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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, 2000
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
900 PENTIUM ROAD, RENO, NEVADA 89511
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (775) 850-6000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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NONE NOT APPLICABLE
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. [ ]
As of January 18, 2001, 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
$20,014,620.
The number of shares of the registrant's Common Stock outstanding as of
January 18, 2001 was 10,513,498.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of GameTech
International, Inc. to be used in connection with the 2001 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 portable hand-held systems that can be played anywhere within a
bingo hall. GameTech had approximately 7,000 fixed-base units and more than
46,000 hand-held units operating in Indian, charity and commercial bingo halls
at October 31, 2000. Both bingo systems display electronic bingo card images
that 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 profits per bingo session for the bingo hall operator.
GameTech installs the electronic bingo systems at no cost to the operator in
exchange for charging a fee per use or a percentage of the sales generated by
each unit. The Company typically enters into one to three year contracts.
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 such as 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, 2000, electronic bingo systems were
permitted for use by charitable and commercial organizations in more than 30
states, and the Company had units in operation in charitable and commercial
bingo halls in 25 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, 2000, management estimates
that bingo was played on tribal Indian lands in 28 states and the Company had
units in operation in Indian bingo halls in 12 of those states.
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, the opportunity
exists for installations of additional electronic bingo units at its customers'
bingo halls.
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EXPAND CUSTOMER BASE IN EXISTING MARKETS. The Company estimates that less
than 5% of the more than $7 billion North American 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 less than 10% of the charitable halls located in
those states. Management believes that this low penetration level presents a
growth opportunity for GameTech increasing its base of customers in its existing
markets.
EXPAND INTO NEW MARKETS DOMESTICALLY. As of October 31, 2000, GameTech had
charitable and commercial bingo hall customers in 25 of the more than 30 states
in which charitable and commercial bingo is played. In addition, GameTech had
Indian bingo hall customers in only 12 of the 28 states where bingo is currently
played on Indian lands. 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
that 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. The Company currently has a small installed base in
the Philippines and Japan. GameTech is also pursuing expansion into the United
Kingdom and the province of Ontario, Canada. At the request of the Politesse, a
representative of the Alcohol and Gaming Commission of Ontario, the Company is
participating in a personal bingo verifier pilot project in which the Company's
hand-held bingo units have been placed in selected charitable bingo halls in the
Province of Ontario. 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 additional applications for its technology. In September 2000, the Company
introduced its TED 2C color hand-held unit, which provides enhanced graphics to
the hand-held units. The TED 2C is still in the alpha test stages, but the
Company expects it to be available in certain markets prior to the end of fiscal
year 2001.
DEVELOP STRATEGIC ALLIANCE/ACQUIRE COMPLEMENTARY COMPANIES. The Company
selectively reviews opportunities to grow through the establishment of strategic
alliances and acquisitions that could extend its presence into new geographic
markets, expand its client base, add new products and/or provide operating
synergies. The Company also intends to pursue joint operating agreements or
joint ventures for additional bingo opportunities.
PRODUCTS
The Company designs its bingo systems to generate maximum appeal to bingo
players. The primary benefits to players of electronic bingo units are: (1) the
ability to play up to 600 electronic bingo card images during one bingo game,
significantly more than can be played on paper, (2) to have the system
simultaneously mark the numbers called, thereby reducing player error in missing
or mismarking a number, and (3) 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 one model of the Company's fixed-base units
incorporates 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. The
Company believes that these aspects of GameTech's
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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 including 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 that 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, typically
located near the entrance of a bingo hall where all customer purchases are
made. The cashier using a light pen activates player buy-in choices for the
session, 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.
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 four or 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
The Company currently has three hand-held bingo systems in commercial use:
(1) the Palm Top or high-end hand-held unit ("Palm Top"), (2) the TED-TM-
("TED") or lower cost hand-held unit, and (3) the BCM-2 (the hand-held unit
predating TED's commercial placement) (collectively referred to as the
"hand-held" units).
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The Company's hand-held bingo systems operate similarly to fixed-base
systems except players must manually enter the numbers as they are called and
each bingo card being played is then simultaneously marked. These units can mark
up to 600 cards 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 units are completely portable, and can be played anywhere within a
bingo hall. The hand-held unit is capable of recognizing almost any bingo game
format the bingo hall operator wishes to play and alerts the player both audibly
and visually when BINGO has been achieved. Hand-held units are battery powered.
The battery packs are designed to last for 11 hours for the Palm Top and TED
units, and approximately 7 hours for the BCM-2. Hand-held units are recharged
between bingo sessions on charging carts, which handle 27 Palm Tops, 25 TEDs,
and 16 BCM-2s, respectively.
The Palm Top unit is the high-end hand-held in GameTech's product portfolio.
It shows three bingo card faces at all times and can play up to 600 cards at one
time. This device resembles a palm top PC and operates on a 386 processor.
The TED unit is the lower cost version of the GameTech Palm Top. In all
areas, with the exception of appearance, the TED unit operates on a similar
basis as the Palm Top. The TED unit can display four bingo cards at a time
rather than the three cards that the Palm Top shows. The TED functions from a
proprietary motherboard and is run by the Company's NED and Diamond bingo
software systems.
The BCM-2 units were the precursor to the TED and were introduced in 1992.
The Company has approximately 1,000 of these hand-held units still in commercial
use. These units' display shows one card with a representation of the bingo
board alongside it. Cards are loaded through infrared transfer.
For the play of electronic video bingo, whether via hand-held or fixed-base
unit, the Company typically uses its "Diamond Bingo Software System."
BACK OFFICE MANAGEMENT SYSTEMS
The Company has two bingo back office management systems, AllTrak and
AllTrak Too. The AllTrak back office management system operates a multi-purpose
DOS-based back office accounting system for bingo hall operators on a PC
platform. Through the point-of-sale systems and the computer into which
inventory is entered, the AllTrak system accumulates and stores incoming data.
The data can be extracted into reports that analyze player spend and
demographics, session performance, and track inventory. The AllTrak Too back
office management system is owned by Active Bingo Solutions, but the Company has
worldwide, exclusive rights to the AllTrak Too system until 2005, at which
point, assuming certain minimum requirements are met, the Company will take
complete title to the AllTrak Too System. This system is a windows-based
multi-purpose accounting system for bingo hall operators running compiled visual
basic software on standard PCs. These systems are typically integrated with
electronic bingo operations to provide a bingo hall with a package of accounting
and marketing information that enhances the bingo operator's ability to manage a
bingo hall.
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. GameTech's 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. In September 2000, the Company introduced its TED 2C color
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hand-held unit, a graphically enhanced version of the hand-held. The TED 2C is
still in the alpha test stages, but the Company expects it to be available in
certain markets prior to the end of fiscal year 2001.
SALES, MARKETING, AND DISTRIBUTION
The Company's marketing strategy is to target 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
- Promotional sessions to introduce players to the system
- Advertising package and point-of-sale materials
- Ongoing maintenance program
The Company operates with both a sales force and a network of outside
distributors. Sales personnel earn base salaries plus incentive commissions
based on the revenues generated by the units they place. The Company's
distributors are located throughout the United States and are compensated based
on a percentage of the sales generated for the Company from their respective
territories. Distributorships are generally granted pursuant to two- to
three-year agreements, and distributors are typically selected based upon their
financial stability and experience, and are generally required to make an
exclusive commitment to the Company.
TARGET MARKETS. There are approximately 275 Indian bingo halls and tens of
thousands of charities licensed to operate bingo games in the United States and
Canada. At October 31, 2000, the Company had over 53,000 installed units at
approximately 500 locations serving approximately 1,200 customers, including
many charitable bingo halls where the Company has multiple customers. Revenues
for the year ended October 31, 2000 were generated approximately 27% from
fixed-base units and 73% from hand-held units.
As of October 31, 2000, GameTech operated in 25 of the more than 30 states
where electronic bingo is currently permitted in charitable and commercial bingo
halls, and in 12 of the 28 states where bingo is currently played in Indian
bingo halls. The Company is actively pursuing additional business in other
states, Canada, and the United Kingdom.
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.
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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 a percentage 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 currently obtains its Palm Top units from Tidalpower
Technologies Inc. ("Tidalpower"), a contract manufacturer in Taiwan. The Company
does not have long-term supply contracts with Tidalpower, but rather obtains
Palm Top units on a purchase order basis. Although the design of Palm Top units
is not unique or proprietary, if Tidalpower ceased doing business with the
Company, the Company would need to find a replacement supplier. The Company
believes the availability of suppliers is such that a capable replacement for
Tidalpower could be found, but not without some risk of delay, and there can be
no assurance that the Company would be able to procure, substitute, or produce
its Palm Top units without a significant interruption or a price increase. Any
failure or delay in receiving Palm Top units could have a material adverse
effect on the Company's business, financial condition, and results of operation.
The Company uses contract manufacturers in Nevada to supply its TED units.
All hardware components for the fixed-base bingo systems are sourced by the
Company from numerous domestic suppliers and assembled at its facility in
Nevada. The Company has not had any significant quality problems or delays in
securing its Palm Top and TED units or the supply of fixed-base system
components. The Company is currently evaluating additional domestic suppliers.
