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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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
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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
incorporation or organization) 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:
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<S> <C>
Title of each class Name of each exchange on which registered
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NONE NOT APPLICABLE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of class)
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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 18, 1999, 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 the Nasdaq National Market on such date, was
$13,910,529.
The number of shares of the registrant's Common Stock outstanding as of
January 18, 1999 was 9,369,076
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of GameTech
International, Inc. to be used in connection with the 1999 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.
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PART I
ITEM 1. BUSINESS
GENERAL
GameTech International, Inc., a Delaware corporation, ("GameTech" or the
"Company"), 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. GameTech had more than 4,800 fixed-base units and 8,400 hand-held
units operating in Indian and charity bingo halls at October 31, 1998. 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 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.
The Company believes its experienced management team, quality electronic bingo
systems and its reputation for superior customer service and support enable it
to compete effectively in the highly competitive bingo industry.
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 (excluding Arkansas, Hawaii, Tennessee and Utah) and the
District of Columbia. As of October 31, 1998, electronic bingo systems were
permitted for use by charitable organizations in 22 states, and the Company had
units in operation in charitable bingo halls in eight 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,
1998, bingo was played on tribal Indian lands in 28 states and the Company had
units in operation in Indian bingo halls in ten of those states.
RECENT DEVELOPMENTS
On December 1, 1997, the Company completed its 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, yielding net proceeds of approximately $32.5
million. The Common Stock trades on the NASDAQ National Market System under the
symbol "GMTC."
On January 12, 1999, GameTech began a 30-day evaluation of its hand held
units and the fixed base system utilizing the Company's newly developed Diamond
Plus software, featuring picture-in-picture technology, at Texas Station Casino
in Las Vegas, Nevada. Upon successful completion of this evaluation, GameTech
will be authorized to market its products to casino bingo operations in Nevada.
On January 18, 1999, GameTech began a 90-day evaluation of the hand held
units in two separate bingo halls in the Province of British Columbia. GameTech
is one of four vendors selected for this 90-day evaluation.
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BUSINESS STRATEGY
The Company's growth strategies are to increase its 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 customer
service programs enable it to maintain a high level of customer loyalty and
satisfaction, which translates into 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. The
Company believes that its dedication to superior customer service has
contributed to the rapid acceptance of GameTech's products and its 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. The Company 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 presents a significant growth
opportunity for GameTech increasing its base of customers in its existing
markets.
EXPAND INTO NEW MARKETS DOMESTICALLY. As of October 31, 1998, GameTech had
charitable bingo hall customers in eight of the 22 states which currently allow
charitable organizations to conduct electronic bingo, and is actively pursuing
entry into four additional states. In addition, GameTech had Indian bingo hall
customers in only ten of the 28 states where bingo is currently played on Indian
lands and is actively pursuing Indian bingo hall customers in four additional
states. As part of its strategy to facilitate the expansion of 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 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, at the request
of the British Columbia Lottery Corporation, is participating in a test of the
hand-held bingo units in selected charitable bingo halls in the Province of
British Columbia. GameTech is also evaluating opportunities to expand into other
provinces in Canada and other 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 July 1998, the Company introduced its
Diamond operating system, which provides enhanced graphics to the fixed base
units. At the same time the Company introduced the Diamond Plus fixed base unit,
which incorporates picture-in-picture technology that allows bingo players to
watch television while playing bingo.
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
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synergies. The Company also intends to pursue joint operating agreements or
joint ventures for additional bingo opportunities.
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 its competitors.
The Company currently markets two types of electronic bingo systems, a
fixed-base bingo system and 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
1,000,000 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 a 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.
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. In July 1998, the Company introduced its Diamond operating system
which provides enhanced graphics to the fixed base units and a point-of-sale
system which allows vending of both fixed-base and hand-held electronic bingo
units, as well as the sale of paper bingo cards, accessories and refreshments.
The Company is currently developing a back office management system which
includes, but is not limited to, inventory control and player tracking.
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 bingo hall
operators and 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.
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
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- 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 seven people at October
31, 1998. Sales personnel earn base salaries plus incentive commissions based on
the revenues generated by the units they place. Management estimates that
approximately 40% of GameTech's units installed at October 31, 1998 were placed
by GameTech's in-house sales force. In addition to its sales force, the Company
has exclusive distributors in California, Mississippi, Nevada, Oklahoma, Texas,
and the Mideast section of the United States whose compensation is based on a
percentage of the sales generated for the Company from their respective
territories. Distributorships are generally granted pursuant to three-year
agreements, and 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 charities licensed to operate bingo games in the United
States. At October 31, 1998, the Company had approximately 13,200 installed
units at 160 locations serving approximately 440 customers, including many
charitable bingo halls where the Company has multiple customers. Revenues were
split approximately 58% from fixed-base units and 42% from hand-held units. For
the year ended October 31, 1998, approximately 30% of the Company's revenues
were derived from units installed in Indian bingo halls and the remaining 70%
were from units installed in charity bingo halls. The bingo halls in which the
Company had fixed-base and hand-held units installed at October 31, 1998 were
located in the following sixteen states: Arizona, California, Connecticut,
Georgia, Kansas, Kentucky, Minnesota, Mississippi, Montana, New Mexico, Ohio,
Oklahoma, Oregon, Texas, Washington and Wisconsin.
As of October 31, 1998, GameTech was operating in charitable bingo halls in
eight of the 22 states where electronic bingo is currently permitted in
charitable bingo halls, and in Indian bingo halls in ten of the 28 states where
bingo is currently played in Indian bingo halls. Further, GameTech is licensed
to serve charitable bingo halls in Alaska, Pennsylvania and Virginia and is
actively marketing to Indian bingo halls in Idaho, Iowa, Florida, and New York.
The Company is actively pursuing additional business in other states and Canada.
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 20%) of the gross revenues derived from GameTech's electronic
bingo systems, or 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 and assembled at its facility
in Arizona. 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.
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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 Magic, Bingo Technology Corporation,
Inc., Cadillac Bingo, Easy Bingo, FortuNet, Inc. and Stuart Entertainment, Inc.,
and also competes with companies offering traditional paper bingo cards. 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 1998, the Company spent $638,000 on Company-sponsored research and
development activities, as compared to $547,000 in fiscal 1997 and $477,000 in
fiscal 1996.
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 the licensing 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 National Indian Gaming Commission ("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 No assurance can be given that the Company would be able to
make any such modifications in the event of such a classification.
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 22 states, including Alabama, Alaska, Arizona,
California, Georgia, Kansas, Kentucky, Maine, Massachusetts, Mississippi,
Nebraska, Nevada, New York, Ohio, Oregon, Pennsylvania, Rhode Island, 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 timely, it at all, and if obtained, will not be subsequently
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
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regulatory authority and the Company fails to seek or does not receive the
necessary license or finding of suitability, the Company may 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, 1998, the Company had 83 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 12,100-square-foot
headquarters site in Tempe, Arizona under two leases which expire on September
18, 2001 and May 31, 2002, respectively, and a 6,500-square-foot regional center
in Austin, Texas under a lease which expires on November 30, 2002. Monthly rent
for these facilities is approximately $3,880, $2,925 and $3,680, respectively.
Assembly of fixed-base systems and testing and repair of all the Company's
products occurs at its Tempe facility. 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. The Company pays no
rent to these employees, but pays certain overhead costs related to, and
believes the facilities are adequate for, the research and development carried
on at such locations.
