona, has set a pre-trial conference date
of February 22, 1999 at which time a trial date will be chosen.
In March 1996, a patent infringement action and demand for jury trial was
commenced against the Company by Bingo Technology Corporation, Inc. (formerly
Bingo Card Minder Corporation), in the U.S. District Court, Northern District of
California. The complaint alleges that the Company has infringed, actively
induced or contributed to the infringement of U.S. Patent No. 4,378,940 (the
"'940 Patent") by making, using and selling, among other acts, electronic bingo
devices that allegedly infringe upon at least one claim of the '940 Patent. The
'940 Patent was issued in 1983 and will expire in 2000 and is allegedly
infringed by the Company's hand-held bingo units. The plaintiff seeks a
preliminary and permanent injunction prohibiting the Company from infringement
of the '940 Patent, as well as actual damages, enhanced (treble) damages,
attorneys' fees and costs. A trial date has been set for December 7, 1998.
The Company believes that its products do not infringe any valid claim of
either the '462 Patent or the '940 Patent and intends to continue to defend
against both actions vigorously. However, 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 effect on the
Company's financial position, results of operations or cash flow.
In October 1997, two actions were commenced against the Company by Apex
Wholesale, Inc. ("Apex") in the U.S. District Court 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 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 23, 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 23,
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.
<PAGE>
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
March 23, 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Form 10-Q
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 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 the three month periods ended
January 31, 1998 and 1997, the Company's capital expenditures were approximately
$709,000 and $1.1 million, respectively, almost all of which represented
investments in bingo equipment. The Company's cost of revenues consists
primarily of the expenses of providing customer service, including labor;
service related overhead and depreciation of the bingo systems installed in
customer locations. The Company records depreciation of bingo equipment over a
five-year estimated useful life using the straight-line method of depreciation.
The Satellite Bingo Network ("TSBN") the Company's 50% owned joint
venture, which launched operations on December 1, 1997, discontinued
operations in February 1998. TSBN incurred losses principally due to a number
of large bingo halls which had agreed to participate delaying their
participation. The Company funded the operating losses of TSBN and
consequently for financial reporting purposes has recorded 100 % of the
operating losses. For the three months ended January 31, 1998, the Company
recorded a loss of $ 2.0 million in connection with writing off its
investment in and advances to TSBN. The Company does not anticipate any
significant additional costs to be recognized due to the discontinuance of
TSBN's operations.
<PAGE>
GAMETECH INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JANUARY 31, 1998 COMPARED TO QUARTER ENDED JANUARY 31, 1997
REVENUES. Revenues increased $1.5 million, or 59.1%, to $4.0 million for
the three months ended January 31, 1998 from $2.5 million for the three months
ended January 31, 1997. This increase in revenues was primarily due to a 123%
increase in the average number of units installed to 8,456 during the quarter
ended January 31, 1998 from 3,787 during the quarter ended January 31, 1997,
partially offset by an 29% 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 $1.0 million of
the revenue increase during the quarter ended January 31, 1998.
COST OF REVENUES. Cost of revenues increased $541,000 or 89.0%, to $1.1
million for the three months ended January 31, 1998, from $608,000 for the
three months ended January 31, 1997. The increase in cost of revenues was
primarily due to the greater average number of units installed. As a
percentage of revenues, cost of revenues increased to 29.0% from 24.4% in the
prior period. The increase was primarily due to increased depreciation
expense of $205,000 in the three months ended January 31, 1998 resulting from
the higher number of installed units. Personnel costs increased $159,000 in
the three months ended January 31, 1998 to enable the Company to service its
customers and to facilitate the Company's growth in installations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$424,000 or 127%, to $758,000 for the three months ended January 31, 1998 from
$334,000 for the three months ended January 31, 1997. As a percentage of
revenues, general and administrative expenses increased to 19.2% from 13.4% in
the prior period. The significant components of the $424,000 increase consist
of: higher personnel costs of $107,000 resulting from hiring seven additional
personnel to help manage the Company's growth; increased professional services
of $244,000 and increased insurance costs of $30,000.
SALES AND MARKETING. Sales and marketing expenses increased $192,000, or
68.4%, to $474,000 for the three months ended January 31, 1998 from $282,000 for
the three months ended January 31, 1997. The increase was primarily due to
larger distributor commissions of $129,000, costs associated with hiring an
additional salesperson of $22,000 and an increase in marketing expenses of
$19,000.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$64,000, or 55.2%, to $180,000 for the three months ended January 31, 1998 from
$116,000 for the three months ended January 31, 1997. As a percentage of
revenues, research and development expenses remained constant at approximately
5%.