TRADEMARKS AND PATENTS
The Company currently holds the following registered trademarks, service
marks, and patents:
The Company owns all rights to U.S. Patent No. 4,378,940 (the "'940 Patent")
issued on April 5, 1983 titled: "Electronic Device for Playing Bingo, Lotto and
Allied Card Games." The '940 Patent expired in December 2000. On October 27,
1998, the PTO, in a response to a request for reexamination sponsored by
FortuNet, Inc. ("FortuNet"), rejected all 11 claims of the '940 Patent. BTC
contested the Examiner's decision and on March 23, 1999, the Patent Office
reversed its initial rejection. In response, FortuNet, on May 23, 1999, filed a
new request for reexamination and a petition to invoke the Commissioner's
authority to amend the Examiner's decision on reversal due to "extraordinary
circumstances." On August 11, 1999, the Commissioner's office rejected the
petition returning it unfiled. On July 24, 1999, the PTO granted a second
request for reexamination, which was concluded in May 2000, and the
patentability of all 11 claims of the '940 Patent was confirmed.
The Company has a pending patent application for an Electronic Bingo Data
Crate. The crate provides information and charging interface between a plurality
of player devices housed within a master point-of-sale computer.
The Company has a pending patent application for Data Crate interface. This
application pertains to the automatic interface between a comprehensive
point-of-sale bingo hall cashier and accounting system.
The Company has the following trademarks: "TED"--U.S. registration
#2,076,334 registered July 1, 1997, expiring July 1, 2008; "Bingo Card
Minder"--U.S. registration #2,035,175 registered February 4, 1997, expiring
February 4, 2007; "Bingo Technologies Corporation" with bingo ball logo--U.S.
registration #75-358,442 registered December 15, 1998, expiring December 15,
2008. The Company has a common law trademark for "The Electronic Dauber" which
is also listed on the U.S. Supplemental Register as #2,127,889 registered
July 1, 1997, expiring July 1, 2007. The term of a federal trademark is
10 years, with 10-year renewal terms. However, between the fifth and sixth year
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after the date of initial registration, the registrant must file an affidavit
setting forth certain information to keep the registration alive. If no
affidavit is filed, the registration is canceled.
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. The Company competes primarily with other companies
providing electronic bingo units, including Advanced Gaming Technology, Inc.,
California Concepts, Bettina Corp., International Gaming Systems, Bingo
Brain, Inc., FortuNet, Inc., Jenosys, and BK Entertainment, 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 compete successfully in the electronic bingo industry. In addition,
the Company competes with other similar forms of entertainment, including casino
gaming and lotteries. The Company 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 2000, the Company spent $1.9 million on Company-sponsored research
and development activities, as compared to $1.2 million in fiscal 1999 and
$638,000 in fiscal 1998.
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 and various state compacts.
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, significant shareholders, 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,
significant shareholders, 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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The Company is classified as a manufacturer and distributor of associated
equipment pursuant to the provisions of the Nevada Gaming Control Act and
regulations promulgated thereunder (the "Nevada Gaming Laws"). Associated
equipment manufacturers and distributors who sell, transfer, or offer associated
equipment for use or play in Nevada may be required to file an application for a
finding of suitability at the discretion of the Nevada Gaming Commission (the
"Nevada Commission") on the recommendation of the Nevada State Gaming Control
Board (the "Nevada Board" and collectively with the Nevada Commission, the
"Nevada Gaming Authorities"). To date, the Nevada Gaming Authorities have not
required the Company to file an application for a finding of suitability as an
associated equipment manufacturer or distributor.
The Company's associated equipment is subject to evaluation and approval by
the Nevada Board under the Nevada Gaming Laws. Each of the Company's associated
equipment products that are in distribution in Nevada (as compared to those
products in research and development) have been submitted to and approved by the
Nevada Board.
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 Conference ("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 key personnel, 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.
Applicable 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.
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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. The Company believes that electronic bingo in
charitable halls is currently permitted in at least 30 of the 50 states. Because
many state laws and regulations are silent and/or ambiguous 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, its manufacturers, 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, if 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 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, 2000, the Company had approximately 190 full-time
equivalent employees. The Company is not subject to collective bargaining
agreements with its employees and the Company believes that its relations with
its employees are good.
ITEM 2. FACILITIES
The Company's corporate headquarters is located in Reno, Nevada, in a 41,000
square-foot facility. The lease expires in November 2010 and has a current
monthly rent expense of $41,000. The Company also operates two regional
facilities: a 5,400 square-foot site in Cleveland, Ohio, and a 1,750 square-foot
site in Dallas, Texas, under leases which expire November 2004 and
September 2001, respectively. Monthly rent for these facilities is approximately
$4,500 and $750, respectively. Additionally, a small research and development
facility in Denver, Colorado is leased for $2,200 per month, together with one
in San Diego, California, for which the Company does not pay rent.
ITEM 3. LEGAL PROCEEDINGS
In January 1995, a patent infringement action, FORTUNET, INC. V. BINGO CARD
MINDER CORP. AND STUART ENTERTAINMENT, INC., CV-S-95-0008 PMP (RJJ) was filed in
the United States District Court, District of Nevada against the Company's
wholly owned subsidiary, Bingo Card Minder Corporation ("BCMC"), and an
unrelated company, Stuart Entertainment, Inc. ("Stuart"). The complaint alleged
that BCMC and Stuart, as individual entities, infringed FortuNet's U.S. Patent
No. 4,455,025 (the " '025 Patent"). Additional claims against Stuart were
asserted in a second amended complaint. On April 11, 2000, the U.S. Court of
Appeals for the Federal Circuit confirmed the rejection by the U.S. Patent &
Trademark Office ("PTO") of a majority of the '025 Patent's claims. On June 12,
2000, the Court entered a stipulated order staying the action up to and
including September 29, 2000. FortuNet has not pled any specific damages but has
pled punitive damages for willful infringement.
In February 1997, BCMC filed an action, BINGO CARD MINDER CORP. V.
FORTUNET, INC. AND YURI ITKIS., C 97-00698 CAL in the United States District
Court Northern District of California, seeking a
10
declaratory judgement that two FortuNet patents, the '025 Patent and U.S. Patent
No. 4,624,462 (the " '462 Patent") are invalid, unenforceable, and not infringed
by BCMC's TED device.
In June 1997, a patent infringement action, FORTUNET, INC. V. BINGO
TECHNOLOGIES CORPORATION; JOHN A. LARSEN DBA OPPORTUNITY SOFTWARE AND BINGO CARD
MINDER CORP., CV-S-97-00778-RLH (LRL), was commenced in the United States
District Court, District of Nevada, against Bingo Technologies Corporation
("BTC") John A. Larsen, dba Opportunity Software and BCMC. FortuNet asserts
infringement of FortuNet's '462 and '025 Patents. The Company believes, based
upon representation of opposing counsel, that the action involves BTC's sale of
the "Max-Plus" units.
In May 1998, FORTUNET, INC. V. BINGO TECHNOLOGIES CORPORATION; JOHN A.
LARSEN, DBA OPPORTUNITY SOFTWARE AND BINGO CARD MINDER CORP., CV-S-98-00777-PMP
(LRL) an action for declaratory relief and breach of contract, was filed in the
United States District Court, District of Nevada. BTC counterclaimed alleging
that FortuNet's "Bingo Star" portable hand-held bingo device infringes
U.S. Patent No. 4,378,940 (the '940 Patent owned by the Company). On
October 27, 1998, in a response to a request for reexamination sponsored by
FortuNet, the PTO rejected all 11 claims of the '940 Patent. BTC contested the
Examiner's decision. In March 1999, the Patent Office reversed its initial
rejection and, on July 20, 1999 issued a certificate confirming the
patentability of all 11 claims of the '940 Patent. In May 2000, a second request
for reexamination was concluded and the patentability of all 11 claims of the
'940 Patent was confirmed.
On January 22, 2001, the Company and FortuNet agreed to dismiss with
prejudice all of the above-referenced actions. In addition, the Company and
FortuNet agreed to grant to the other, non-exclusive licenses to practice under
the '940, '462, '025, and FortuNet's 4,856,787 patents. The amount to be paid by
the Company has been adequately reserved in the accompanying financial
statements as of October 31, 2000. Court approval of the dismissals with
prejudice of the actions between the Company and FortuNet are pending.
On June 14, 1999, GAMETECH INTERNATIONAL, INC. V. BETTINA CORPORATION,
CV-N-99-00317- (ECR), the Company filed a patent infringement action in the
United States District Court, District of Nevada against Bettina Corporation,
alleging that Bettina Corporation's "Bingo Magic" portable hand-held device
infringes the Company's '940 Patent. Bettina Corporation, in its answer to the
complaint, denies all causes of action and has asked the Court to find the '940
Patent invalid, unenforceable and not infringed. A stay of the case was lifted
pursuant to stipulation of the parties and order dated August 31, 2000. No trial
date has yet been set. The Company intends to pursue the case vigorously.
On January 6, 2000, the Company was named as a third-party defendant in
Cause No. DV-99-3012H, TREND GAMING SYSTEMS, LLC V. HIGHLANDS PTA, ET AL.,
pending in the 44th District Court of Dallas County, Texas. The lawsuit involves
a claim for breach of contract filed by Trend Gaming Systems, LLC ("Trend," a
distributor for the Company) against several bingo conductors, and a claim for
tortious interference with contract against K&B Sales, Inc. dba Goodtime Bingo
("K&B") and Daniel Hennessy. K&B added the Company as a third-party defendant
alleging breach of contract, interference with contract, illegal restraint of
trade, and conspiracy to commit tortious interference, and has requested actual
and exemplary damages. The bingo conductors also added a third-party claim
against the Company, alleging that the Company conspired with Trend to defraud
the conductors.