ITEM 3. LEGAL PROCEEDINGS
In March 1996, a patent infringement action and demand for jury trial was
commenced against the Company by Bingo Technology Corporation, Inc. (formerly
Bingo Card Minder Corporation), in the U.S. District Court, Northern District of
California. The complaint alleges that the Company has infringed, actively
induced or contributed to the infringement of U.S. Patent No. 4,378,940 (the
"'940 Patent") by making, using and selling, among other acts, electronic bingo
devices that allegedly infringe upon at least one claim of the '940 Patent. The
'940 Patent was issued in 1983 and will expire in 2000 and is allegedly
infringed by the Company's hand-held bingo units. The plaintiff seeks a
permanent injunction prohibiting the Company from infringement of the '940
Patent, as well as actual damages, enhanced (treble) damages, attorneys' fees
and costs. A stay of all proceedings is in effect until February 1, 1999.
The Company believes that its products do not infringe any valid claim of
the '940 Patent and intends to continue to defend against this action
vigorously. However, there can be no assurance that favorable outcomes will be
obtained or that if the action were resolved in favor of the plaintiff, such
results would not have a material adverse effect on the Company's financial
position, results of operations or cash flow.
In October 1997, Apex Wholesale, Inc. ("Apex") commenced two actions against
the Company in the U.S. District Court, Southern District of California. The
Company formerly purchased its hand-held units manufactured by Tidalpower
Technologies, Inc. ("Tidalpower") through Apex but terminated such arrangement
in September 1996 and now purchases hand-held units directly from Tidalpower.
The 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 sought
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 alleged 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 sought general damages,
8
<PAGE>
injunctive relief, exemplary and punitive damages, attorney's fees, and any
other costs the court deemed proper.
In the second action, Apex sought to avoid an alleged fraudulent transfer.
Apex alleged that the Company, as well as Tidalpower, Green Dollars Industrial
Ltd., Leo Lee, Doris Tsao, and Morgan Chen conspired to avoid a right to attach
order and default judgment entered in favor of Apex against Green Dollars
Industrial Ltd. Apex sought 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
deemed proper.
Entries of dismissal with prejudice of both Apex actions were entered by the
Court on December 8, 1998.
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. 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. Trial is scheduled for May 12, 1999.
On February 13, 1998, a purported securities class action complaint, WEISS
V. GAMETECH INTERNATIONAL, INC., No. 98-0268 PHX-ROS, was filed in the United
States District Court for the District of Arizona against that defendants
violated Section 11 of the Securities Act of 1933 (the "Securities Act") by
making false, misleading statements and omissions in GameTech's Form S-1
Registration Statement in connection with the Company's public offering on
November 25, 1997. Two other complaints making nearly identical factual
allegations have been consolidated with the WEISS action for all purposes as IN
RE GAMETECH, INC. SECURITIES LITIGATION, Master File No. Civ. 98-0268 PHX-ROS.
On September 21, 1998, plaintiffs filed a consolidated complaint, alleging a
claim against the Company and the individual defendants under Section 11 of the
Securities Act and a claim against the individual defendants under Section 15 of
the Securities Act, based upon the conduct alleged in the original complaints.
Plaintiffs seek an unspecified amount of damages. On July 17, 1998, the Court
appointed "lead plaintiff" and co-lead counsel.
On November 5, 1998, defendants moved to dismiss the complaint. Defendants'
motion to dismiss is scheduled to be heard by the Court on May 24, 1999. There
has been no discovery to date and no trial is scheduled in this action.
Defendants believe that there is no merit to plaintiffs' allegations and intend
to defend the action vigorously.
On December 7, 1998, GameTech intervened in Cause No. 97-11164, pending in
the 160(th) District Court in Dallas County, Texas. The lawsuit was filed by
Trend Gaming Systems, LLC, the Company's exclusive Texas distributor, against
four charities and two individuals for breach of contract and tortious
interference with contract. GameTech alleges that it is a third-party
beneficiary of the contract between Trend and the four charities. Actual damages
are estimated at $126,000, plus attorneys' fees.
The charities have filed a counter claim for damages, alleging that
misrepresentations were made in connection with the original contract, and
seeking to be reimbursed for their attorneys' fees. The charities and Trend
filed cross motions for summary judgment. Both motions were denied by the Court.
The charities have moved to strike the Company's plea in intervention but the
matter has not been set for hearing.
9
<PAGE>
The case is set for jury trial on February 22, 1999.
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
1998 fiscal year.
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 System under the symbol "GMTC." The high and low prices of the Company's
Common Stock from December 1, 1997 (the date of the Company's initial public
offering) through October 31, 1998 is set forth below.
<TABLE>
<CAPTION>
GAMETECH INTERNATIONAL,
INC.
COMMON STOCK
------------------------
HIGH LOW
----------- -----
<S> <C> <C>
FISCAL YEAR ENDED OCTOBER 31, 1998
First Quarter......................................... 13 4 7/16
Second Quarter........................................ 7 7/8 3 1/2
Third Quarter......................................... 4 5/8 3 1/8
Fourth Quarter........................................ 4 3/16 1 3/8
</TABLE>
As of January 15, 1999, there were 128 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 of the Company 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 $10 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 various dates between November 1, 1997 and October 31, 1998, Company
employees exercised options granted in partial compensation for their services
to purchase an aggregate of 295,384 shares of Common Stock in private sales for
an aggregate consideration of $138,479 in reliance upon Section 4(2) of the
Securities Act as a transaction not involving a 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, File
number 333-34967, (the "Registration Statement") effective. 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 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
10
<PAGE>
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 commenced on November 25, 1997. 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 during the current
reporting period. Expenses incurred by the Company were: $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 reimbursement of expenses. Net offering proceeds to the Company after
deducting these expenses were approximately $32,500,000.
From the effective date of the Registration Statement to the end of the
reporting period the Company has used none of the net offering proceeds for
construction of plant, building and facilities; for the purchase of real estate;
or the acquisition of other businesses. The Company has used $3.4 million for
the repayment of indebtedness and $2.8 million for the repurchase of Common
Stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected statement of operations data for the years ended October 31,
1996, 1997 and 1998 and the selected balance sheet data set forth below at
October 31, 1997 and 1998 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 year
ended October 31, 1995 and the selected balance sheet data set forth below at
October 31, 1994, 1995 and 1996 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 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................................... $ 599 $ 3,350 $ 5,364 $ 12,578 $ 16,177
Cost of revenues............................................... 253 712 1,615 3,249 5,327
--------- --------- --------- --------- ---------
Gross profit................................................... 346 2,638 3,749 9,329 10,850
Operating expenses:
General and administrative................................... 220 693 1,020 1,993 3,646
Sales and marketing.......................................... 149 552 613 1,419 2,564
Research and development..................................... 94 329 477 547 638
--------- --------- --------- --------- ---------
Total operating expenses................................... 463 1,574 2,110 3,959 6,848
--------- --------- --------- --------- ---------
Income (loss) from operations.................................. (117) 1,064 1,639 5,370 4,002
Interest income (expense) and other............................ (58) (194) (275) (450) 1,368
Equity in net loss of affiliate................................ -- -- -- (179) (2,000)
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes................ (175) 870 1,364 4,741 3,370
Provision for income taxes..................................... -- 278 559 1,880 1,300
--------- --------- --------- --------- ---------
Net income (loss).............................................. $ (175) $ 592 $ 805 $ 2,861 $ 2,070
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted net income (loss) per share(b)......................... $ (0.12) $ 0.12 $ 0.13 $ 0.43 $ 0.20
Shares used in the calculation of diluted net income (loss) per
share(b) (000s).............................................. 936 5,781 7,071 6,909 10,577
Diluted net income (loss) per share(d)......................... (0.03) 0.08 0.09 0.29 0.20
BALANCE SHEET DATA:
Cash, cash equivalents and short term investments.............. $ 25 $ 37 $ 166 $ 1,020 $ 25,587
Working capital (deficit)...................................... (76) (37) (1,302) (422) 27,259
Total assets................................................... 1,330 2,783 5,794 13,251 42,477
Total debt(c).................................................. 1,464 1,306 3,398 4,942 853
Total stockholders' equity (deficit)........................... (175) 980 1,785 3,976 40,322
</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 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 attributes its growth to the experience of
its management team, and its ability to provide its customers with a combination
of quality electronic bingo units and superior
12
<PAGE>
customer service and support. The Company's recent growth is primarily
attributable to an increase in its installed base of bingo units resulting from
the Company's entry into the Texas market in August 1996 and the 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 fiscal 1996, 1997 and 1998, the
Company's capital expenditures were approximately $3.0 million, $6.1 million and
$5.8 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.