INTEREST (EXPENSE) INCOME AND OTHER. Interest (expenses) income and
other increased $295,000, to $205,000 of income for the three months ended
January 31, 1998 from $90,000 of expense for the three months ended January 31,
1997. The increase in net interest income was due primarily to the approximate
$32.5 million of net proceeds from the Company's initial public offering (IPO)
which closed on December 1, 1997. The Company paid off its approximate $ 3.4
million in debt with proceeds from the IPO in December 1997. The Company also
paid off its approximately $3.4 million in debt with proceeds from the IPO in
December 1997, thereby decreasing its interest payment obligations.
EQUITY IN NET LOSS OF AFFILIATE. Equity in net loss of affiliate of
$2.0 million resulted from losses incurred by the TSBN joint venture for the
quarter ended January 31, 1998 and to write-off of the Company's investment in
and advances to the joint venture with the discontinuance of the TSBN
operations in February 1998. Since the Company financed this venture, it
recorded 100% of the losses rather than the 50% share which would arise from
its 50% ownership interest.
PROVISION (BENEFIT) FOR INCOME TAXES. Provision (benefit) for income taxes
decreased $581,000 to a benefit of $(156,000) for the three months ended January
31, 1998 from a provision of $425,000 for the three months ended January 31,
1997 primarily due to a net loss as a result of the loss from TSBN's
discontinuance. The Company's effective income tax rate remained constant at
approximately 40% in each quarter.
NET INCOME (LOSS). As a result of the factors discussed above, net income
decreased $ 876,000 for the three months ended January 31, 1998 from net income
of $632,000 for the three months ended January 31, 1997 to a net loss of
$244,000 for the three months.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company received net proceeds of approximately $32.5 million from
the sale of 3,270,000 shares of Common Stock in its IPO, which closed on
December 1, 1997. At January 31, 1998, the Company had cash and equivalents
of $29.5 million. The Company used $3.4 million of the net proceeds to repay
all outstanding long-term debt and short-term borrowings in December 1997.
The Company has primarily used its cash flow to purchase additional
bingo units to install in customers' bingo halls and to meet its ordinary
operating expenses. GameTech currently has with Wells Fargo Bank, N.A.
("Wells Fargo") a $3 million line of credit (the "Revolving Credit
Facility"), which has an interest rate based on the prime rate plus 0.5% or
LIBOR plus 2.5%, at the Company's option on which the outstanding balance at
January 31, 1998 was zero. The principal sources of the Company's liquidity
prior to the IPO were: cash flow from operations; borrowing under the
Revolving Credit Facility and a term loan with Wells Fargo (the "Term Loan"),
which was repaid with a portion of the net proceeds for the IPO; the issuance
to officers of promissory notes payable convertible into Common Stock and
sales of Common Stock. In addition on September 2, 1997 the Company issued
and sold 400,000 shares of Series A Preferred Stock for net proceeds of $2.8
million. All outstanding shares of Series A Preferred Stock were converted
into Common Stock at the close of the IPO.
The Revolving Credit Facility expires on April 11, 1998. The Company
repaid borrowings under the Revolving Credit Facility with a portion of the
net proceeds the IPO. The Company expects to maintain availability under the
Revolving Credit Facility and does not anticipate that it will have
difficulty refinancing or replacing the Revolving Credit Facility should it
so desire. Covenants under this credit facility restrict payment of cash
dividends and interest to holders of convertible notes without prior consent
of Wells Fargo.
Operating activities provided $891,000 of cash for the three months
ended January 31, 1998 compared to $1.0 million for the three months ended
January 31, 1997. The decrease was due to reduced earnings of $876,000,
principally related to a $2.0 million charge to earnings from the
discontinuance of operations and write-off of its investment in TSBN,
partially offset by net increases in accounts receivable and deposits and
decreases in accrued payroll and income taxes payable.
Investing activities used $2.1 million in the three months ended January
31,1998 compared to $1.1 million in the three months ended January 31, 1997. The
increase was due advances of $1.5 million to TSBN, partially offset by lower
capital expenditure of $400,000.
Financing activities provided cash of $29.8 million in the three months
ended January 31, 1998 compared to $110,000 for the three months ended January
31, 1997. The $29.8 million represents the net proceeds from the IPO less the
repayment of the Company's debt under the Revolving Credit Facility and the
Term Loan.