The underlying dispute between the Company and K&B involves termination of
K&B's distributor relationship with the Company. The Company has denied all
claims asserted by K&B and has counterclaimed for damages, alleging multiple
breaches by K&B of its distribution agreements. The case was set for trial on
December 11, 2000, but was continued and a new trial date has not been reset.
The Company was a defendant in Cause No. GN-001359, TEXAS BINGO SUPPLY V.
GAMETECH INTERNATIONAL, INC. AND TREND GAMING SYSTEMS, LLC in the 126th District
Court of Travis County, Texas. The Plaintiff is a former distributor of GameTech
equipment in Texas. On May 8, 2000, because of
11
multiple breaches of the Distribution Agreement by Texas Bingo Supply, GameTech
terminated the agreement. Pursuant to an agreement between the parties, the
court signed a judgment on November 22, 2000 dismissing the case with prejudice.
On February 8, 1999, the Company acquired BTC by entering into a series of
agreements including a Stock Purchase Agreement and Escrow Agreement
(collectively, the "Acquisition Agreements") with BTC and its stockholders. In
connection with the acquisition, BTC's stockholders made certain representations
and warranties and a portion of the purchase price was put into escrow to
provide for indemnification to the Company in the event of any breaches of these
representations and warranties.
On February 4, 2000, the Company delivered notice that it has certain claims
for indemnification against BTC's stockholders for breaches of representations
and warranties arising from the acquisition. The Company estimates that its
claims exceed the escrow fund and it has requested that no escrow funds be
released pending a final determination of its claims. The escrow fund consists
of 373,387 shares of the Company's common stock and cash totaling $1,952,211.
BTC's stockholders delivered their objections to the escrow on February 24,
2000, objecting to all of the Company's indemnification claims. The parties must
make a good faith effort to reach agreements upon the rights of the parties with
respect to each claim. The matter is currently pending before the American
Arbitration Association.
The Company is involved in various other legal proceedings arising out of
its operations in the ordinary course of its business. The Company does not
believe that any of those proceedings will have a material adverse effect on its
business, financial condition, or result of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
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, 2000 is set forth below.
GAMETECH
INTERNATIONAL, INC.
COMMON STOCK
------------------------------
HIGH LOW
------------ ------------
FISCAL YEAR ENDED OCTOBER 31, 2000
First Quarter............................................. 5 3/4 3 5/8
Second Quarter............................................ 9 1/2 4 23/32
Third Quarter............................................. 7 3 15/16
Fourth Quarter............................................ 4 9/16 3 3/8
FISCAL YEAR ENDED OCTOBER 31, 1999
First Quarter............................................. 3 3/4 1 15/16
Second Quarter............................................ 4 3/16 2 1/8
Third Quarter............................................. 7 1/2 2 7/8
Fourth Quarter............................................ 5 1/2 3 3/8
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
As of January 18, 2001, there were 114 stockholders of record of the
Company's Common Stock. Shares held by all persons in street name are considered
to be one stockholder of record.
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., which restricts payment of dividends
without the prior consent of the bank.
SALES OF UNREGISTERED SECURITIES DURING THE YEAR ENDED OCTOBER 31, 2000
On various dates between November 1, 1999 and October 31, 2000, Company
employees exercised options, granted in partial compensation for their services
to purchase an aggregate of 86,900 shares of Common Stock in private sales for
an aggregate consideration of $123,795 in reliance upon Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving a public
offering.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected statement of income data for the years ended October 31, 1998,
1999, and 2000, and the selected balance sheet data set forth below at
October 31, 1999 and 2000, 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 income data for the
years ended October 31, 1996 and 1997 and the selected balance sheet data set
forth below at October 31, 1996, 1997 and 1998 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.
YEARS ENDED OCTOBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Revenues....................................... $ 5,364 $12,578 $16,177 $41,663 $49,695
Cost of revenues............................... 1,615 3,249 5,327 11,590 16,011
------- ------- ------- ------- -------
Gross profit................................... 3,749 9,329 10,850 30,073 33,684
Operating expenses:
General and administrative................... 1,020 1,993 3,646 8,070 12,223
Sales and marketing.......................... 613 1,419 2,564 11,519 12,680
Research and development..................... 477 547 638 1,152 1,938
Acquisition related charges.................. -- -- -- 1,050 --
------- ------- ------- ------- -------
Total operating expenses................... 2,110 3,959 6,848 21,791 26,841
------- ------- ------- ------- -------
Income from operations......................... 1,639 5,370 4,002 8,282 6,843
Interest income (expense) and other............ (275) (450) 1,368 476 326
Equity in net loss of affiliate................ -- (179) (2,000) -- --
------- ------- ------- ------- -------
Income before provision for income taxes....... 1,364 4,741 3,370 8,758 7,169
Provision for income taxes..................... 559 1,880 1,300 3,900 3,513
------- ------- ------- ------- -------
Net income..................................... $ 805 $ 2,861 $ 2,070 $ 4,858 $ 3,656
======= ======= ======= ======= =======
Diluted net income per share(a)................ $ 0.11 $ 0.43 $ 0.20 $ 0.42 $ 0.30
Shares used in the calculation of diluted net
income per share(a) (000s)................... 7,071 6,909 10,577 11,683 12,064
Diluted net income per share(c)................ 0.09 0.29 0.20 0.42 0.30
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................. $ 166 $ 1,020 $25,587 $11,389 $ 7,890
Working capital (deficit)...................... (1,302) (422) 27,259 12,963 10,701
Total assets................................... 5,794 13,251 42,477 58,803 59,324
Total debt(b).................................. 3,398 4,942 853 4,559 3,584
Total stockholders' equity..................... 1,785 3,976 40,322 51,424 50,030
- ------------------------
(a) See Note 1 of Notes to Financial Statements included elsewhere herein for
information concerning the computation of diluted net income (loss) per
share.
(b) Includes convertible subordinated debt to stockholders (including accrued
interest) of $1,530,845 and $1,526,000, on October 31, 1996 and 1997,
respectively, which was converted into Common Stock on November 24, 1997.
(c) 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.
14
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 customer service and support. The
Company's product line and distribution network were enhanced as a result of its
acquisition of BTC on February 8, 1999.
GameTech generates revenues by installing electronic bingo systems in bingo
halls under revenue sharing agreements or by charging 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 a greater initial capital investment.
The Company also generates revenues from the sale or lease of its back office
management systems.
The Company installs its electronic bingo systems at no charge to its
customers and capitalizes the costs. During fiscal 1998, 1999, and 2000, the
Company's capital expenditures were approximately $5.7 million, $8.3 million,
and $9.6 million, respectively, almost all of which in 1998 and 1999 and
$8.4 million of which in 2000 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:
YEARS ENDED OCTOBER 31,
------------------------------------
1998 1999 2000
-------- -------- --------
STATEMENT OF INCOME DATA:
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................ 32.9 27.8 32.2
----- ----- -----
Gross profit................................................ 67.1 72.2 67.8
Operating expenses:
General and administrative................................ 22.5 19.4 24.6
Sales and marketing....................................... 15.9 27.6 25.5
Research and development.................................. 3.9 2.8 3.9
Acquisition related charges............................... -- 2.5 --
----- ----- -----
Total operating expenses.............................. 42.3 52.3 54.0
----- ----- -----
Income from operations...................................... 24.8 19.9 13.8
Interest income (expense) and other......................... 8.4 1.1 0.7
Equity in net loss of affiliate............................. (12.4) -- --
----- ----- -----
Income before provision for income taxes.................... 20.8 21.0 14.5
Provision for income taxes.................................. 8.0 9.3 7.1
----- ----- -----
Net income.................................................. 12.8% 11.7% 7.4%
===== ===== =====
15
YEAR ENDED OCTOBER 31, 2000 COMPARED TO YEAR ENDED OCTOBER 31, 1999
REVENUES. The Company generated revenues of $49.7 million for fiscal 2000
versus $41.7 million for fiscal 1999. The 19.2% growth is attributable to a net
increase of approximately 7,000 units placed in the current fiscal year, while
recognizing a full year of BTC revenues as compared to approximately nine months
during fiscal 1999. Additional business in the existing markets in Ohio,
Florida, and South Carolina, as well as new markets, significantly contributed
to the rise in unit placements from 46,000 to 53,000 at October 31, 1999 and
2000, respectively. These gains were partially offset by competitive pricing
pressures and a reduction of the number of bingo halls in Texas that utilized
GameTech products in fiscal 2000.
COST OF REVENUES. During fiscal 2000, cost of revenues totaled
$16.0 million or 32.2% of revenues compared to $11.6 million or 27.8% of
revenues in fiscal 1999. Service costs and depreciation collectively rose
$2.4 million in fiscal 2000 while, as a percent of revenue, they grew to 24.0%
from 23.0% in fiscal 1999. This percent of revenue increase is due in part to:
(1) depreciation expense and certain service costs associated with the placement
and use of bingo units are fixed costs, and as the Company expands into markets
that play a limited number of days each week, those fixed costs, as a percent of
revenue, are higher, and (2) costs associated with the loss of business in
Texas. In addition, the Company recorded an inventory valuation adjustment of
$900,000 in fiscal 2000.