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.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------------------------------
1994(a) 1995 1996 1997 1998
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................................................... 42.3 21.2 30.1 25.8 32.9
----- --------- --------- --------- ---------
Gross profit.......................................................... 57.7 78.8 69.9 74.2 67.1
Operating expenses:
General and administrative.......................................... 36.8 20.7 19.0 15.9 22.5
Sales and marketing................................................. 24.8 16.5 11.5 11.3 15.9
Research and development............................................ 15.7 9.8 8.9 4.3 3.9
----- --------- --------- --------- ---------
Total operating expenses.......................................... 77.3 47.0 39.4 31.5 42.3
----- --------- --------- --------- ---------
Income (loss) from operations......................................... (19.6) 31.8 30.5 42.7 24.8
Interest income (expense) and other................................... (9.7) (5.8) (5.1) (3.6) 8.4
Equity in net loss of affiliate....................................... -- -- -- (1.4) (12.4)
----- --------- --------- --------- ---------
Income (loss) before provision for income taxes....................... (29.3) 26.0 25.4 37.7 20.8
Provision for income taxes............................................ -- 8.3 10.4 15.0 8.0
----- --------- --------- --------- ---------
Net income (loss)..................................................... (29.3)% 17.7% 15.0% 22.7% 12.8%
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
</TABLE>
- ------------------------
(a) Represents the period from inception (April 18, 1994) through October 31,
1994. Actual operations began June 1, 1994.
YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED OCTOBER 31, 1997
REVENUES. Revenues increased $3.6 million, or 28.6%, to $16.2 million for
the year ended October 31, 1998 from $12.6 million for the year ended October
31, 1997. This increase in revenues was primarily due to a 104% increase in the
average number of units installed to 9,712 during the year ended
13
<PAGE>
October 31, 1998 from 4,758 during the year ended October 31, 1997. The impact
of the large increase in the number of units was partially offset by a
competitive price adjustment made in the mid-year and the higher ratio of hand
held units, which generate lower revenue per unit, versus fixed base units in
the installed base.
COST OF REVENUES. Cost of revenues increased $2.1 million, or 65.6%, to
$5.3 million for the year ended October 31, 1998, from $3.2 million for the year
ended October 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 32.9% from 25.8%. The increase was primarily due to
increased depreciation expense of $860,000 resulting from the higher number of
installed units and increased personnel costs of $650,000 due to the hiring of
additional personnel to enable the Company to service its customers and
facilitate the Company's growth in installations. The increase in cost of
revenues as a percent of revenue was due primarily to the competitive price
adjustment made in mid-year and costs associated with expansion into new
geographic territories that were not immediately offset by increased revenue,
particularly with respect to route operations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.6 million, or 80.0%, to $3.6 million for the year ended October 31, 1998,
from $2.0 million for the year ended October 31, 1997. The primary components of
the $1.6 million increase consist of: higher personnel costs of $483,000
resulting from hiring additional personnel to help manage the Company's growth
and increased legal fees of $839,000. As a percentage of revenues, general and
administrative expenses increased to 22.5% from 15.9% in the prior period.
SALES AND MARKETING. Sales and marketing expenses increased $1.2 million,
or 85.7%, to $2.6 million for the year ended October 31, 1998 from $1.4 million
for the year ended October 31, 1997. The increase was primarily due to larger
distributor commissions of $493,000 and higher personnel costs of $323,000
resulting from hiring additional salespersons to help achieve the increased
installed units and revenue.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$91,000, or 16.6%, to $638,000 for the year ended October 31, 1998, from
$547,000 for the year ended October 31, 1997. As a percentage of revenues,
research and development expenses decreased to 3.9% from 4.3% in the prior
period.
INTEREST INCOME (EXPENSE). Net interest income increased $1.8 million to
$1.4 million of income for the year ended October 31, 1998 from $450,000 of
expense for the year ended October 31, 1997. The increase in net interest income
was primarily due to interest on the net proceeds from the Company's initial
public offering (IPO) on December 1, 1997 which was invested in interest bearing
investments during the year ended October 31, 1998 compared to $4.9 million in
average debt outstanding for the year ended October 31, 1997. The Company paid
off approximately $3.4 million in debt with proceeds from the IPO in December
1997.
EQUITY IN NET LOSS OF AFFILIATE. Equity in net loss of affiliate of $2.0
million resulted from losses incurred by The Satellite Bingo Network ("TSBN")
joint venture for the year ended October 31, 1998 and a write off of the
Company's investment and advances to the joint venture with the discontinuance
of the TSBN operation in February 1998. Since the Company financed this venture,
it recorded 100% of the losses rather than its 50% ownership percentage.
PROVISION FOR INCOME TAXES. Provision for income taxes decreased $580,000,
or 30.5%, to $1.3 million for the year ended October 31, 1998 from $1.9 million
for the year ended October 31, 1997, primarily due to an increase in pre-tax
income. The Company's effective income tax rate remained at approximately 39% in
each year.
NET INCOME. As a result of the factors discussed above, net income
decreased $791,000, or 27.3%, to $2.1 million for the year ended October 31,
1998 from $2.9 million for the year ended October 31, 1997.
14
<PAGE>
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. This increase was
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.
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.
15
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company received net proceeds of approximately $32.5 million from the
sale of 3,270,000 shares of its Common Stock in its IPO, which closed on
December 1, 1997. At October 31, 1998, the Company had cash and equivalents and
short-term investments totaling $25.6 million. The Company used approximately
$3.4 million of the net proceeds from the IPO to pay off long-term debt and
short-term borrowings in December 1997.
The Company has primarily used its cash flow to purchase additional bingo
units to install in customers' bingo halls and to meet its ordinary operating
expenses. GameTech currently has a $10.0 million line of credit (the "Revolving
Credit Facility") with Wells Fargo Bank, N.A. ("Wells Fargo"), which has an
interest rate based on the prime rate or LIBOR plus 2.0%, at the Company's
option, on which there was no outstanding balance at October 31, 1998. The
principal sources of the Company's liquidity prior to the IPO were; cash flow
from operations; borrowing under the Revolving Credit Facility and a term loan
with Wells Fargo (the "Term Loan"), which was repaid with a portion of the net
proceeds from the IPO; the issuance to officers of promissory notes convertible
into Common Stock and sales of Common Stock. In addition, on September 2, 1997,
the Company issued and sold 400,000 shares of Series A Preferred Stock for net
proceed of $2.8 million. All outstanding shares of Series A Preferred Stock were
converted into Common Stock prior to the close of the IPO. All convertible
promissory notes payable to officers were converted into Common Stock on
November 24, 1997.