The Company believes that cash flow from operations and the net proceeds to
the Company from the IPO, together with funds available under the Revolving
Credit Facility, will be sufficient to support its operations and provide for
budgeted capital expenditures and liquidity requirements for the next twelve
months.
<PAGE>
ITEM 3. 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 31, 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 form 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.
<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
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1996, a patent infringement action and demand for jury trial
was commenced against the Company and five other defendants by FortuNet, Inc. in
the U.S. District Court, Southern District of California. The other defendants
were Advanced Gaming Technology, Inc., American Video Systems, FortuNet Canada,
Inc., Network Gaming, Inc. (f/k/a/ Artificial Intelligence), and Multimedia
Games, Inc. The complaint alleges that the Company, among others, has
infringed, actively induced or contributed to the infringement of U.S. Patent
No. 4,624,462 (the "'462 Patent") by making, using and selling, among other
acts, electronic bingo devices that allegedly infringe upon at least one claim
of the '462 Patent. The '462 Patent was issued in 1986 and will expire in 2001
and is allegedly infringed by the Company's fixed-base bingo units. The
plaintiff seeks a preliminary and permanent injunction prohibiting the Company
from infringement of the '462 Patent, as well as actual damages, enhanced
(treble) damages, attorneys' fees and any other costs. The Company, in July
1997, won its motion for transfer and severance in this action. The U.S.
District Court, for the District of Arizona, has set a pre-trial conference date
of February 22, 1999 at which time a trial date will be chosen.
In March 1996, a patent infringement action and demand for jury trial was
commenced against the Company by Bingo Technology Corporation, Inc. (formerly
Bingo Card Minder Corporation), in the U.S. District Court, Northern District of
California. The complaint alleges that the Company has infringed, actively
induced or contributed to the infringement of U.S. Patent No. 4,378,940 (the
"'940 Patent") by making, using and selling, among other acts, electronic bingo
devices that allegedly infringe upon at least one claim of the '940 Patent. The
'940 Patent was issued in 1983 and will expire in 2000 and is allegedly
infringed by the Company's hand-held bingo units. The plaintiff seeks a
preliminary and permanent injunction prohibiting the Company from infringement
of the '940 Patent, as well as actual damages, enhanced (treble) damages,
attorneys' fees and costs. A trial date has been set for December 7, 1998.
The Company believes that its products do not infringe any valid claim of
either the '462 Patent or the '940 Patent and intends to continue to defend
against both actions vigorously. However, 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 effect on the
Company's financial position, results of operations or cash flow.
In October 1997, two actions were commenced against the Company by Apex
Wholesale, Inc. ("Apex") in the U.S. District Court 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 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 23, 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 23,
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.
<PAGE>
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
March 23, 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 2. Changes in Securities and Use of Proceeds.
SALES OF UNREGISTERED SECURITIES DURING THE THREE MONTHS ENDED
JANUARY 31, 1998
On various dates during the three months ended January 31, 1998, Company
employees exercised options granted in partial compensation of their services
to purchase an aggregate of 16,250 shares of Common Stock in private sales for
an aggregate consideration of $162.50 in reliance upon Section 4(2) of the
Securities Act as a transaction not involving a public offering.
USE OF PROCEEDS
On November 24, 1997, the Securities and Exchange commission (the
"Commission") declared the Company's Registration Statement on Form S-1 (the
"Registration Statement") effective. The Commission file number assigned to
the Registration Statement is 333-34967. The Company filed the Registration
Statement in connection with the offering (the "Offering") of 3,710,000
shares of its Common Stock.
From the effective date of the Registration Statement to the end of the
reporting period the Company has used none of net offering proceeds for
construction of plant, building and facilities; for the purchase of real
estate; for the acquisition of other businesses; or for working capital. The
Company has used $3.4 million for the repayment of indebtedness and $29.2
million for temporary investments in short-term securities of the net
offering proceeds.
None of these payments have been direct or indirect payments to
directors, officers or other affiliates of the Company.
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
See Attached Exhibit Index
b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended
January 31, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------- Chief Financial Officer/Treasurer -----------
John J. Paulson (Authorized Officer and
Principal Financial Officer)
<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)
27.1 Financial Data Schedule (2)
- ---------------
(1) Incorporated Herein by Reference to Registration Statement No. 333-34967
(2) File with this Report
<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 JANUARY 31, 1998
AND THE STATEMENT OF OPERATIONS OF THE COMPANY FOR THE THREE MONTHS ENDED
JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> OCT-31-1998
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