GENERAL AND ADMINISTRATIVE. Fiscal 2000 general and administrative expenses
totaled $12.2 million compared to $8.1 million in fiscal 1999. General and
administrative expenses are comprised primarily of costs associated with the
Company's executive management and the following departments: finance, legal and
compliance, information technology, and human resources. Several significant
events contributed to the increased costs: the Company has reserved
$1.1 million in anticipation of settling pending litigation in addition to
expending $200,000 in the fourth quarter as the deductible on settlement of a
class action lawsuit; the Company has expensed $592,000 related to the
relocation of its corporate office to Reno, Nevada, primarily duplicate
staffing, relocation, and other employee-related expenses; the Company recorded
$628,000 relating to the cost of employment separation for certain key
executives during fiscal 2000; the expense for bad debts increased $580,000;
and, the recognition of a full year of amortization of goodwill and additional
professional fees associated with the Company's acquisition of BTC in the second
fiscal quarter of 1999.
SALES AND MARKETING. Sales and marketing expenses increased $1.2 million in
fiscal 2000 compared to the prior year, primarily related to distributor
commissions and sales personnel costs. The decline from 27.6% to 25.5% as a
percent of revenue in fiscal 2000 resulted from the Company's efficiencies
achieved by realignment of its sales force regionally to work in conjunction
with distributors to promote its products.
RESEARCH AND DEVELOPMENT. Research and development expenses totaled
$1.9 million in fiscal 2000 compared to $1.2 million in fiscal 1999. Costs
associated with the development of a new colored hand-held unit, TED 2C, and the
addition of engineering personnel primarily compose this increase.
INTEREST INCOME (EXPENSE). Net interest income totaled $326,000 in fiscal
2000 compared to $390,000 in fiscal 1999. The decline of $64,000 primarily
resulted from the Company's use of $5.2 million of cash and short-term
investments for the repurchase of treasury stock.
PROVISION FOR INCOME TAXES. Provision for income taxes decreased $387,000,
or 9.9%, to $3.5 million for the year ended October 31, 2000, from $3.9 million
for the year ended October 31, 1999. The Company's effective income tax rate was
approximately 49.0% in 2000 and 44.5% in 1999. The increase in the effective
rate is due to the effect of the non-deductible goodwill from the acquisition of
BTC as a percentage of pre-tax income.
16
YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998
REVENUES. Revenues increased $25.5 million, or 63.5%, to $41.7 million for
the year ended October 31, 1999, from $16.2 million for the year ended
October 31, 1998. This increase is due in part to the acquisition of BTC.
Excluding revenue generated from products acquired from BTC, the revenue
increase was $5.6 million or 34.6%. The number of units installed at
October 31, 1999 was approximately 46,000, 17,500 excluding units resulting from
the acquisition of BTC, compared to approximately 13,300 at October 31, 1998.
COST OF REVENUES. Cost of revenues increased $6.3 million, or 119%, to
$11.6 million for the year ended October 31, 1999, from $5.3 million for the
year ended October 31, 1998. 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 27.8% from 32.9%. Depreciation expense as a
percent of revenue decreased 3.6% due primarily to the mix of units acquired in
the BTC acquisition, as those units have a lower unit cost.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$4.5 million, or 125%, to $8.1 million for the year ended October 31, 1999, from
$3.6 million for the year ended October 31, 1998. Excluding costs resulting from
the acquisition of BTC, including amortization of goodwill of $1.2 million,
general and administrative costs increased $1.0 million or 27.8%. As a
percentage of revenues, general and administrative expenses decreased to 19.4%
from 22.5% in the prior period.
SALES AND MARKETING. Sales and marketing expenses increased $8.9 million,
or 342%, to $11.5 million for the year ended October 31, 1999, from
$2.6 million for the year ended October 31, 1998. The increase was primarily due
to larger distributor commissions of $6.7 million. The increase in distributor
commissions is due primarily to the distributor network acquired from BTC.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$514,000, or 80.6%, to $1.2 million for the year ended October 31, 1999, from
$638,000 for the year ended October 31, 1998. As a percentage of revenues,
research and development expenses decreased to 2.8% from 3.9% in the prior
period.
ACQUISITION RELATED CHARGES. The Company recorded a charge in April 1999 in
the amount of $1.1 million resulting from the acquisition of BTC and the
Company's plan to close and transition its existing Arizona operations to
Nevada. Employees from all areas of the Company, including manufacturing,
development, and administrative areas, were extended severance agreements. The
acquisition related charges were comprised of $637,000 related to accruals for
severance costs and non-cancelable operating lease commitments on vacated
facilities, and $411,000 in write-offs of existing assets which the Company
determined had no on-going value as a result of the acquisition.
INTEREST INCOME (EXPENSE). Net interest income decreased $978,000 to
$390,000 of income for the year ended October 31, 1999, from $1.4 million for
the year ended October 31, 1998. The decrease in net interest income was due
primarily to the use of approximately $10.0 million of cash in the acquisition
of BTC and $5.2 million of cash to retire debt from BTC.
PROVISION FOR INCOME TAXES. Provision for income taxes increased
$2.6 million, or 200%, to $3.9 million for the year ended October 31, 1999, from
$1.3 million for the year ended October 31, 1998. The Company's effective income
tax rate was approximately 44.5% in 1999 and 38.6% in 1998. The rate change is
due to the non-deductibility of goodwill that resulted from the acquisition of
BTC.
NET INCOME. As a result of the factors discussed above, net income
increased $2.8 million, or 135%, to $4.9 million for the year ended October 31,
1999, from $2.1 million for the year ended October 31, 1998.
17
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $14.0 million of cash in the year ended
October 31, 2000, compared to $9.8 million in the year ended October 31, 1999.
The $14.0 million consists primarily of $3.7 million of net income,
$10.2 million of depreciation, amortization, and obsolescence provisions offset
by changes to operating assets and liabilities. In 1999, the $9.8 million
provided by operating activities consisted primarily of net income of
$4.9 million and depreciation and amortization of $6.3 million offset by changes
to operating assets and liabilities.
Investing activities used $7.8 million of cash in the year ended
October 31, 2000, compared to $21.2 million of cash in the year ended
October 31, 1999. The $7.8 million consists of $9.6 million of capital
expenditures and the payment of $1.3 million associated with the restructuring
of a distributor agreement offset by a $3.1 million reduction in short-term
investments. In 1999, the $21.2 million used in investing activities consisted
primarily of an increase in short-term investments of $2.7 million, capital
expenditures of $8.3 million, and the purchase of BTC common stock of
$9.8 million.
The Company used $6.6 million in cash for financing activities in the year
ended October 31, 2000, compared to $5.5 million in the year ended October 31,
1999. The $6.6 million used in 2000 is primarily due to $5.2 million used to
repurchase common stock and $1.2 million in payments on long-term debt. The
$5.5 million used in 1999 reflects primarily the payments on long-term debt
assumed in the acquisition of BTC.
At October 31, 2000, the Company had cash and equivalents and short-term
investments totaling $7.9 million. GameTech also 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, 2000. The Revolving Credit Facility expires on March 31, 2001. The
Company expects to renew the Revolving Credit Facility with similar terms. The
Company believes that cash flow from operations and the $7.9 million in cash,
cash equivalents, and short-term investments at October 31, 2000, together with
funds available under the Revolving Credit Facility, will be sufficient to
support its operations and provide for budgeted capital expenditures and
liquidity requirements through fiscal 2001. 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, and whether it does so
internally or through acquisitions. 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 may 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.
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
The Company experienced no significant Year 2000 compliance issues and Year
2000 issues did not have a material effect on its business, results of
operations, or financial condition.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's Revolving Credit Facility with Wells Fargo is a $10.0 million
line of credit with an interest rate based on the prime rate or LIBOR plus 2.0%,
at the Company's option. The line of credit expires on March 31, 2001.
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 unpredicted
increase in both alternated 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 $2.0 million balance
outstanding as of October 31, 2000, the rate of interest calculated using the
prime rate option would be 9.5%. The Company's monthly interest payment, if the
rate stayed constant, would be $15,833. If the prime rate rose to 14%, which
assumes an unusually large increase, the Company's monthly payment would be
$23,333. 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 $17,500 or $19,167, 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
None.
19
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 to be filed with the Securities and Exchange Commission, 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 2000.
None
(c) Exhibits are set forth in the "Exhibit Index" on page 25.
(d) Financial Statement Schedules
See Item 14 (a) (2) above.
RISK FACTORS AND CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
FORWARD-LOOKING STATEMENT
This annual report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to analyses and other information, which are based on
forecasts of future results and estimates of amounts not yet determinable. These
statements also relate to future prospects, developments, and business
strategies. These forward-looking statements are identified by their use of
terms and phrases such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "plan," "predict," "project," "will," and similar
terms and phrases, including references to assumptions. The Company does not
undertake to update the forward-looking statements to reflect future events or
circumstances.
Such forward-looking statements and GameTech's operations, financial
condition, and results of operations involve known and unknown risks and
uncertainties. Such risks and factors include, but are not limited to, the
effect of changes in economic conditions.
DEPENDENCE ON BINGO AND ELECTRONIC BINGO INDUSTRY
Future revenues and profits will depend upon continued market acceptance of
the Company's products and services, the continued penetration of electronic
bingo into bingo halls nationwide, and various other factors, many of which are
beyond the control of the Company. For example, while IGRA does not impose
limits on prizes that may be offered for bingo games conducted on Indian lands,
in substantially all states where charitable bingo is legal, the state imposes
limits on prizes on a per game, per session or annual basis. These prize limits
for charitable bingo may influence players to limit their spending, which could
eventually restrict the Company's ability to grow in the charitable bingo
market. Other factors beyond the Company's control include the continued
popularity of bingo as a leisure activity and as a means of charitable
fundraising. The bingo industry is a mature industry and there can be no
assurance that it will not decline in the future due to an increase in competing
forms of
20
entertainment including those resulting from developments in on-line gaming and
the continued expansion of the legalization of casino gaming (for example,
riverboat gaming).