The Revolving Credit Facility expires on March 31, 2000. Covenants under
this credit facility restrict the Company's payment of cash dividends, as well
as other customary covenants. The Revolving Credit Facility is secured by
substantially all of the Company's assets.
Operating activities provided $5.3 million of cash in the year ended October
31, 1998 compared to $5.0 million in the year ended October 31, 1997. The $5.3
million consists primarily of $2.1 million of net income, adjusted for $2.6
million of depreciation and amortization and a $2.0 million loss from the
discontinuance of TSBN's operations offset by changes to operating assets and
liabilities. In 1997, the $5.0 million provided by operating activities
consisted primarily of net income of $2.9 million, adjusted for depreciation and
amortization of $1.4 million.
Investing activities used $11.5 million of cash in the year ended October
31, 1998, compared to a use of $7.0 million of cash in the year ended October
31,1997. The increase was primarily due to $4.1 million of short-term
investments and an increase in the advances to a joint venture of $768,000. In
1997, investing activities used cash of $7.0 million as compared to $3.1million
in 1996. The increase was primarily due to a $3.1million increase in capital
expenditures for bingo units and other fixed assets and investments in and
advances to a joint venture of $705,000.
Financing activities provided cash of $26.7 million in the year ended
October 31, 1998, compared to $2.9 million in the year ended October 31,1997.
The increase was due primarily to the net proceeds from the Company's IPO of
$32.5 million, less approximately $3.4 million used to pay off outstanding long-
and short-term debt. The Company also used $2.8 million of cash to repurchase
755,400 shares of Common Stock. In 1997, financing activities provided cash of
$2.9 million as compared to $1.9 million in 1995. The increase resulted
primarily from the sale of 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.
The Company believes that cash flow from operations and the net proceeds to
the Company from its IPO, 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
16
<PAGE>
requirements through fiscal 1999. 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 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 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 financing. 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 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. The Company has changed the method used to compute earnings per share and
restated all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options are excluded.
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 business
results of operations or financial condition.
YEAR 2000 RISKS
Year 2000 compliance concerns the ability of certain computerized
information systems to properly recognize date-sensitive information as the year
2000 approaches. Systems that do not recognize such information could generate
erroneous data or cause systems to fail. The Company is at risk both for its own
Year 2000 compliance and for the Year 2000 compliance of those with whom it does
business.
The Year 2000 compliance assessments of the Company's information and
operating systems are in progress. The Company is also investigating the Year
2000 compliance efforts of suppliers and other third party entities with whom
the Company does business and has material relationships, with the goal of
preventing the Company's operations from being adversely affected by significant
compliance problems of others. The Company intends that all material Year 2000
issues identified will be corrected by the end of 1999. The total amount of
costs to be incurred by the Company to address Year 2000 issues cannot be
reasonably estimated at this time. While the actual effects of the Year 2000
issue on the Company may be different from the current assessment, the Company
does not believe that the Year 2000 issues will have a material effect on its
business, operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's Revolving Credit Facility with Wells Fargo is a $10 million
line of credit with and interest rate based on the prime rate of LIBOR plus
2.0%, at the Company's option. The line of credit expires on March 31, 2000.
Because the interest rate on the Revolving Credit Facility is variable, the
Company's cash flow may be affected by increases in interest rates, in that the
Company would be required to pay more interest in the event that both the prime
and LIBOR interest rates increase. Management does not, however, believe that
any risk inherent in the variable-rate nature of the loan is likely to have a
material effect on the Company's interest expense or available cash. The Company
currently maintains a zero balance on the Revolving Credit Facility. Even if the
Company were to draw down on the line prior to its expiration and an
17
<PAGE>
unpredicted increase in both alternate rates occurred, it would not be likely to
have a material effect on the Company's interest expense or available cash.
SENSITIVITY ANALYSIS. Assuming the Company had a $2 million balance
outstanding as of October 31, 1998, the rate of interest calculated using the
prime rate option would be 8.5%. The Company's monthly interest payment, if the
rate stayed constant, would be $14,167. If the prime rate rose to 13%, which
assumes an unusually large increase, the Company's monthly payment would be
$21,667. A more likely increase of 1 or 2%, given the recent trend of decreasing
or relatively low interest rates, would result in a monthly payment of $15,833
or $17,500, respectively. The Company does not believe the risk resulting from
such fluctuations is material or that the payment required would have a material
effect on cash flow.
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.
All 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 21.
(d) Financial Statement Schedules
See Item 14 (a) (2) above.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This document includes various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events. Statements
containing expressions such as "believes," "anticipates" or "expects" used in
the Company's press releases and periodic reports on Forms 10-K and 10-Q filed
with the Commission are intended to identify forward-looking statements. All
forward-looking statements involve risks and uncertainties. Although the Company
believes its expectations are based upon reasonable assumptions within the
bounds of its knowledge of its
18
<PAGE>
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; or 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.
19
<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.
<TABLE>
<S> <C> <C>
GAMETECH INTERNATIONAL, INC.
By:
-----------------------------------------
</TABLE>
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
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
- ------------------------------ Chairman of the Board
Richard T. Fedor
- ------------------------------ Chief Executive Officer
Todd S. Myhre and Director
- ------------------------------ Chief Financial Officer
John J. Paulson
Vice President--Business
- ------------------------------ Development
Gary R. Held and Director
- ------------------------------ Director
Clarence H. Thiesen
- ------------------------------ Director
Douglas M. Hayes
- ------------------------------ Director
Frederick C. Lane
</TABLE>
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S> <C>
23.1 Consent of Ernst & Young LLP, independent auditors
27.1 Financial Data Schedule
</TABLE>
21
<PAGE>
GAMETECH INTERNATIONAL, INC.
FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent
Auditors................................... F-2
Financial Statements
Balance Sheets............................... F-3
Statements of Operations..................... F-4
Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity... F-5
Statements of Cash Flows..................... F-6
Notes to Financial Statements................ F-7
</TABLE>
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, 1997 and 1998 and the related statements of operations,
redeemable convertible preferred stock and stockholders' equity and cash flows
for each of the three years in the period ended October 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 for 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, 1997 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1998, in
conformity with generally accepted accounting principles.