COMPETITION
The electronic bingo industry is characterized by intense competition based
on, among other things, an electronic bingo unit's ability to generate
incremental sales for bingo hall operators through product appeal to players,
ease of use, ease of serviceability, support and training, distribution, name
recognition, and price. 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 market 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, 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 lotteries.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF LITIGATION
The Company regards its products as proprietary and relies primarily on a
combination of patent law, copyrights, trademarks, trade secret laws, and
employee and third-party non-disclosure agreements to protect its proprietary
rights. Defense of intellectual property rights can be difficult and costly and
there can be no assurance that the Company will be able to protect its
technology from misappropriation by competitors. In addition, the protections
offered by trademark, copyright and trade secret laws would not prevent a
competitor from designing electronic bingo systems having appearance and
functionality that closely resemble those of the Company.
As the number of electronic bingo units in the industry increases and the
functionality of these products further overlaps, the Company may become subject
to infringement claims, with or without merit, that are brought by competitors.
Intellectual property-related claims or litigation can be costly and can result
in a significant diversion of management's attention. Any settlement of such
claims or adverse determinations in such litigation could also have a material
adverse impact on the Company's business and financial condition.
RISKS ASSOCIATED WITH THE COMPANY'S CONTRACTS
Contracts and agreements with customers generally (i) permit termination by
the customers upon relatively short notice; (ii) do not designate the Company as
the customer's exclusive electronic bingo system provider; and (iii) do not
penalize customers for early termination.
RELIANCE ON TEXAS MARKET
The concentration of revenues in the Texas market, where approximately 27%
of fiscal 2000 revenues were generated, potentially heightens the exposure of
regulatory changes that may prevent or impede GameTech from doing business
there. Furthermore, the loss of and/or inability of GameTech to find suitable
distributors in Texas, where state law requires electronic bingo devices and
systems to be placed through a qualified distributor, could cause a material
adverse impact on the Company.
21
DEPENDENCE ON KEY PERSONNEL
The operations of the Company depend to a great extent on its ability to
retain and attract existing and new key personnel. Competition is intense for
skilled marketing and product development employees in particular and there can
be no assurance that the Company will be successful in attracting and retaining
such personnel, or that it can avoid increased costs in order to do so. Although
management believes replacement personnel, including persons already employed by
the Company, could be found, the loss of key personnel, were the Company unable
to hire suitable replacements, or the Company's failure to attract additional
qualified employees, could have a material adverse effect on the Company's
operating results and financial condition. The loss of key personnel or the
failure to attract additional qualified personnel for whatever reason could
delay implementation of the Company's business plans.
MANAGEMENT OF GROWTH
The Company's growth plans will require full use of the Company's current
financial, managerial and other resources as well as substantial expansion of
those resources. The Company's ability to manage its growth effectively will
require it to continue to improve its operational, financial and management
information systems and to attract, motivate and train key employees. The
Company plans to expand within its existing domestic markets and into foreign
and domestic bingo markets in which it has no previous operating experience.
There can be no assurance that the Company will be able to maintain
profitability or successfully manage the aggressive expansion of its existing
and planned business. If the Company's management were unable to manage growth
effectively, the Company's business, operating results and financial condition
would be materially and adversely affected.
REGULATORY RISKS
The Company must maintain its existing license and approvals necessary to
operate in its existing markets and obtain the necessary licenses, approvals,
findings of suitability and product approvals in all additional jurisdictions in
which it intends to distribute its products. The licensing and approval
processes can involve extensive investigation into the Company and its officers,
directors, principal stockholders and products, and can require significant
expenditures of time and resources by the Company. The Company must comply with
applicable regulations for its activities in any international jurisdictions
into which it expands. There can be no assurance that the Company will receive
licensing approval, or that approval will come in a timely manner, in the
jurisdictions in which it is currently seeking such approval. The regulations
relating to company and product licensing are subject to change and other
jurisdictions, including the federal government, may elect to regulate or tax
bingo. The Company cannot predict the nature of any such changes or their impact
on the Company. The loss of a license in a particular state will prohibit the
Company from realizing revenues in that state and may prohibit the Company from
installing its units in other states. The loss of one or more licenses held by
the Company could have an adverse effect on the Company's business.
DEPENDENCE ON SINGLE-SOURCE SUPPLIER FOR PALM TOP UNITS
The Company currently obtains its Palm Top units from Tidalpower
Technologies Inc. ("Tidalpower"), a contract manufacturer in Taiwan. The Company
does not have long-term supply contracts with Tidalpower, but rather obtains
Palm Top units on a purchase order basis. Although the design of Palm Top units
is not unique or proprietary, if Tidalpower ceased doing business with the
Company, the Company would need to find a replacement supplier. The Company
believes the availability of suppliers is such that a capable replacement for
Tidalpower could be found, but not without some risk of delay, and there can be
no assurance that the Company would be able to procure, substitute or produce
its Palm Top units without a significant interruption or a price increase. Any
22
failure or delay in receiving Palm Top units could have a material adverse
effect on the Company's business, financial condition and results of operation.
PROTECTION OF LAW
The Company's units are operated in many bingo halls located on Indian
reservations in the United States. State and federal laws governing the business
or other conduct of private citizens generally do not apply to bingo halls that
operate on Indian reservations. The Company would therefore have little or no
recourse if any Indian tribe operating a particular bingo hall seized the units
or barred entry onto the reservation in the event of a contract or other
dispute. The Company has the capability to render any units inoperable in the
event of such action. However, any seizure of the Company's units is likely to
result in a capital loss and loss of revenue to the Company and could, were it
to occur on a large scale, have a materially adverse effect on the Company's
capital resources.
OPERATIONS ON INDIAN LAND; IGRA
The Company's operations in Indian gaming halls, which generated
approximately 23% of fiscal 2000 revenues, are subject to tribal and federal
regulation under IGRA, which established the National Indian Gaming Commission
(the "NIGC"). The NIGC has the authority to promulgate rules and regulations to
enforce certain aspects of IGRA and to protect tribal interests. Under IGRA,
electronic bingo games similar to the Company's have previously been determined
by the NIGC to be Class II gaming activities that are subject solely to tribal
regulation as approved by the NIGC. The Company believes its electronic bingo
systems meet all of the requirements of a Class II game and that the NIGC has
the regulatory authority to make final and binding determinations on the
classification of the Company's electronic bingo systems. There can be no
assurance that the NIGC would classify the Company's electronic bingo systems as
Class II games under IGRA. There can be no assurance that the NIGC would not
enact future regulations or reinterpret existing regulations in such a manner so
as to limit the authority of tribes to self-regulate Class II gaming or to
change the definition of Class II gaming in such a manner that the Company's
electronic bingo systems are classified as a Class III game under IGRA. If
classified as Class III games, the Company's electronic bingo systems would
become subject to state regulation through the tribal-state compacts required
for Class III games played on Indian lands. In that event, or in the event other
federal laws are enacted that would subject the Company's operations on Indian
lands to state regulation there can be no assurance the Company could modify its
electronic bingo systems so that they could be classified as Class II games, or
that the Company could gain the necessary state approval and licenses to
continue its operations in Indian gaming halls and such an event could have a
material adverse effect on the Company. Any modifications of the Company's
electronic bingo systems would also have the additional risk that such
modifications would not appeal to customers or be acceptable to the Indian
tribes.
CHANGING TECHNOLOGY
The Company's products utilize hardware components that have been developed
primarily for the personal computer industry, which is characterized by rapid
technological change and product enhancements. Should any current or potential
competitor of the Company succeed in developing a better electronic bingo
system, such competitor could be in a position to out perform the Company in its
ability to exploit developments in microprocessor, video technology or other
multimedia technology. The emergence of an electronic bingo system that is
superior to the Company's in any respect could substantially diminish the
Company's revenues and limit the Company's ability to grow and thereby have a
material adverse effect on the Company's operating results.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GAMETECH INTERNATIONAL, INC.
By:
-----------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer,
President, Chief Financial
------------------------------------------- Officer, Treasurer, and January 29, 2001
Jon L. Whipple Director
------------------------------------------- Director of Finance and January 29, 2001
Mark F. Wimbush Accounting
------------------------------------------- Chairman of the Board January 29, 2001
Frederick C. Lane
------------------------------------------- Vice-Chairman of the Board January 29, 2001
Richard T. Fedor
------------------------------------------- Vice President--Business January 29, 2001
Gary R. Held Development and Director
------------------------------------------- Director January 29, 2001
Douglas M. Hayes
------------------------------------------- Director January 29, 2001
Clarence H. Thiesen
24
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
23.1 Consent of Ernst & Young LLP, independent auditors
25
GAMETECH INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998, 1999, AND 2000
CONTENTS
PAGE
--------
Report of Ernst & Young LLP, Independent Auditors........... F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
GameTech International, Inc.