December 19, 1998
F-2
<PAGE>
GAMETECH INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and equivalents............................................................. $ 1,019,524 $ 21,484,556
Short-term investments........................................................... -- 4,102,500
Accounts receivable, less allowance for doubtful accounts of $164,000 in 1997 and
$49,000 in 1998................................................................ 1,151,108 1,676,960
Deposits......................................................................... 108,042 166,572
Prepaid expenses and other current assets........................................ 48,702 292,072
Deferred income taxes............................................................ 196,325 610,157
------------- -------------
Total current assets............................................................... 2,523,701 28,332,817
Bingo units, furniture and equipment, net.......................................... 9,024,887 12,495,557
Intangibles, less accumulated amortization of $238,000 in 1997 and $376,000 in
1998............................................................................. 367,398 454,525
Investment in and advances to affiliate............................................ 526,365 --
Other assets, net.................................................................. 808,306 1,194,511
------------- -------------
Total assets....................................................................... $ 13,250,657 $ 42,477,410
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term borrowings from bank.................................................. 550,000 --
Accounts payable................................................................. 402,772 324,550
Accrued payroll and related obligations.......................................... 324,716 257,946
Other accrued liabilities........................................................ 235,385 78,478
Income taxes payable............................................................. 166,534 74,403
Current portion of long-term debt................................................ 1,266,523 338,000
------------- -------------
Total current liabilities.......................................................... 2,945,930 1,073,377
Convertible notes payable to officers, including accrued interest.................. 1,526,001 --
Long-term debt..................................................................... 1,599,658 514,500
Deferred income taxes.............................................................. 368,412 567,418
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par value; 5,000,000 shares
authorized; 400,000 shares issued and outstanding in 1997; 0 shares issued and
outstanding in 1998; 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; 4,621,491 shares
issued and outstanding in 1997 and 10,126,226 in 1998............................ 4,622 10,126
Capital in excess of par value..................................................... 35,639 37,116,880
Retained earnings.................................................................. 3,935,397 6,005,483
Less: treasury stock, 0 shares in 1997 and 755,400 shares in 1998.................. -- (2,810,374)
------------- -------------
Total stockholders' equity......................................................... 3,975,658 40,322,115
------------- -------------
Total liabilities and stockholders' equity......................................... $ 13,250,657 $ 42,477,410
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Revenues............................................... $5,364,017 $12,577,821 $16,177,307
Operating expenses:
Cost of revenues..................................... 1,614,562 3,248,657 5,327,060
General and administrative........................... 1,019,919 1,993,064 3,645,920
Sales and marketing.................................. 613,503 1,418,676 2,564,140
Research and development............................. 477,482 546,860 638,490
--------- ---------- ----------
3,725,466 7,207,257 12,175,610
--------- ---------- ----------
Income from operations................................. 1,638,551 5,370,564 4,001,697
Interest (expense) income, net......................... (279,032) (478,387) 1,368,389
Equity interest in net loss of affiliate............... -- (178,815) (2,000,000)
Other income, net...................................... 4,430 27,696 --
--------- ---------- ----------
Income before provision for income taxes............... 1,363,949 4,741,058 3,370,086
Provision for income taxes............................. 559,217 1,880,000 1,300,000
--------- ---------- ----------
Net income............................................. $ 804,732 $2,861,058 $2,070,086
--------- ---------- ----------
--------- ---------- ----------
Basic net income per share............................. $ .16 $ .64 $ .22
--------- ---------- ----------
--------- ---------- ----------
Diluted net income per share........................... $ .13 $ .43 $ .20
--------- ---------- ----------
--------- ---------- ----------
Shares used in the calculation of net income per share:
Basic................................................ 5,117,517 4,463,023 9,360,955
Diluted.............................................. 7,071,032 6,908,643 10,577,030
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDER'S EQUITY
REDEEMABLE ------------------------------------------------------------------
CONVERTIBLE
PREFERRED STOCK COMMON STOCK CAPITAL IN TREASURY STOCK
-------------------- -------------------- EXCESS OF RETAINED ---------------------
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS SHARES AMOUNT
--------- --------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at October 31, 1995.... -- $ -- 5,109,875 $ 5,110 $ 557,865 $ 416,914 -- $ --
Issuance of common stock upon
exercise of stock options at
$.01 per share................ -- -- 71,700 72 645 -- -- --
Net income...................... -- -- -- -- -- 804,732 -- --
--------- --------- --------- --------- ---------- --------- --------- ----------
Balances at October 31, 1996.... -- -- 5,181,575 5,182 558,510 1,221,646 -- --
Repurchase and cancellation of
common stock.................. -- -- (1,000,000) (1,000) (558,510) (147,307) -- --
Common stock issued in exchange
for services.................. -- -- 5,500 5 5,495 -- -- --
Issuance of common stock upon
exercise of stock options at
$.01 per share................ -- -- 407,916 408 3,671 -- -- --
Conversion of convertible notes
payable into common stock..... -- -- 26,500 27 26,473 -- -- --
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 -- --
--------- --------- --------- --------- ---------- --------- --------- ----------
Balances at October 31, 1997.... 400,000 2,834,998 4,621,491 4,622 35,639 3,935,397 -- --
Common stock issued at initial
public offering, net of
$3,420,000 in issuance
costs......................... -- -- 3,270,000 3,270 32,570,647 -- -- --
Conversion of convertible notes
payable into common stock..... -- -- 1,539,351 1,539 1,537,812 -- -- --
Conversion of preferred stock
into common stock............. (400,000) (2,834,998) 400,000 400 2,834,598 -- -- --
Issuance of common stock upon
exercise of stock options at
$.01 per share................ -- -- 147,884 148 1,331 -- -- --
Issuance of common stock upon
exercise of stock options at
$.16 per share................ -- -- 12,500 12 1,988 -- -- --
Issuance of common stock upon
exercise of stock options at
$1.00 per share............... -- -- 135,000 135 134,865 -- -- --
Repurchase of common stock for
treasury...................... -- -- -- -- -- -- 755,400 (2,810,374)
Net income...................... -- -- -- -- -- 2,070,086 -- --
--------- --------- --------- --------- ---------- --------- --------- ----------
Balances at October 31, 1998.... -- $ -- 10,126,226 $ 10,126 $37,116,880 $6,005,483 755,400 $(2,810,374)
--------- --------- --------- --------- ---------- --------- --------- ----------
--------- --------- --------- --------- ---------- --------- --------- ----------
<CAPTION>
TOTAL
----------
<S> <C>
Balances at October 31, 1995.... $ 979,889
Issuance of common stock upon
exercise of stock options at
$.01 per share................ 717
Net income...................... 804,732
----------
Balances at October 31, 1996.... 1,785,338
Repurchase and cancellation of
common stock.................. (706,817)
Common stock issued in exchange
for services.................. 5,500
Issuance of common stock upon
exercise of stock options at
$.01 per share................ 4,079
Conversion of convertible notes
payable into common stock..... 26,500
Sale of redeemable convertible
preferred stock for cash, net
of issuance costs of
approximately $165,000........ --
Net income...................... 2,861,058
----------
Balances at October 31, 1997.... 3,975,658
Common stock issued at initial
public offering, net of
$3,420,000 in issuance
costs......................... 32,573,917
Conversion of convertible notes
payable into common stock..... 1,539,351
Conversion of preferred stock
into common stock............. 2,834,998
Issuance of common stock upon
exercise of stock options at
$.01 per share................ 1,479
Issuance of common stock upon
exercise of stock options at
$.16 per share................ 2,000
Issuance of common stock upon
exercise of stock options at
$1.00 per share............... 135,000
Repurchase of common stock for
treasury...................... (2,810,374)
Net income...................... 2,070,086
----------
Balances at October 31, 1998.... $40,322,115
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
GAMETECH INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 804,732 $2,861,058 $ 2,070,086
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 599,458 1,428,571 2,612,489
Accrued interest payable to officers..................................... 164,363 189,839 13,350
Deferred income taxes.................................................... 46,000 16,880 (214,826)
Equity in net loss of affiliate.......................................... -- 178,815 2,000,000
Changes in operating assets and liabilities:
Accounts receivable, net............................................... (301,642) (604,752) (525,852)
Deposits............................................................... (18,422) 168,580 (58,530)
Prepaid expenses and other current assets.............................. 9,853 (16,130) (243,370)
Accounts payable....................................................... (232,008) 350,240 (78,222)
Accrued payroll and related obligations................................ 114,323 174,443 (66,770)
Other accrued liabilities.............................................. (3,359) 200,219 (156,907)
Income taxes payable................................................... 105,309 32,318 (92,131)
---------- ---------- -----------
Net cash provided by operating activities.................................. 1,288,607 4,980,081 5,259,317
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in short-term investments....................................... -- -- (4,102,500)
Capital expenditures for bingo units, furniture and equipment.............. (2,965,612) (6,057,574) (5,683,344)
Investment in and advances to affiliate.................................... -- (705,180) (1,473,635)
Change in other assets..................................................... -- (156,326) --
Capitalized software development costs..................................... (122,235) (74,581) 225,127
---------- ---------- -----------
Net cash used in investing activities...................................... (3,087,847) (6,993,661) (11,484,606)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings from bank.............................. 2,360,493 3,330,000 --
Payments on short-term notes payable and borrowings from bank.............. (507,900) (2,050,000) (550,000)
Proceeds from borrowings on convertible notes payable to officers.......... 100,000 -- --
Payments on convertible notes payable to officers.......................... (24,978) -- --
Proceeds from issuance of long-term debt................................... -- 403,207 --
Payments on long-term debt................................................. -- (758,819) (2,866,181)
Payments for buy-out of distributorship agreement.......................... -- -- (447,500)
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........................................ 717 9,579 32,712,296
Payments for repurchase of common stock for treasury....................... -- -- (2,810,374)
Deferred offering costs.................................................... -- (651,980) 651,980
---------- ---------- -----------
Net cash provided by financing activities.................................. 1,928,332 2,866,985 26,690,321
---------- ---------- -----------
Net increase in cash and equivalents....................................... 129,092 853,405 20,465,032
Cash and equivalents at beginning of year.................................. 37,027 166,119 1,019,524
---------- ---------- -----------
Cash and equivalents at end of year........................................ $ 166,119 $1,019,524 $21,484,556
---------- ---------- -----------
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................... $ 109,000 $ 275,000 $ 66,000
Cash paid for income taxes............................................... $ 410,000 $1,831,000 $ 1,607,000
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS:
Conversion of redeemable convertible preferred stock to common stock..... $ -- $ -- $ 2,834,998
Conversion of convertible notes payable to common stock.................. $ -- $ 26,500 $ 1,539,351
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
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 electronic bingo units and rents them
under operating type leases on 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be a cash equivalent.
SHORT-TERM INVESTMENTS
Short-term investments, which consist of interest bearing securities are
carried at fair value and are classified as available for sale. Unrealized gains
and losses are not material.
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:
<TABLE>
<S> <C>
Bingo units....................................................... 5 years
Office furniture and equipment.................................... 5-7 years
Leasehold improvements............................................ 5 years
</TABLE>
SUPPLIER DEPENDENCE
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. The unamortized portion of
businesses acquired is approximately $214,000 and $155,000 at October 31, 1997
and 1998, respectively. Also included in intangibles, is capitalized software
development costs of approximately $197,000 and $422,000 at October 31, 1997 and
1998, 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 years
ended October 31, 1997 and 1998 amounted to approximately $43,000 and $80,000,
respectively.
F-7
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible assets are reviewed on an ongoing basis by the Company's
management based on several factors including, among others, the Company's
projection of future operations and their related impact on cash flows. If an
impairment of the carrying value were to be indicated by this review, the
Company would adjust the carrying value of intangibles to its estimated fair
value.
INVESTMENT IN JOINT VENTURE
The Company had a 50 percent interest in The Satellite Bingo Network, LLC.
("TSBN") which was accounted for using the equity method. TSBN was formed on
April 8, 1997, launched operations in December 1997 and ceased operations in
February 1998. The Company funded the operating losses of TSBN and for financial
reporting purposes had recorded 100 percent of the operating losses. For the
year ended October 31, 1998, the Company recorded a loss of $2.0 million in
connection with the write-off of the Company's investment in and advances to
TSBN, which included the operating loss of $955,000. The Company had recorded
through October 31, 1997, approximately $179,000 as its share of TSBN's
operating losses which represents 50 percent of the first $100,000 in losses and
100 percent of the losses in excess of $100,000.
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.
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.
No single customer comprised more than 10 percent of total revenues during
the years ended October 31, 1996, 1997 and 1998.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standard No. 109, ACCOUNTING FOR INCOME TAXES.
F-8
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs during the
years ended October 31, 1996, 1997 and 1998 were not material.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to certain
employees with an exercise price equal to or greater than the fair value of the
shares at the date of grant. The Company accounts for stock option grants to
employees in accordance with Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), and, accordingly, recognizes
no compensation expense for the stock option grants.
NET INCOME PER SHARE
Net income per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE. SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share. Basic earnings per
share is based solely upon the weighted average number of common shares
outstanding and excludes any dilutive effects of options, warrants and
convertible securities. Dilutive earnings per share is based upon the weighted
average number of common and common equivalent shares outstanding during the
year. The difference between basic and diluted earnings per share is
attributable to stock options, redeemable convertible preferred stock and
convertible notes payable to officers.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been with in the range
of management's expectations.
The Company's customer base consists primarily of bingo establishments in
the United States. Although the Company is directly affected by the financial
and operational well-being of the companies in this industry, management does
not believe significant credit risk exists at present.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The fair value of bank credit lines and long-term debt is
determined using current applicable interest rates as of the balance sheet date
and approximate the carrying value of such debt because the underlying
instruments are at variable subject to any increases or decreases in the bank's
prime rate or LIBOR.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. The Company is required to adopt the
provisions of SFAS No. 131 in fiscal year 1998.
F-9
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS No. 131 establishes a new method by which companies will report operating
segment information. This method is based on the manner in which management
organizes the segments within a company for making operating decisions and
assessing performance. The Company is evaluating the provisions of SFAS No. 131
and, upon adoption, may report operating segments.
2. BINGO UNITS, FURNITURE AND EQUIPMENT
Bingo units, furniture and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Installed bingo units............................................... $8,324,179 $12,981,272
Bingo units on-hand................................................. 1,791,959 1,567,629
Raw materials and bingo units in-progress........................... 534,563 730,971
Office furniture and equipment...................................... 446,636 1,007,387
Leasehold improvements.............................................. 62,730 68,640
--------- ----------
11,160,067 16,355,899
Less accumulated depreciation and amortization...................... 2,135,180 3,860,342
--------- ----------
$9,024,887 $12,495,557
--------- ----------
--------- ----------
</TABLE>
"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, 1996, 1997 and 1998
amounted to approximately $541,000, $1,327,000, and $2,187,000, respectively.
3. CREDIT AGREEMENTS
On August 19, 1998, the Company obtained a revolving line-of-credit (the
"Line"). The maximum amount available under the terms of the Line is $10,000,000
and borrowings bear interest based on the bank's prime rate percent or LIBOR
plus 2.0 percent, at the Company's option. Interest is payable monthly and the
Line expires on March 31, 2000. The Line is secured by substantially all of the
Company's assets. The Line contains certain restrictive covenants, which among
other things require that specified financial balances and ratios be maintained,
restricts the payment of dividends and the incurrence of additional
indebtedness. At October 31, 1998, there was no outstanding balance under the
Line.