We have audited the accompanying consolidated balance sheets of GameTech
International, Inc. as of October 31, 1999 and 2000, and the related
consolidated statements of income, redeemable convertible preferred stock and
stockholders' equity, and cash flows for each of the three years in the period
ended October 31, 2000. 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of GameTech
International, Inc. at October 31, 1999 and 2000 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended October 31, 2000, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Reno, Nevada
December 4, 2000
F-2
GAMETECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
OCTOBER 31,
-------------------
1999 2000
-------- --------
ASSETS:
Current assets:
Cash and equivalents...................................... $ 4,554 $ 4,129
Short-term investments.................................... 6,835 3,761
Accounts receivable, less allowance for doubtful accounts
of $503 in 1999 and $1,335 in 2000...................... 3,652 4,839
Deposits.................................................. 147 606
Prepaid income taxes...................................... -- 947
Prepaid expenses and other current assets................. 218 407
Deferred income taxes..................................... 1,557 2,006
------- -------
Total current assets........................................ 16,963 16,695
Bingo units, furniture and equipment, net................... 21,506 23,289
Intangible assets, including goodwill, less accumulated
amortization of $2,139 in 1999 and $4,481 in 2000......... 20,334 19,340
------- -------
Total assets................................................ $58,803 $59,324
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.......................................... $ 550 $ 1,473
Accrued payroll and related obligations................... 992 1,140
Acquisition related accrued liabilities................... 552 308
Other accrued liabilities................................. 554 1,976
Income taxes payable...................................... 107 --
Current portion of long-term debt......................... 1,245 1,097
------- -------
Total current liabilities................................... 4,000 5,994
Long-term debt.............................................. 3,314 2,487
Non-current employment obligations.......................... -- 277
Deferred income taxes....................................... 65 536
Commitments and contingencies
Stockholders' equity:
Common stock: $.001 par value; 40,000,000 shares
authorized; 12,284,323 shares issued and outstanding in
1999 and 12,371,223 in 2000............................. 12 12
Capital in excess of par value............................ 43,418 43,541
Retained earnings......................................... 10,863 14,519
Less: treasury stock, at cost: 774,500 shares in 1999 and
1,840,725 shares in 2000................................ (2,869) (8,042)
------- -------
Total stockholders' equity.................................. 51,424 50,030
------- -------
Total liabilities and stockholders' equity.................. $58,803 $59,324
======= =======
SEE ACCOMPANYING NOTES.
F-3
GAMETECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
Revenues................................................. $ 16,177 $ 41,663 $ 49,695
Operating expenses:
Cost of revenues....................................... 5,327 11,590 16,011
General and administrative............................. 3,646 8,070 12,223
Sales and marketing.................................... 2,564 11,519 12,680
Research and development............................... 638 1,152 1,938
Acquisition related charges............................ -- 1,050 --
---------- ---------- ----------
12,175 33,381 42,852
---------- ---------- ----------
Income from operations................................... 4,002 8,282 6,843
Interest income, net..................................... 1,368 390 326
Equity interest in net loss of affiliate................. (2,000) -- --
Other income, net........................................ -- 86 --
---------- ---------- ----------
Income before provision for income taxes................. 3,370 8,758 7,169
Provision for income taxes............................... 1,300 3,900 3,513
---------- ---------- ----------
Net income............................................... $ 2,070 $ 4,858 $ 3,656
========== ========== ==========
Basic net income per share............................... $ .22 $ .45 $ .33
========== ========== ==========
Diluted net income per share............................. $ .20 $ .42 $ .30
========== ========== ==========
Shares used in the calculation of net income per share:
Basic.................................................. 9,360,955 10,827,221 11,202,883
========== ========== ==========
Diluted................................................ 10,577,030 11,683,196 12,063,654
========== ========== ==========
SEE ACCOMPANYING NOTES.
F-4
GAMETECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
REDEEMABLE STOCKHOLDER'S EQUITY
CONVERTIBLE -----------------------------------------
PREFERRED STOCK COMMON STOCK
------------------- --------------------- CAPITAL IN EXCESS
SHARES AMOUNT SHARES AMOUNT OF PAR VALUE
-------- -------- ---------- -------- -----------------
Balances at October 31, 1997....... 400,000 $2,835 4,621,491 $ 5 $ 36
Common stock issued at initial
public offering, net of
$3,420,000 in issuance costs..... -- -- 3,270,000 3 32,571
Conversion of convertible notes
payable into common stock........ -- -- 1,539,351 2 1,537
Conversion of preferred stock into
common stock..................... (400,000) (2,835) 400,000 -- 2,835
Issuance of common stock upon
exercise of stock options........ -- -- 295,384 -- 138
Repurchase of common stock for
treasury......................... -- -- -- -- --
Net income......................... -- -- -- -- --
-------- ------ ---------- --- -------
Balances at October 31, 1998....... -- -- 10,126,226 10 37,117
Common stock issued for acquisition
of Bingo Technologies
Corporation...................... -- -- 1,866,938 2 6,066
Issuance of common stock upon
exercise of stock options........ -- -- 291,159 -- 235
Repurchase of common stock for
treasury......................... -- -- -- -- --
Net income......................... -- -- -- -- --
-------- ------ ---------- --- -------
Balances at October 31, 1999....... -- -- 12,284,323 12 43,418
Issuance of common stock upon
exercise of stock options........ -- -- 86,900 -- 123
Repurchase of common stock for
treasury......................... -- -- -- -- --
Net income......................... -- -- -- -- --
-------- ------ ---------- --- -------
Balances at October 31, 2000....... -- $ -- 12,371,223 $12 $43,541
======== ====== ========== === =======
STOCKHOLDER'S EQUITY
-------------------------------
TREASURY STOCK
RETAINED --------------------
EARNINGS SHARES AMOUNT TOTAL
-------- --------- -------- --------
Balances at October 31, 1997....... $ 3,935 -- $ -- $ 3,976
Common stock issued at initial
public offering, net of
$3,420,000 in issuance costs..... -- -- -- 32,574
Conversion of convertible notes
payable into common stock........ -- -- -- 1,539
Conversion of preferred stock into
common stock..................... -- -- -- 2,835
Issuance of common stock upon
exercise of stock options........ -- -- -- 138
Repurchase of common stock for
treasury......................... -- 755,400 (2,810) (2,810)
Net income......................... 2,070 -- -- 2,070
------- --------- ------- -------
Balances at October 31, 1998....... 6,005 755,400 (2,810) 40,322
Common stock issued for acquisition
of Bingo Technologies
Corporation...................... -- -- -- 6,068
Issuance of common stock upon
exercise of stock options........ -- -- -- 235
Repurchase of common stock for
treasury......................... -- 19,100 (59) (59)
Net income......................... 4,858 -- -- 4,858
------- --------- ------- -------
Balances at October 31, 1999....... 10,863 774,500 (2,869) 51,424
Issuance of common stock upon
exercise of stock options........ -- -- -- 123
Repurchase of common stock for
treasury......................... -- 1,066,225 (5,173) (5,173)
Net income......................... 3,656 -- -- 3,656
------- --------- ------- -------
Balances at October 31, 2000....... $14,519 1,840,725 $(8,042) $50,030
======= ========= ======= =======
SEE ACCOMPANYING NOTES.
F-5
GAMETECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 2,070 $ 4,858 $ 3,656
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and obsolescence............... 2,612 6,347 10,214
Loss on disposal of assets................................ -- -- 171
Accrued interest payable to officers...................... 13 -- --
Deferred income taxes..................................... (215) (207) 22
Equity interest in net loss of affiliate.................. 2,000 -- --
Changes in operating assets and liabilities:
Accounts receivable, net................................ (526) (470) (1,187)
Deposits................................................ (58) 24 (459)
Prepaid income taxes.................................... -- -- (947)
Prepaid expenses and other current assets............... (243) 120 66
Accounts payable........................................ (78) (1,665) 923
Accrued payroll and related obligations................. (67) 471 148
Acquisition related accrued liabilities................. -- 552 (244)
Other accrued liabilities............................... (157) 250 1,422
Income taxes payable.................................... (92) (452) (107)
Non-current employment obligations...................... -- -- 277
-------- -------- -------
Net cash provided by operating activities................... 5,259 9,828 13,955
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments............... (4,102) (2,733) 3,074
Capital expenditures for bingo units, furniture and
equipment................................................. (5,683) (8,341) (9,614)
Purchase of common stock of Bingo Technologies Corporation,
net of cash acquired...................................... -- (9,790) --
Investment in and advances to affiliate..................... (1,474) -- --
Intangible assets........................................... (225) (375) (1,290)
-------- -------- -------
Net cash used in investing activities....................... (11,484) (21,239) (7,830)
F-6
GAMETECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings from bank............... $ -- $10,591 $4,019
Payments on short-term notes payable and borrowings from
bank...................................................... (550) (15,304) (4,019)
Payments on long-term debt.................................. (2,866) (645) (1,155)
Payments for buy out of distributorship agreement........... (448) (338) (345)
Proceeds from sales of common stock......................... 32,712 235 123
Payments for repurchase of common stock for treasury........ (2,810) (59) (5,173)
Deferred offering costs..................................... 652 -- --
------- ------- ------
Net cash provided by (used in) financing activities......... 26,690 (5,520) (6,550)
------- ------- ------
Net increase (decrease) in cash and equivalents............. 20,465 (16,931) (425)
Cash and equivalents at beginning of year................... 1,020 21,485 4,554
------- ------- ------
Cash and equivalents at end of year......................... $21,485 $ 4,554 $4,129
======= ======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 66 $ 286 $ 223
======= ======= ======
Cash paid for income taxes................................ $ 1,607 $ 4,523 $4,404
======= ======= ======
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS:
Conversion of redeemable convertible preferred stock to
common stock............................................ $ 2,835 $ -- $ --
======= ======= ======
Conversion of convertible notes payable to common stock... $ 1,539 $ -- $ --
======= ======= ======
Acquisition of capitalized software in exchange for note
payable................................................. $ -- $ -- $ 525
======= ======= ======
In connection with the Bingo Technologies Corporation
acquisition, the Company assumed liabilities as follows:
Fair value of assets acquired........................... $ -- $28,331 $ --
Cash paid for the acquisition (including acquisition
costs)................................................ -- (9,964) --
------- ------- ------
Liabilities assumed, and common stock and notes payable
issued to seller...................................... $ -- $18,367 $ --
======= ======= ======
SEE ACCOMPANYING NOTES.