F-10
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
October 31
--------------------
1997 1998
--------- ---------
<S> <C> <C>
$3,000,000 term note bearing interest at 8.92 percent per
annum. Principal and interest of $95,288 are paid monthly.
Repaid in fiscal year 1998.................................. $2,553,681 $ --
$625,000 term note bearing interest at 5.65 percent per annum.
Principal of $156,250 plus interest are paid semi-annually
on March 1 and September 1. Repaid in fiscal year 1998...... 312,500 --
$1,014,000 term note related to acquisition of electronic
video bingo devices distribution routes. Weekly payments of
$6,500 are due until the balance is paid in full............ -- 852,500
--------- ---------
2,866,181 852,500
--------- ---------
Less: current portion......................................... 1,266,523 338,000
--------- ---------
$1,599,658 $ 514,500
--------- ---------
--------- ---------
</TABLE>
Maturities of long-term debt for the years following October 31, 1998 are
$338,000 in fiscal year 1999, $338,000 in fiscal year 2000, and $176,500 in
fiscal year 2001.
5. CONVERTIBLE NOTES PAYABLE TO OFFICERS
Convertible notes payable to officers were unsecured borrowings bearing
interest at prime plus 4.25 percent (aggregating 12.75 percent at October 31,
1997). In November 1997, principal and interest of $1,539,351 were converted
into the 1,539,351 shares of the Company's common stock at $1.00 per share.
Interest expense recorded on notes payable to officers amounted to approximately
$164,000, $190,000, and $13,000 during the years ended October 31, 1996, 1997
and 1998, respectively. Included along with the principal amount of convertible
notes payable to officers on the accompanying balance sheets is accrued interest
of approximately $421,000 (no current portion) at October 31, 1997.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases administrative and manufacturing facilities under
non-cancelable operating leases. Rent expense during the years ended October 31,
1996, 1997 and 1998 amounted to approximately $89,000, $118,000, and $205,000,
respectively.
Future minimum lease payments under these leases, by year, as of October 31,
1998 are as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 170,000
2000.............................................................. 142,000
2001.............................................................. 127,000
2002.............................................................. 60,000
2003.............................................................. 11,000
---------
$ 510,000
---------
---------
</TABLE>
F-11
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
In March 1996, a patent infringement action and demand for jury trial was
commenced against the Company by Bingo Technology Corporation, Inc. (formerly
Bingo Card Minder Corporation), in the U.S. District Court, Northern District of
California. The complaint alleges that the Company has infringed, actively
induced or contributed to the infringement of U.S. Patent No. 4,378,940 (the
"'940 Patent") by making, using and selling, among other acts, electronic bingo
devices that allegedly infringe upon at least one claim of the '940 Patent. The
'940 Patent was issued in 1983 and will expire in 2000 and is allegedly
infringed by the Company's hand-held bingo units. The plaintiff seeks a
permanent injunction prohibiting the Company from infringement of the '940
Patent, as well as actual damages, enhanced (treble) damages, attorneys' fees
and costs. A stay of all proceedings is in effect until February 1, 1999.
The Company believes that its products do not infringe any valid claim of
the '940 Patent and intends to continue to defend against this action
vigorously. However, there can be no assurance that favorable outcomes will be
obtained or that if the action were resolved in favor of the plaintiff, such
results would not have a material adverse effect on the Company's financial
position, results of operations or cash flow.
In October 1997, Apex Wholesale, Inc. ("Apex") commenced two actions against
the Company in the U.S. District Court, Southern District of California. The
Company formerly purchased its hand-held units manufactured by Tidalpower
Technologies, Inc. ("Tidalpower") through Apex but terminated such arrangement
in September 1996 and now purchases hand-held units directly from Tidalpower.
The 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 sought
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 alleged 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 sought general damages, injunctive relief, exemplary and
punitive damages, attorney's fees, and any other costs the court deemed proper.
In the second action, Apex sought to avoid an alleged fraudulent transfer.
Apex alleged that the Company, as well as Tidalpower, Green Dollars Industrial
Ltd., Leo Lee, Doris Tsao, and Morgan Chen conspired to avoid a right to attach
order and default judgment entered in favor of Apex against Green Dollars
Industrial Ltd. Apex sought 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
deemed proper.
Entries of dismissal with prejudice of both Apex actions were entered by the
Court on December 8, 1998.
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
F-12
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
allegedly owed under an oral purchase agreement for 134 pull-tab dispensers
which were to be manufactured by Diamond. 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. Trial is scheduled for May 12, 1999.
On February 13, 1998, a purported securities class action complaint, WEISS
V. GAMETECH INTERNATIONAL, INC., No. 98-0268 PHX-ROS, was filed in the United
States District Court for the District of Arizona
alleging that the Company and certain of its officers and directors violated
Section 11 of the Securities Act of 1933 (the "Securities Act") by making false,
misleading statements and omissions in GameTech's Form S-1 Registration
Statement in connection with the Company's public offering on November 25, 1997.
Two other complaints making nearly identical factual allegations have been
consolidated with the WEISS action for all purposes as IN RE GAMETECH, INC.
SECURITIES LITIGATION, Master File No. Civ. 98-0268 PHX-ROS.
On September 21, 1998, plaintiffs filed a consolidated complaint, alleging a
claim against the Company and the individual defendants under Section 11 of the
Securities Act and a claim against the individual defendants under Section 15 of
the Securities Act, based upon the conduct alleged in the original complaints.
Plaintiffs seek an unspecified amount of damages. On July 17, 1998, the Court
appointed "lead plaintiff" and co-lead counsel.
On November 5, 1998, defendants moved to dismiss the complaint. Defendants'
motion to dismiss is scheduled to be heard by the Court on May 24, 1999. There
has been no discovery to date and no trial is scheduled in this action.
Defendants believe that there is no merit to plaintiffs' allegations and intend
to defend the action vigorously.
On December 7, 1998, GameTech intervened in Cause No. 97-11164, pending in
the 160(th) District Court in Dallas County, Texas. The lawsuit was filed by
Trend Gaming Systems, LLC, the Company's exclusive Texas distributor, against
four charities and two individuals for breach of contract and tortious
interference with contract. GameTech alleges that it is a third-party
beneficiary of the contract between Trend and the four charities. Actual damages
are estimated at $126,000, plus attorneys' fees.
The charities have filed a counter claim for damages, alleging that
misrepresentations were made in connection with the original contract, and
seeking to be reimbursed for their attorneys' fees. The charities and Trend
filed cross motions for summary judgment. Both motions were denied by the Court.
The charities have moved to strike the Company's plea in intervention but the
matter has not been set for hearing.
The case is set for jury trial on February 22, 1999.
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.
7. 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 was convertible, at the holder's option, into common
stock on a one-for-one basis subject to certain antidilution adjustments.
Concurrent with the
F-13
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
completion of the Company's initial public offering, the Preferred Stock was
automatically converted into 400,000 shares of its common stock.
8. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On November 25, 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 $32,600,000.
COMMON STOCK
Of the 29,873,774 shares of common stock authorized but unissued at October
31, 1998, 1,955,000 shares were reserved for future issuance through stock
options. At October 31, 1998, options for 1,928,000 shares were outstanding.
STOCK OPTIONS
The Company has elected to follow APB No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, in accounting for its employee stock options because, as discussed
below, the alternative fair value accounting for under SFAS No. 123, ACCOUNTING
AND DISCLOSURE OF STOCK-BASED COMPENSATION, requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price the underlying stock on the date of grant, no
compensation expense is recognized.