F-7
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1999, AND 2000
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DESCRIPTION OF BUSINESS
GameTech International, Inc. (the "Company") was incorporated in Delaware on
April 18, 1994. The Company designs, develops and markets electronic bingo
systems and rents them under operating type leases on long-term or
month-to-month arrangements. The consolidated financial statements include the
accounts of the Company and Bingo Technologies Corporation acquired in
February 1999 (Note 2). All significant intercompany accounts and transactions
have been eliminated.
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 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:
Installed bingo units....................................... 5 years
Office furniture and equipment.............................. 5-7 years
Leasehold improvements...................................... 10 years
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.
INTANGIBLE ASSETS
Goodwill, resulting primarily from the acquisition of Bingo Technologies
Corporation (Note 2), is being amortized on a straight-line basis over twelve
years and amounted to $18,947,000 and $17,168,000, net of accumulated
amortization, at October 31, 1999 and 2000, respectively. Goodwill amortization
expense in fiscal years 1998, 1999, and 2000 was $58,000, $1,415,000 and
$1,779,000, respectively. Other intangibles, consisting of capitalized software,
distribution agreements, and copyrights are being amortized over the respective
useful lives of the assets ranging from three to five years. Amortization
expense related to the other intangibles in fiscal years 1998, 1999, and 2000
was $213,000, $458,000, and $775,000, respectively.
F-8
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
fiscal 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.
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
Revenues are recognized as machines are played and 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 individual contracts.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standard No. 109, ACCOUNTING FOR INCOME TAXES.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs during the
fiscal years 1998, 1999 and 2000 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 has elected to follow APB No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for its employee stock
options because the Company believes that the alternative fair value accounting
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 of the underlying stock
on the date of grant, no compensation expense is recognized.
F-9
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
Net income per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE, which requires companies to
present both basic and diluted net income 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.
Diluted earnings per share are based upon the weighted average number of common
shares and common-share equivalents 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 cash and cash-equivalents,
short-term investments, and trade receivables. Cash equivalents and short-term
investments are investment-grade, short-term debt instruments, primarily
corporate bonds and money market accounts, all of which are maintained with high
credit quality financial institutions. Cash and cash equivalents are in excess
of FDIC insurance limits.
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 within the range of management's expectations. The Company's customer
base consists primarily of Native American reservation gaming halls, casinos,
and charity bingo operations located throughout 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 beyond the amounts reserved for doubtful accounts.
No single customer comprised more than ten percent of total revenues during
fiscal years 1998, 1999 and 2000.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, short-term investments, 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 is determined using current applicable interest rates as of the
balance sheet dates, and approximate the carrying value of such debt because the
underlying instruments are variable subject to any increases or decreases in the
bank's prime rate or LIBOR. The fair value of notes payable is not practicable
to determine because the amounts are owed to former BTC shareholders (Note 2),
do not bear interest, and there is no market for these securities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, which establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133 is required to be adopted in fiscal years beginning after June 15, 2000.
This statement is not expected to affect the Company as the Company currently
does not engage or plan to engage in derivative instruments or hedging
activities.
F-10
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101"), which summarizes certain
of the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company will be required to
adopt the accounting provisions of SAB No. 101 during its fiscal year ending
October 31, 2001. The Company is currently evaluating the impact of adopting SAB
No. 101, but the Company does not believe that the implementation of SAB
No. 101 will have a significant effect on its results of operations.
2. ACQUISITION OF BINGO TECHNOLOGIES CORPORATION
On February 8, 1999, the Company purchased all of the outstanding common
stock of Bingo Technologies Corporation ("BTC"), pursuant to a Stock Purchase
Agreement. The total purchase price for the acquisition of BTC was approximately
$20.1 million, comprised of $10.0 million in cash, 1,866,938 shares of the
Company's common stock with a fair market value of $6.1 million, and promissory
notes totaling $4.0 million payable to BTC's stockholders. The acquisition was
accounted for in accordance with the purchase method of accounting and,
accordingly, the net assets acquired were included in the Company's consolidated
balance sheet based upon their estimated fair values on the date of the
acquisition. The Company's consolidated statements of income include the
revenues and expenses of the acquired business after the effective date of the
transaction.
A summary of the purchase price allocation as of October 31, 1999 for the
acquisition is as follows (in thousands):
Acquired assets:
Cash acquired........................................... $ 174
Accounts receivable..................................... 1,505
Prepaid expenses and other current assets............... 49
Bingo units, furniture and equipment.................... 5,092
Intangible assets....................................... 212
Goodwill................................................ 20,057
Deferred income taxes................................... 1,242
Assumed liabilities:
Notes payable to shareholders and outstanding balance on
Bank Lines of Credit.................................. (4,713)
Long-term debt.......................................... (640)
Accounts payable and accrued liabilities................ (2,436)
Income taxes payable.................................... (477)
-------
$20,065
=======
F-11
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF BINGO TECHNOLOGIES CORPORATION (CONTINUED)
The following unaudited pro forma information shows the results of the
Company's operations as though the acquisition had occurred as of November 1,
1997 (in thousands):
YEAR ENDED
OCTOBER 31,
-------------------
1998 1999
-------- --------
(UNAUDITED)
Revenues.................................................. $34,102 $47,800
======= =======
Net income................................................ $ 2,133 $ 5,003
======= =======
Basic net income per share................................ $ 0.19 $ 0.44
======= =======
Diluted net income per share.............................. $ 0.17 $ 0.41
======= =======
The pro forma results of operations have been prepared for comparative
purposes only and are not necessarily indicative of the actual results of
operations that would have been achieved had the acquisition occurred on
November 1, 1997, or the results of future operations of the Company.
Furthermore, the pro forma results do not give effect to all costs savings or
incremental costs that may occur as a result of the integration and
consolidation of BTC.
3. BINGO UNITS, FURNITURE AND EQUIPMENT
Bingo units, furniture and equipment consist of the following (in
thousands):
OCTOBER 31
-------------------
1999 2000
-------- --------
Installed bingo units..................................... $24,628 $25,827
Bingo units on-hand, primarily used....................... 3,927 5,625
Raw materials and bingo units in-progress................. 937 1,138
Office furniture and equipment............................ 2,546 3,319
Leasehold improvements.................................... 92 279
------- -------
32,130 36,188
Less accumulated depreciation and amortization............ 10,624 12,899
------- -------
$21,506 $23,289
======= =======
"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 toward these units over a five year period. Depreciation is suspended
for bingo units during the periods when they are not being rented. Items that
are not expected to be re-used are reserved for as obsolete.
Depreciation expense during the fiscal years ended October 31, 1998, 1999
and 2000 amounted to approximately $2.2 million, $4.5 million and $5.6 million,
respectively. In addition, during the fiscal year ended October 31, 2000, the
Company reserved $900,000 for bingo units in inventory not expected to be
re-used, which amount was estimated based on forecasts of unit placements
impacted by expected new product introductions in 2001.
F-12
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BINGO UNITS, FURNITURE AND EQUIPMENT (CONTINUED)
Office furniture and equipment includes assets under capital leases
amounting to $182,000 and $102,000 at October 31, 1999 and 2000, respectively,
net of accumulated amortization of $218,000 and $279,000. Prior to the
acquisition of BTC (Note 2), there were no assets under capital leases.
4. CREDIT AGREEMENTS
Effective April 1, 2000, the Company renewed its revolving line-of-credit
agreement with a bank. The maximum amount available under the terms of the
agreement is $10.0 million, and borrowings bear interest based on the bank's
prime rate or LIBOR plus 2.0 percent, at the Company's option. Interest is
payable monthly and the agreement expires on March 31, 2001. The agreement is
secured by substantially all of the Company's assets. The agreement contains
certain restrictive covenants, which among other things require that specified
financial balances and ratios be maintained, and restrict the payment of
dividends and the incurrence of additional indebtedness. At October 31, 2000,
there was no outstanding balance under the line-of-credit.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
OCTOBER 31,
----------------------
1999 2000
-------- --------
(IN THOUSANDS)
$3.7 million zero interest note payable to a BTC shareholder
(Note 2) discounted at 5.5 percent per annum. Monthly
principal and interest payments of $61,000 beginning
February 1999 are due until the balance is paid in
full...................................................... $2,843 $2,244
$943,000 zero interest note payable to a BTC shareholder
(Note 2) discounted at 5. 5 percent per annum. Monthly
principal and interest payments of $16,000 beginning
February 1999 are due until the balance is paid in
full...................................................... 728 575
$1.0 million zero interest 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...................................................... 515 170
Obligations under capital leases............................ 213 132
Other....................................................... 260 463
------ ------
4,559 3,584
Less amounts due within one year............................ 1,245 1,097
------ ------
$3,314 $2,487
====== ======
Aggregate contractual future principal payments of long-term debt for the
years following October 31, 2000 are $1.1 million in fiscal year 2001,
$1.0 million in fiscal year 2002, $1.0 million in fiscal year 2003, $361,000 in
fiscal year 2004, and $95,000 in fiscal year 2005 and thereafter.
F-13
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases administrative and manufacturing facilities and certain
equipment under non-cancelable operating leases. Rent expense during fiscal
years ended October 31, 1998, 1999, and 2000 amounted to approximately $205,000,
$580,000, and $645,000, respectively.
Future minimum lease payments under these leases as of October 31, 2000 are
as follows:
2001............................................ $ 629,000
2002............................................ 525,000
2003............................................ 524,000
2004............................................ 524,000
2005............................................ 488,000
Thereafter...................................... 2,507,000
----------
$5,197,000
==========
LITIGATION
The Company is involved in various legal proceedings arising out of its
operations in the ordinary course of its business, including various complaints
that have been filed alleging patent infringement. The Company does not believe
that any of these proceedings will have a material adverse effect on its
business, financial condition, or result of operations beyond the amounts
recorded in the accompanying financial statements. At October 31, 2000, the
Company has recorded $1.1 million in other accrued liabilities for the estimated
settlement of specific lawsuits. However, if settlement is not reached and the
lawsuits proceed to trial, an unfavorable outcome could have a material adverse
effect on the Company's financial position and results of operations.
7. STOCKHOLDERS' EQUITY
STOCK OPTIONS
In August 1997, the Company adopted the 1997 Incentive Stock Plan (1997
Plan). Under the 1997 Plan, either incentive stock options ("ISO's") or
nonqualified stock options ("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 4,000,000 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, 2000,
options to purchase 1,849,826 shares of common stock were outstanding at
exercise prices ranging from $0.01 to $6.06 per share under the 1997 Plan. In
addition, at October 31, 2000, 1,722,115 shares of common stock were available
for future grants under the 1997 Plan.
F-14
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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 its 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 assumptions:
YEAR ENDED OCTOBER 31, 1998 1999 2000
- ---------------------- -------- -------- --------
Risk-free interest rate.......................... 4.75% 6.20% 6.00%
Dividend yield................................... 0% 0% 0%
Expected volatility.............................. 1.022% 0.813% 0.749%
Expected life.................................... 5 years 4 years 8 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:
YEAR ENDED OCTOBER 31, 1998 1999 2000
- ---------------------- -------- ---------- ----------
Pro forma net income....................... $938,000 $4,593,000 $3,106,000
Pro forma net income per basic share....... 0.10 0.42 0.28
Pro forma net income per diluted share..... 0.09 0.39 0.26
F-15
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity, and related information is
presented below:
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------
1998 1999 2000
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(OPTIONS) PRICE (OPTIONS) PRICE (OPTIONS) PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of
year........................... 1,447,384 $ .84 1,928,000 $2.78 1,754,441 $2.64
Granted.......................... 863,000 5.22 847,000 3.20 255,285 5.35
Forfeited........................ (87,000) 9.74 (729,400) 4.39 (73,000) 4.05
Exercised........................ (295,384) .47 (291,159) . 81 (86,900) 1.42
--------- --------- ---------
Outstanding at end of year....... 1,928,000 2.78 1,754,441 2.64 1,849,826 3.02
========= ====== ========= ====== ========= ======
Exercisable at end of year....... 1,016,667 $1.48 1,068,841 $2.30 1,192,701 $2.57
========= ====== ========= ====== ========= ======
Weighted average fair value of
options granted during the
year........................... $4.78 $1.98 $4.06
---- ---- ----
---- ---- ----
The following table summarizes information regarding stock options
outstanding and exercisable at October 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE
- --------------------- --------- ---------------- --------- --------- ---------
$.01--$.16 7,500 5.25 $ .11 7,500 $.11
$1.00--$1.10 671,091 6.01 1.03 671,091 1.03
$2.25--$4.13 757,950 8.26 3.22 255,825 3.22
$4.75--$6.06 413,285 8.02 5.88 283,285 6.00
--------- ---------
1,849,826 $ 3.02 1,217,701 $2.64
========= ======= ========= ========
The range of exercise prices of stock options outstanding and their weighted
average remaining contractual life at October 31, 2000, were $.01 to $6.06 per
share and 7.32 years, respectively.
8. ACQUISITION RELATED CHARGES
The Company recorded a charge in April 1999 in the amount of $1.1 million
resulting from the acquisition of BTC (Note 2) and the Company's plan to close
and transition its existing Arizona operations to Nevada. Employees from all
areas of the Company, including manufacturing, development, and administrative
areas, were extended severance agreements. The acquisition related charges were
comprised of $637,000 related to accruals for severance costs and non-cancelable
operating lease commitments on vacated facilities, and $411,000 in write-offs of
existing assets which the Company determined had no ongoing value as a result of
the acquisition. Of the total accruals, $552,000 and $308,000 remained unpaid as
of October 31, 1999 and 2000, respectively.
F-16
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The income tax provisions consist of the following (in thousands):
YEAR ENDED OCTOBER 31,
------------------------------------
1998 1999 2000
-------- -------- --------
Current:
Federal...................................... $1,243 $3,417 $2,927
State........................................ 272 690 564
Deferred:
Federal...................................... (191) (182) 19
State........................................ (24) (25) 3
------ ------ ------
$1,300 $3,900 $3,513
====== ====== ======
The significant components of the Company's deferred income tax assets and
liabilities at October 31, 1999 and 2000 are as follows (in thousands):
OCTOBER 31, 2000
----------------------
CURRENT NON-CURRENT
-------- -----------
Deferred income tax assets:
Amortization of intangible assets..................... $ -- $ 844
Various accruals...................................... 2,006 --
------ -------
Total deferred income tax assets.................... 2,006 844
Deferred income tax liability:
Depreciation.......................................... -- (1,380)
------ -------
Net deferred income tax asset (liability)............... $2,006 $ (536)
====== =======
OCTOBER 31, 1999
----------------------
CURRENT NON-CURRENT
-------- -----------
Deferred income tax assets:
Amortization of intangible assets..................... $ -- $ 828
Various accruals...................................... 1,557 --
------ ------
Total deferred income tax assets.................... 1,557 828
Deferred income tax liability:
Depreciation.......................................... -- (893)
------ ------
Net deferred income tax asset (liability)............... $1,557 $ (65)
====== ======
F-17
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The differences between the Company's provision for income taxes as presented in
the accompanying statements of income 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:
YEAR ENDED OCTOBER 31,
------------------------------------
1998 1999 2000
-------- -------- --------
Income tax provision at the statutory rate........... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit........... 4.2 5.4 5.2
Goodwill amortization................................ -- 4.8 8.3
Other, net........................................... 0.4 .3 1.5
---- ---- ----
38.6% 44.5% 49.0%
==== ==== ====
10. NET INCOME PER SHARE
A reconciliation of the shares used in the basic and fully diluted net income
per share calculations is:
YEAR ENDED OCTOBER 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
Basic.................................... 9,360,955 10,827,221 11,202,883
Effect of dilutive securities:
Stock options.......................... 1,083,509 855,975 860,771
Convertible notes payable to
officers............................. 99,957 -- --
Redeemable convertible preferred
stock................................ 32,609 -- --
---------- ---------- ----------
Diluted.................................. 10,577,030 11,683,196 12,063,654
========== ========== ==========
11. VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS DEDUCTIONS
BALANCE AT CHARGED TO (WRITE-OFFS,
BEGINNING OF COSTS AND NET OF BALANCE AT
DESCRIPTION PERIOD EXPENSES COLLECTIONS) END OF PERIOD
- ----------- ------------ ---------- ------------ -------------
Year ended October 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts............. $164 $ 180 $(295) $ 49
Year ended October 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts............. $ 49 $ 725 $(271) $ 503
Year ended October 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts............. $503 $1,308 $(476) $1,335
F-18
GAMETECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited quarterly financial information for the years 2000 and 1999
are noted below (in thousands, except per share amounts):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Fiscal year 2000
Net revenues................................... $13,177 $12,583 $11,922 $12,013
Gross margin................................... 9,598 8,849 8,246 6,991
Income (loss) from operations.................. 3,444 3,354 2,200 (2,155)
Net income (loss).............................. 1,969 1,937 1,183 (1,433)
Basic net income (loss) per share.............. .17 .17 .11 (.13)
Diluted net income (loss) per share............ .16 .16 .10 (.13)
During the fourth quarter ended October 31, 2000, the Company recorded the
following expenses:
- An inventory valuation adjustment of $900,000 was charged to cost of
revenues.
- Approximately $1.1 million was charged to general and administrative
expenses as the estimated settlement of three lawsuits.
- The Company's corporate office was relocated to Reno, Nevada, at a cost of
$592,000, charged to general and administrative expense.
- The Company's Chief Executive Officer and another executive resigned and
were extended severance packages. Under these packages, a total of
$628,000 will be paid by the Company by September 2002. This amount was
charged to general and administrative expense.
- The reserve for bad debts was increased $580,000, and charged to general
and administrative expense.
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Fiscal year 1999
Net revenues................................... $4,534 $11,344 $12,747 $13,038
Gross margin................................... 2,878 8,266 9,356 9,573
Income from operations......................... 955 1,162 2,774 3,391
Net income..................................... 770 562 1,557 1,969
Basic net income per share..................... .08 .06 .14 .17
Diluted net income per share................... .08 .04 .13 .16
F-19