In August 1997, the Company adopted the 1997 Incentive Stock Plan (1997
Plan). The 1997 Plan may grant either incentive stock options ("ISO's") or
nonqualified stock options ("NSO's"). NSO's may be granted to employees,
directors and consultants to purchase the Company's stock at an exercise price
determined by the board of directors at the date of grant. ISO's may be granted
only to employees at an exercise price that equals or exceeds the fair value of
such shares on the date such option is granted. The options generally have a
term of ten years and vesting periods are determined at the discretion of the
board of directors. The Company has reserved 2,000,000 shares of common stock
for issuance under the 1997 Plan, which included options granted during the
twelve months immediately preceding the adoption of the 1997 Plan. At October
31, 1998, options to purchase 949,167 of common stock were exercisable at
exercise prices ranging from $.16 to $6.00 per share under the 1997 Plan. In
addition, at October 31, 1998, 27,000 shares of common stock were available for
future grants under the 1997 Plan.
F-14
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
On July 9, 1998, the Company canceled 66,500 options held by certain
employees issued under the 1997 Plan with an exercise price per share of $11.00
and granted 66,500 options with an exercise price per share of $4.00 to the same
employees. The new options started a new vesting schedule from the new date of
grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for it employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes pricing model with the following weighted-average
assumptions for 1998: risk-free interest rates of 4.75 percent, dividend yields
of 0 percent, volatility factor of the expected market price of the Company's
stock of 1.022 and a weighted-average life of the options of five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1996 1997 1998
- ------------------------------------------------------- ---------- ------------ ----------
<S> <C> <C> <C>
Pro forma net income................................... $ 791,683 $ 2,779,135 $ 938,072
Pro forma net income per basic share................... 0.15 0.62 0.10
Pro forma net income per diluted share................. 0.13 0.40 0.09
</TABLE>
The effects of applying SFAS No. 123 for the years ended October 31, 1996,
1997, and 1998 are not likely to be representative of the effects on reported
net income for future years.
A summary of the Company's stock option activity, and related information
during the years ended October 31, 1996, 1997 and 1998 is presented below:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- --------------------------- ---------------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(OPTIONS) EXERCISE PRICE (OPTIONS) EXERCISE PRICE (OPTIONS) EXERCISE PRICE
----------- --------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year......... 675,000 $ .01 678,300 $ .02 1,447,384 $ .84
Granted.................................. 75,000 $ .09 1,182,000 $ 1.02 863,000 $ 5.22
Forfeited................................ -- -- (5,000) $ .01 (87,000) $ 9.74
Exercised................................ (71,700) $ .01 (407,916) $ .01 (295,384) $ .47
----------- ---------- ----------
Outstanding at end of year............... 678,300 $ .02 1,447,384 $ .84 1,928,000 $ 2.78
----------- --- ---------- ----- ---------- -----
----------- --- ---------- ----- ---------- -----
Exercisable at end of year............... 240,000 $ .02 932,750 $ .99 1,016,667 $ 1.48
----------- --- ---------- ----- ---------- -----
----------- --- ---------- ----- ---------- -----
Weighted average fair value of options
granted during the year................ $0.16 $1.00 $4.78
----- ---- ----
----- ---- ----
</TABLE>
F-15
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information regarding stock options
outstanding and exercisable at October 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
- -------------------------------- ---------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$.01--$.16...................... 95,000 6.48 $ .05 67,500 $ .04
$1.00--$1.10.................... 1,047,000 8.09 1.03 839,167 1.03
$2.88--$6.00.................... 786,000 9.34 5.44 110,000 5.77
---------- ----------
1,928,000.. $ 2.78 1,016,667 $ 1.48
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
The range of exercise prices of stock options outstanding and their weighted
average remaining contractual life at October 31, 1998, were $.01 to $6.00 per
share and 8.53 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 percent 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. Subsequent to October 31, 1997 the
Company paid-off all amounts outstanding under the Agreement.
9. INCOME TAXES
The income tax provisions consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................................. $ 431,092 $ 1,530,226 $ 1,243,341
State............................................... 82,125 332,894 271,485
Deferred:
Federal............................................. 34,472 14,774 (191,081)
State............................................... 11,528 2,106 (23,745)
---------- ------------ ------------
$ 559,217 $ 1,880,000 $ 1,300,000
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
F-16
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred income tax assets and
liabilities at October 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1998
------------------------
CURRENT NON-CURRENT
---------- ------------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable reserves...................................... $ 19,670 $ --
Amortization...................................................... -- 98,879
Accrued expenses.................................................. 8,682 --
Vacation accrual.................................................. 47,782 --
Inventory reserves................................................ 127,068 --
Nondeductible loss in affiliate................................... 400,898 --
Other............................................................. 6,057 --
---------- ------------
Total deferred income tax assets.................................... 610,157 98,879
Deferred income tax liability:
Depreciation...................................................... -- (666,297)
---------- ------------
Net deferred income tax asset (liability)........................... $ 610,157 $ (567,418)
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------
CURRENT NON-CURRENT
---------- ------------
<S> <C> <C>
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)
---------- ------------
---------- ------------
</TABLE>
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:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Income tax provision at the statutory rate....................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit....................... 7.0% 4.7 4.2
Other, net....................................................... -- 1.0 0.4
--- --- ---
41.0% 39.7% 38.6
--- --- ---
--- --- ---
</TABLE>
F-17
<PAGE>
GAMETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. NET INCOME PER SHARE
A reconciliation of the shares used in the basic and diluted net income per
share calculations are:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Basic............................................. $ 5,117,517 $ 4,463,023 $ 9,360,955
Effect of dilutive securities
Options......................................... 528,792 921,472 1,083,509
Convertible notes payable to officers........... 1,424,723 1,458,395 99,957
Redeemable convertible preferred stock.......... -- 65,753 32,609
------------ ------------ -------------
Diluted........................................... $ 7,071,032 $ 6,908,643 $ 10,577,030
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Net income used in the diluted calculation was adjusted for the convertible
notes payable to officers interest expense, net of taxes of $97,000, $112,000
and $8,000 in 1996, 1997 and 1998, respectively.
11. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------- DEDUCTIONS
BALANCE AT CHARGED TO CHARGED TO (WRITE-OFFS, BALANCE AT
BEGINNING COSTS AND OTHER NET OF END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS COLLECTIONS) PERIOD
- ------------------------------------ ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
Year ended October 31, 1998:
Deducted from asset accounts:
Allowance for doubtful
accounts...................... 163,847 180,184 -- (295,029) 49,002
</TABLE>
F-18
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 1997 Incentive Stock Plan of GameTech
International, Inc. of our report dated December 19, 1998, with respect to the
financial statements of GameTech International, Inc. included in the Annual
Report (Form 10-K) for the year ended October 31, 1998.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
January 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF GAME TECH INTERNATIONAL, INC. (THE "COMPANY") AS OF OCTOBER 31, 1998
AND THE STATEMENTS OF OPERATIONS OF THE COMPANY FOR THE YEAR ENDED OCTOBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 21,485
<SECURITIES> 4,103
<RECEIVABLES> 1,726
<ALLOWANCES> 49
<INVENTORY> 0
<CURRENT-ASSETS> 28,333
<PP&E> 16,356
<DEPRECIATION> 3,860
<TOTAL-ASSETS> 42,477
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0
0
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</TABLE>
